This blog was first published by Voyant and the original article can be found on the following link: https://voyantblog.wordpress.com/2020/05/11/collaboration-cash-flow-planning-business-lpas/
It is reproduced in full here.
By Sebastian Elwell & Stewart Stretton-Hill TEP
Most business owners are likely to have a range of advisers, including accountants, solicitors and financial planners. It is easy for these advisers to work independently of each other, but the magic happens when they work together as a team.
In this article, we’ll provide a practical example of how a financial planner or accountant can collaborate with a solicitor to meet an important client planning need, the Business LPA. In fact, this article itself is a collaboration between a financial planner and solicitor.
It can be difficult for healthy clients to imagine being unable to make decisions for themselves. Even clients who are acting as attorneys for parents or are carers often think it won’t happen to me.
But drawing up a Lasting Power of Attorney is fundamental to good financial management and providing clients with the care they’ll need in difficult times. We must persuade clients to put one in place before it’s too late.
LPAS & Cashflow Planning
Cashflow planning is essential when talking to clients about the necessity of an LPA. Looking at their current and projected cashflow requirements gives you the opportunity to ask ‘what if?’
Through cashflow planning, clients can see just how much money they need in order to cover their living costs, and how those might increase if they need additional care. Add to that the question of who would manage their finances if they couldn’t do it anymore, and clients can start to see the downsides of not having an LPA.
How To Talk To LPAs During Cashflow Planning
Solicitors are the experts in LPAs, but financial planners and accountants can greatly benefit from reasonable working knowledge of LPAs. This way, they can ensure their clients are protected and that they position the referral correctly to initiate a collaboration rather than a simple hand off.
The best way to introduce LPAs into a cashflow conversation is to build the basic cashflow plan and then introduce realistic scenarios that would change the plan, such as:
- How would you continue to pay the bills if you couldn’t work?
- What if you ran up unexpected debts?
- Do you have plans in place if you lost capacity as a result of an accident or illness?
- What would you do if you had to give up work to care for your spouse, parent or child?
- What might happen to your capital or assets if you hadn’t appointed anyone to look after them?
This is also an excellent opportunity to talk about safeguarding. Working age clients might not feel personally vulnerable, but they will be aware of the potential for someone to abuse a position of financial trust. Explain to your clients how to monitor and protect accounts, how they can bring fraudulent attorneys to account and how professionals like solicitors or accountants can keep an eye on their finances under an LPA.
Now that the client can see the need for the LPA and speaking to a solicitor, talk to them about the specific considerations the solicitor is likely to ask about. This will allow the client time to think about their situation ahead of the conversation with a solicitor.
Choosing An Attorney
Most clients will want a family member to act as their attorney. But they should understand the burden that being an attorney places on that family member. Running their own lives and the financial affairs of the donor can become a strain. While attorneys have an obligation to act in the best interests of their clients, even the most well-meaning people can lose sight of what ‘best interests’ means, interpreting it too widely or forgetting whose best interests they should have at heart.
There have been many cases before the Court of Protection where attorneys have deliberately or unwittingly abused or misused their powers. One family felt it appropriate to purchase themselves Rolex watches while leaving the donor £5 per week spending money [Re GM 2013]. Another attorney purchased a reptile farm with the donor’s funds thinking it was a sure-fire investment (it went bust) [Re Buckley 2013].
Professional Attorneys
Clients may shy away from the idea of appointing a professional attorney because of the cost. But professional attorneys are regulated and insured. Intuitively family members may feel certain about ‘best interests’ without realising it is a specific legal test, imposed by the Mental Capacity Act 2005 section 4. A professional attorney will be fully familiar with the best interests test, can act impartially and stand up to inappropriate demands or pressure from the donor’s family members.
As the famous quote by Red Adair goes, “If you think it’s expensive to hire a professional to do the job, wait until you hire an amateur.”
Business Lasting Powers of Attorney
For family business owners, putting in place an LPA is crucial. A family business is likely to be the client’s main source of income and will form a significant share of their retirement pot. Clients must understand the huge impact that loss or impairment of their mental capacity will have on the business. If the business cannot continue their income may dry up completely, decimating their financial security.
A Business LPA is as essential as key-man insurance.
If the client does not make a business LPA then a deputyship order may be unduly restrictive, making it hard for the deputy to run the business after the client has lost capacity. The deputy is usually a family member (often the spouse) of the individual. But does a family member have the right skills and expertise to successfully operate the business?
While it is technically possible for the Court of Protection to appoint two deputies (one for personal finances and the other to manage the business) this would be very unusual and add another layer of expense and reporting.
A business LPA is essentially no different than a normal LPA. The key difference is that a business LPA restricts the attorney’s authority so they may only deal with the individual’s business interests. The client can make a separate LPA enabling other attorneys to deal with their personal finances.
Clients must take proper advice from a legal professional specialising in mental capacity and later life issues when making a business LPA as there are a range of issues to consider:
- Who would be best placed to manage the business?
- Will the attorney be allowed to charge or draw a wage for their time in running the business?
- Does the attorney have the necessary skills or qualifications to continue to run the business?
- What obligations does the client owe to the business investors?
- What instructions do the attorneys require?
Clients who own several businesses should consider making different LPAs for each business with separate instructions and guidance.
- Does the legal structure of the business permit an attorney to act?
The underlying legal structure of the business may provide terms on what should happen if the owner loses capacity. For example, the model articles for companies provide that a director’s appointment is immediately terminated if they lose their mental capacity. This would mean an attorney cannot act on the individual’s behalf as they would no longer be a director. This could cause significant issues in the exercise of voting rights, placing the entire management of the business at risk. Plus, a draconian provision like this may leave the business open to a discrimination claim under the Equality Act.
Business Protection Insurance
The high-level conversation about business LPAs leads naturally to a conversation about
business protection insurance and ensuring the right assets are in the right hands with the right legal control at the right time.
A collaboration between professional advisers helps to deliver advice outcomes that clients will recognise and value and helps to cement your professional network.
About the authors –
Stewart Stretton-Hill TEP is a senior associate with Irwin Mitchell LLP. He qualified as a personal injury specialist in 2000 and acted on high value clinical negligence claims for children who sustained brain damage as a result of injury at birth. In 2007 he switched to private client specialising in advising on Court of Protection applications, powers of attorney and matters affecting elderly and vulnerable clients. Stewart is a member of STEP, Solicitors for the Elderly, and the Law Society Probate Section and is part of the firm’s internal Later Life team of specialist advisors.
Sebastian Elwell, FPFS TEP, specialises in providing joined-up advice across the professions. As an Independent Chartered Financial Planner, a Fellow of the Personal Finance Society, full member of STEP and accredited member of SOLLA he has worked with accountancy and legal professions to advise vulnerable clients for 15 years.
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