Private Trusts and the Court of Protection

Sun, 03 Feb 2013

By Claire Van Overdijk
The Court of Protection has jurisdiction over the property, financial affairs and personal welfare of people who lack mental capacity to make decisions for themselves. Among its various roles the Court is responsible for determining disputes as to the registration of enduring powers of attorney (“EPA”), and Lasting Powers of Attorney (“LPA”), appointing new trustees, authorising certain gifts and making statutory wills. 
In the absence of an EPA or LPA, the Court has power to appoint a deputy to manage the property and affairs of an individual who lacks mental capacity (s16, Mental Capacity Act 2005 (MCA 2005)). It also has power to authorise the setting up of a trust to hold the individual's property (s.18(1)(h), MCA 2005). When deciding which structure to use the Court must consider what is in the best interests of the mentally incapacitated individual (s.16(3), MCA 2005). However, nothing on the face of the MCA 2005 prevents the setting up of a trust as an alternative to deputyship. 
Prior to the MCA 2005, while the setting up of a trust for individuals without capacity was an exception to the norm of receivership, successful applications for the implementation of a private trust were not uncommon and recognised the main benefits of a private trust over the appointment of a receiver being the flexibility afforded and lower costs involved. Further, trusts are often created for claimants in personal injury cases to protect an award from being treated as capital when assessing entitlement to means-tested benefits. The test prior to the MCA 2005 required the court to consider whether the proposed course was reasonable in all the circumstances. However, since the MCA 2005, the Court now must focus on the best interests of the incapacitated individual when deciding how the individual’s property is to be held/managed. 
This is a fundamentally different approach and until recently there was a paucity of post MCA 2005 jurisprudence on the factors to be taken into account when preferring one route over the other and determining the general approach to be taken with regard to the management of damages awards for personal injury or clinical negligence for incapacitated adults, which represents a growing body of individuals who come under the jurisdiction of the Court. These incapacitated individuals usually do not fit the description of the majority of cases handled by the court: the elderly mentally infirm who have either taken the step of establishing an enduring or lasting power of attorney in which they have appointed an attorney or attorneys to manage their financial affairs should they become incapable of doing so or, if the absence of an EPA or LPA, the appointment of a deputy on their behalf to do so. Recipients of damages awards tend to be younger and many are in receipt of substantial awards to administer, which requires a very different role compared to the management of day to day finances such as paying bills by a deputy.
Recent cases have filled in this gap, in particular the decision of Her Honour Judge Hazel Marshall QC in the case of Re HM [2012] COPLR 187. In this case the applicant mother applied for a reconsideration of an order that it was not appropriate for the Court to authorise the creation of a trust of the assets of her daughter, HM, who was seven years old and had been born with cerebral palsy because of injuries sustained during her birth. Proceedings had been brought against the relevant NHS trust and HM was to receive a lump sum, which was significantly less than the level at which her financial needs had been calculated. In order to save some of the costs involved in a deputyship, it was proposed to set up a personal injury trust to administer the damages award. The proposed trustees were the mother and HM’s solicitor. The application was refused by District Judge Gordon Ashton at first instance who decided that it would not be in HM’s best interests to authorise the trust. The case was heard by HHJ Marshall QC on an application for reconsideration under rule 89 Court of Protection Rules 2007.
HHJ Marshall QC highlighted a non-exhaustive list of factors to be considered in deciding whether to authorise the creation of a trust, the weight of each factor being individual to any particular case. The main factors were identified as follows:
(i)    the limits of a deputyship as against a trust such as in a situation where it was not in the best interests of the incapacitated individual for the rules of distribution on intestacy to apply if the individual died before attaining majority, or where the individual was an adult who might regain capacity, but who might then be vulnerable to financial abuse;
(ii)    the least restrictive option for the incapacitated individual; 
(iii)    the degree of supervision applied to each regime acknowledging that there would be less supervision and diminished protection if the incapacitated adult’s funds were placed in a personal injury trust and the extent of the proposed trustee’s experience in such matters;
(iv)    the degree of protection afforded by each regime, in particular the mandatory supervision of deputies by the Office of the Public Guardian and continued court involvement in the appointment of a deputy;
(v)     the comparative cost and expense; 
(vi)    administrative efficiency; and
(vii)    the investment powers of trustees compared to deputies. 
Although the mother’s application was allowed on its particular facts(1) , in her general assessment of the two regimes HHJ Marshall QC came down heavily in favour of deputyship as generally being in the best interests of an incapacitated adult. The main areas of concern were the absence of statutory oversight under the MCA 2005 by the use of a trust and the increased cost and expense in respect of the charges levied by a professional trustee. HHJ Marshall QC concluded that in the absence of a factor of magnetic importance a deputyship was likely to be preferred over a trust arrangement in all but the most singular circumstances. 
