INHERITANCE TAX – PLANNING
Synopsis: New plans to introduce financial incentives for doctors for the early diagnosis of Alzheimer’s and risk-screening tests for the middle-aged may be effective weapons in the war on dementia; but what will an early diagnosis of dementia mean for wealthy clients who have not yet carried out inheritance tax planning or made provision for somebody to deal with their estate on their behalf in the event of them becoming mentally disabled?
In light of concerns that only half of the estimated 850,000 people living with dementia in the UK have been diagnosed, the NHS has announced plans to pay doctors a financial incentive to boost early diagnoses. Under the national initiative, doctors who opt into the scheme will receive £55 for every new patient they identify as having dementia. However, while an early diagnosis will help to ensure that those with dementia get the tailored care and support they need, it could cause issues for wealthy clients who have not yet finalised their estate planning strategies.
Mental capacity is a pre-requisite for making effective gifts and creating valid trusts and wills – the cornerstone of estate planning – and once dementia has been diagnosed, capacity to make gifts will, at best, be in doubt. Although dementia will often be of gradual onset – allowing gifts to continue to be made during lucid intervals – a diagnosis could leave wills and gifts made in the timeframe surrounding the diagnosis open to challenge. This could create real problems where relationships within the family are strained or hostile.
While the existence of a valid (and pre-registered) lasting power of attorney (LPA) will go some way towards reducing the difficulties faced by the family of the diagnosed; even this will not provide any assistance when it comes to inheritance tax planning. An attorney’s power to make gifts on behalf of the donor is strictly limited to those made on ‘customary occasions’ (such as birthdays, Christmas etc) and even then, the gifts made must, taking account of all the circumstances, be ‘reasonable’ in relation to both the size of the donor’s estate and the size of the gift itself. This leaves little scope for estate planning without the additional expense of an application to the Court of Protection.
Ensuring that a Lasting Power of Attorney is in place and registered may however provide invaluable benefits for the client’s family later on notwithstanding the restrictions on inheritance tax planning. Where an individual loses capacity to act for himself and no power of attorney is in place, a deputyship application will need to be made before any financial or personal welfare decisions can be taken on behalf of the incapable person. Not only does this take the decision of who will act out of the hands of the client; it will lead to additional costs, delays and administration and create a huge inconvenience to the family as bank accounts and other assets may well be inaccessible until the position has been finalised.
The risk of dementia increases with age and because people are living longer, the number of people with dementia is increasing. It is estimated that by 2021, the number of people with dementia in the UK will have increased to around 1 million. This latest initiative to encourage early diagnosis of the disease reinforces the importance of planning ahead. Ensuring that wills and powers of attorney are in place will be vital when advising middle-aged to older clients.
However, while it may be tempting to implement inheritance tax planning strategies in advance, caution should be exercised. Although it is true that making gifts will become more problematic after a diagnosis of dementia, there is, of course, no guarantee that dementia will set in and clients will be ill-advised to make substantial gifts when future capital and income requirements remain uncertain. Clearly it is important to adopt a careful balance when considering lifetime gifting.
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