It is crucial to ensure that clients plan for the possibility that they might one day lose mental capacity to manage their worldwide affairs, to avoid leaving loved ones (and their advisers) in limbo should the worst happen.
There is, of course, no "typical" client but it is safe to say that the affairs of almost all high net worth individuals have become increasingly global in recent years. Greater wealth and more accessible travel have meant that clients are far more likely than previous generations to own properties in other countries and/or to relocate to another country in retirement. It is also safe to say that the proportion of elderly individuals is increasing faster than ever. The UK government describes this in stark terms:
"There are currently three million people aged more than 80 years and this is projected to almost double by 2030 and reach eight million by 2050. While one in six of the UK population is currently aged 65 and over, by 2050 one in four will be."
The combination of an ageing population and clients with assets dotted across the world means that cross-border incapacity issues are becoming more and more important.
This article examines the extent to which English Lasting Powers of Attorney ("LPAs") and Orders of the English Court of Protection are recognised beyond these shores, or may be in future. It will be seen that there are various legal and practical hurdles but these can, at least to some extent, be overcome via sensible planning. References to "incapacity" are to mental, rather than physical, incapacity.
The current environment
If a client loses capacity without sufficient safeguards in place then it can be extremely difficult for their families and advisers to manage the client's property and financial affairs (wherever located) on their behalf. Banks, investment managers and other institutions will usually refuse to take instructions from (or even provide information to) family members and/or advisers without some form of legal authority confirming they may do so. This can cause significant emotional and indeed financial problems for all concerned.
In England and Wales, the Mental Capacity Act 2005 (the "2005 Act") governs this area of law. The 2005 Act introduced the LPA in October 2007. LPAs allow the client to choose one or more persons ("the Attorney') to make certain decisions on the client's behalf. The client can make i) an LPA for property and financial affairs (enabling the Attorney, for example, to operate a bank account for the client and/or to make investment decisions); and/or ii) an LPA for health and welfare (enabling the Attorney, for example, to make decisions in relation to the client's care and medical treatment).
An LPA is not complex in its substance but its form is by no means straightforward. Clients and advisers alike should consider carefully the terms of the LPA. Care should also be taken when arranging signature, because the knowledge and consent of the proposed Attorney(s) is required, as is a statement from a third party (who may be a professional or a person who has known the client for at least two years) confirming that the client understands the nature and effect of the LPA and that they have sufficient capacity to sign it.
Clients and advisers should beware that neither an "ordinary' (or "general") power of attorney nor a trustee power of attorney will survive the client's incapacity. While these powers of attorney can be very useful in the short term (for example to enable decisions to be made while the client is abroad or otherwise out of contact), LPAs are advisable in almost all cases because they endure beyond the onset of incapacity and therefore are a key part of planning for the medium to long term.
If a client loses capacity and there is no valid LPA in place, it would be extremely difficult for the next of kin to take action to prevent harm to the client's estate - for example to liquidate investments during a falling market. All is not lost, however; in most circumstances an application could be made to the Court of Protection for an order that a Deputy be appointed. A Deputy's role is similar to an Attorney's - they are both charged with managing the affairs of a client and they must act in the client's best interests at all times. However, the procedure for appointing a Deputy is far more cumbersome and expensive than putting an LPA in place and, significantly, the client is unable to specify i) who they wish to act and any substitutes; ii) how exactly their chosen Attorney(s) can manage their affairs; and iii) whether any other conditions or restrictions should be put in place. For these reasons it is far preferable for clients to put LPAs in place while they have capacity to do so.
The extent to which Lasting Powers of Attorney and orders of the Court of Protection are recognised outside England and Wales
The 2005 Act provides a comprehensive framework for clients whose affairs are based exclusively in England and Wales. Matters become more complicated, however, when there is a foreign element.
In determining the extent to which an LPA is recognised abroad, the first issue is whether the LPA is governed by the laws of England and Wales or the laws of another country.
To help determine which system of law applies, the 2005 Act provides that:
- If the client is habitually resident in England and Wales at the time of granting the LPA, the law applicable to the existence, extent, modification or extinction of the LPA is i) the law of England and Wales; or ii) such other law as specified in writing by the client.
If the client is habitually resident in another country at the time of granting the LPA, but England and Wales is a connected country, then the law applicable is i) the law of the other country; or ii) if the donor specifies in writing the law of England and Wales for that purpose, that law.
- The applicable law in relation to the manner in which the LPA is being exercised is the law of the country where it is exercised (or where it is proposed it will be exercised).
Once it has been determined which system of law applies, the Attorney/Deputy should take advice from a suitably qualified lawyer to confirm the scope of the LPA/Deputyship Order and whether it can be operated in the applicable jurisdiction. It will, in practice, usually be necessary to discuss matters with the relevant bank, investment manager or other institution to determine their requirements.