While this case was decided on its particular facts and should not be regarded as a return to the more welcoming approach for such applications under pre-MCA 2005 incapacity law, it does provided helpful parameters for those advising on the merits of an application to set up a trust in place of deputyship. A party proposing a trust will be required to provide detailed evidence to enable the court to carry out a balance sheet approach of the benefits and disbenefits of a trust compared to a deputyship and to show that the former will be more cost effective without prejudicing the trust assets. Furthermore, the court will expect to see evidence of the proposed lay trustees’ competence as well as the professional trustee’s charges and commitment to a charging policy. 
Another case that has shed light on this area is Re JDS [2012] COPLR 383, a decision of Senior Judge Lush. The application related to a young man, J, who had received substantial damages for clinical negligence. The application was made by his deputy for authority to transfer £325,000 into a flexible power of appointment trust whereby a settled gift would be made primarily in favour of J’s parents. The purpose of the gift was to reduce the amount of inheritance tax that would otherwise be payable upon J’s death.
J was an only child and he lived with his parents in a house bought from the damages award and held for J in the names of the deputy and the parents as trustees. Although earlier medical reports considered that J was only likely to survive into his late twenties or early thirties, subsequent reports indicated that his life expectancy was likely to be into his late forties or early fifties with the continuation of appropriate care. The deputy argued that the proposed arrangement was in J's best interests; it did not affect his financial security but it allowed him to make provision for his parents and mitigate inheritance tax and that would give effect to the wishes and feelings that he would have had, if he had capacity. 
Senior Judge Lush rejected the application and concluded that it would not be in J’s best interests to authorise the proposed gift at this stage of his life. In J’s case, as in most cases where an individual’s assets derive exclusively from a damages award for personal injury/clinical negligence, a factor of magnetic importance when determining whether or not a lifetime gift is in his best interests is likely to be the purpose for which the compensation was awarded and the assumptions upon which it was based. In the judge’s view this extended to the fundamental principles that underlie clinical negligence litigation generally, in particular that of restitutio in integrum: to place the claimant in the same position as he would have been had he not suffered the wrong and not to interfere with the sum that had been carefully calculated to support him to the end of his life. As such, it is the Court’s duty to ensure that as much money as possible remains available to meet the incapacitated adults’ ongoing needs throughout his lifetime and no duty exists to mitigate inheritance tax for others. The judge emphasised that while the Court was generally sympathetic to family members who take on a caring role and dedicate their lives to injured relatives, it was not part of the Court’s function to anticipate, ring-fence or maximise any potential inheritance for the benefit of those family members as this is not the purpose for which the award was made. The Court recognised that a distinction could be drawn, however, on different facts where the incapacitated adult had surplus funds from a separate source, e.g. from an inheritance or a lottery win. 
Under the pre-MCA 2005 rules the outcome of this case may well have been different. However, under the MCA 2005 this case demonstrates that in the absence of special circumstances, it is unlikely that the Court of Protection will authorise a gift out of funds derived from an award of damages for personal injury/clinical negligence. While the proposals would clearly have benefitted J’s parents, aside from giving effect to the wishes and feelings J would have had if capacitous, it is difficult to see how J would have benefitted. 
Following the introduction of the MCA 2005 these cases demonstrate a fundamental shift in emphasis in applications for the management of financial affairs of protected parties through trusts, especially for those that do not fit the archetypical description of a protected party under the Court’s jurisdiction. Aside from the central role afforded to the best interests of the incapacitated individual under the MCA 2005, there can be no room for doubt that, absent special circumstances to be assessed on the facts of each case, the Court will be reluctant to depart from the protective regime afforded by the MCA 2005 and the scrutiny and supervision of those who manage the financial affairs of protected parties. 
(1) The judge identified three factors without which she would not have been prepared to authorise the creation of the relevant settlement. These were a) the administration of a trust, based on the evidence in this case, would be cheaper than a deputyship; b) HM’s mother was “a competent, forceful, well-educated and responsible person” and her presence as a trustee would provide a means of monitoring legal costs; and c) the proposed professional trustee had agreed that his firm’s costs would be limited to the guideline rates that would be allowed on detailed assessment.

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