A common practical problem is that the LPA may only be acceptable if it has been prepared in a certain way, even if the local law is in principle prepared to regard it as conferring authority on the Attorney. As might be expected, it will often be necessary to present the LPA in a form that has been "legalised" by the Foreign and Commonwealth Office ("FCO"). The FCO defines legalisation as "...the process by which the FCO attaches an apostille (certificate) to a UK public document. Legalisation is the official confirmation that a signature, seal or stamp on a public document is genuine." In addition, confusion can arise if the LPA has been signed by the client, certificate provider(s) and Attorney(s) on different dates (notwithstanding that the LPA would be perfectly valid under English law).
Clients based outside the UK, but with UK assets should, of course, also consider the risk of losing capacity in future. Consider, for example, a Swiss client who is habitually resident in the UK and who is concerned to ensure that their London townhouse and UK investment portfolio can be managed properly should the client lose capacity in later life. An appropriately drafted LPA should ensure that, should it be necessary, all and any steps can be taken to preserve the value of the house and portfolio. Equally importantly, it would provide peace of mind in the meantime.
The Court of Protection can exercise its full jurisdiction and make Orders under the 2005 Act in relation to i) an adult habitually resident in England and Wales; ii) an adult's property in England and Wales (regardless of residence, habitual residence or nationality); and iii) an adult present in England and Wales or who has property there, if the matter is urgent.
For these purposes, an "adult" is someone who "as a result of impairment or insufficiency of his personal faculties, cannot protect his interests" and who has reached the age of 16. The adult's nationality is irrelevant and the Court's jurisdiction applies whether or not the adult has assets in England and Wales (although, as with LPAs, advice should also be taken in the relevant jurisdiction). While there is no statutory definition of habitual residence for these purposes, the English High Court has described habitual residence in the context of EU law as "the place where the person had established, on a fixed basis, his permanent or habitual centre of interests, with all the relevant facts being taken into account".
Time for change? The Hague Convention XXXV of 13 January 2000 on the International Protection of Adults
This Convention came into force on 1 January 2009, having been adopted by the Hague Conference on Private International Law. It has been ratified by Germany, France, the UK (in respect of Scotland alone), Austria, the Czech Republic, Estonia, Finland, France and Switzerland. A further seven states have signed the Convention (Cyprus, Greece, Ireland, Italy, Luxembourg, Netherlands and Poland).
Among the Convention's objects are a) to determine the State whose authorities have jurisdiction to take measures directed to the protection of the individual or property of the individual; and b) to determine which law is to be applied by such authorities in exercising their jurisdiction.
The 2005 Act introduced the bulk of the Convention's provisions into English law, although the UK has not ratified the Convention in relation to England and Wales. The EU Commission recently encouraged member states to ratify the Convention and this is an eminently sensible approach.
One of the main benefits of the UK ratifying the Convention in relation to England and Wales would be that the procedure under Article 38 of the Convention for confirming the terms of LPAs, Court Orders (and indeed certain foreign instruments) would become available. Article 38 provides for certificates to be issued where, for example, a client has put an LPA in place or a Deputyship Order has been made. The Attorney/Deputy would be able to obtain a certificate indicating the capacity in which they are entitled to act, and the powers conferred on them. This would be very useful for banks, investment managers or other institutions outside the UK who are asked to rely on an LPA because it would, in most circumstances, remove the need for advice to be taken on the terms and scope of the Court Order or LPA; the relevant information would instead be set out in the certificate.
This system would be extremely useful; it would give a measure of security to the holders of LPAs that the powers will be accepted in other Contracting States that have ratified the Convention and it would reduce greatly the practical difficulties mentioned above. The difficulty at present is that only a small number of states have ratified the Convention but as more and more states accede to it then the use of the Article 38 procedure will become more widespread. It is unlikely that the certificates will cover all possible cases, but it would at least provide certainty (and reduced delay) in the majority of circumstances.
Clients are often reluctant to discuss the potential loss of capacity, especially when they are beginning to show signs of Alzheimer's disease or other forms of dementia. However, it is essential that clients and their advisers do all they can to prepare for loss of capacity — even if there appears to be no imminent risk. Ideally clients will retain their faculties throughout their life but it is important to have an "insurance policy" in place in case they do not.
It may be helpful to note that if a client is habitually resident in England and Wales, then (from an English law perspective) it is comparatively straightforward to put in place an LPA to safeguard their assets here.
It would be of great benefit for the UK to ratify the Convention in England and Wales, not least because of the subsequent availability of the Article 38 certificate procedure. That said, much benefit can be obtained under the current system by preparing clients in advance for the risk of loss of mental capacity and taking advice from suitably qualified lawyers in the jurisdictions in which clients hold assets. In practice, implementing powers of attorney in each applicable jurisdiction is likely to remain the most efficient way of administering clients' assets.
If you require further information on anything covered in this briefing please contact Richard McDermott, or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Private Wealth page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, November 2014