Best interests

Tuesday, 01 May 2012
HHJ Marshall QC's verdict in the case of SM v HM is big news in both the mental capacity world and the trust sector in general.

Developed legal systems have long recognised the need for an appropriate mechanism to allow the effective management of wealth belonging to a person (P) who lacks the mental capacity to administer it themselves. If P has not planned for this eventuality (e.g. by making a power of attorney that endures beyond incapacity), common-law jurisdictions traditionally respond by either imposing a form of state-regulated guardianship, where P’s powers are delegated to a substitute, or permitting the management of the assets through a private trust arrangement.

In England and Wales, the Mental Capacity Act 2005 (the Act) governs decision-making for people who lack mental capacity. The Act allows the Court of Protection (CoP) to appoint substitute decision makers (deputies), and permits the settlement of P’s property. However, the Act does not specify when either structure is appropriate, and it was not until the recent decision of HHJ Marshall QC in HM v SM (2011) that the position was clarified.

Case facts

The case concerned HM, a seven-year-old girl, who was awarded substantial damages following a clinical negligence claim. It was agreed that HM would never be mentally capable of managing her affairs and a suitable mechanism was needed to allow the award to be administered for her benefit.

HM’s mother argued that the optimal structure was a trust under which she would act alongside a professional trustee. She suggested that this would be more cost-effective than deputyship, and would allow her interest in and knowledge of HM’s needs to be coupled with the professional trustee’s expertise. While HM’s award was sizeable, it was accepted that it represented only a modest proportion of the cost of her overall needs, so costs considerations were particularly important.

The Court considered evidence from a number of experienced practitioners, and noted that trusts were believed to offer potential advantages compared with deputyships. These were that beneficiaries and their families preferred a private arrangement because of a perception that the CoP and the Office of the Public Guardian (OPG) represented intrusive and unwelcome state interference, and a sense that trusts were associated with greater responsiveness, informality and efficiency.

A sophisticated trust would have wide powers of investment, avoiding repeated applications to the Court. It could provide for other family members, or circumvent the application of the intestacy rules, particularly where the settlor was too young for the Court to be able to approve a statutory will.

Unlike a deputy, who must seek discharge if P later regains capacity, the trustees would not automatically need to retire. The beneficiary would have an incentive to continue the trust (damages from personal injury awards are disregarded from means-test thresholds for various state benefits and social care entitlement if held on trust or by a deputy), which could protect a vulnerable yet capacitated beneficiary.

The decision

HM’s trust was approved, but HHJ Marshall’s detailed 50-page judgment made it clear that, barring exceptional cases, deputyship would be the ‘default’ option. She disputed many of the professed advantages of using a trust, noting that the Act’s joint deputyships were common, allowing professionals and family members to work together, and that the Court can and does make bespoke orders giving deputies wide powers, obviating the need for repeated applications.

She also disagreed that a deputy would necessarily be impersonal or representative of a hostile Court (particularly if a family member acted), and suggested that perceptions of delays and inefficiencies on the part of the Court and OPG were outdated, noting that both have ‘improved considerably’ in recent years and are committed to further improvement despite widespread public sector cutbacks. Most importantly, however, she considered that deputyship represented better protection for P.

This decision confirms that only exceptional cases justify a departure from the gold standard of deputyship

The Judge observed that deputyship offers ‘built-in’ safeguards, including compulsory insurance, supervision by the OPG (which can call for accounts and investigate concerns) and the facility for the Court to restrict the deputy’s powers. These augment the deputy’s statutory duty to act in P’s best interests, and the Court can sanction failures by removing them. By contrast, trustees’ duties (to manage the assets properly in accordance with the terms of the trust) are not directly equivalent, and are arguably narrower.

Family conflicts

Second, HHJ Marshall perceived that a deputy (particularly a sole professional) would be able to negotiate family conflicts at least as well as trustees. She noted that deadlock between trustees would need judicial intervention in any event, and that the Court’s input may actually help to resolve pressures to use P’s funds improperly by giving the deputy grounds for referring matters back to the Court. She also observed that the Court should be alert to possible conflicts of interest where family members are proposed as trustees.

Third, the Judge noted that trustees could only manage the settled assets, while a deputy could administer all of P’s property and affairs, including benefits, tax returns, future inheritances, etc. Management by the deputy was preferable as P would be inadequately protected if non-trust assets were handled informally (e.g. by family), given the lack of indemnity cover.

Finally, the Judge disputed that trusts were necessarily cheaper than deputyships. Both require similar Court applications, but deputyship applications avoid the involvement of the Official Solicitor, whose costs will usually outweigh the GBP100 deputyship appointment fee. HHJ Marshall also noted that while a trust avoids ongoing statutory fees, this needs to be weighed against the relative lack of safeguards for P, and the possible costs of managing P’s non-trust assets.

In addition, the Judge noted that the fees of solicitor deputies were scrutinised by the Senior Courts Costs Office, providing a further safeguard for P by ensuring ‘reasonable costs, reasonably incurred’. By contrast, as there was no similar provision for trusts there was a risk that professional fees may drift ‘unchecked’ unless there was a confident lay trustee prepared to challenge these.

Case consequences

HHJ Marshall’s decision confirms that only exceptional cases justify a departure from the gold standard of deputyship, where the advantages to P demonstrably outweigh the loss of protection. The Judge sympathised with the desire to preserve HM’s limited damages for her care but cautioned that the inadequacy of an award (whether through miscalculation or compromise on liability) will not justify a trust.

The decision is what reflects P’s best interests given their actual resources, not the reasons why they are at that level. Nonetheless, she gave welcome clarification that the costs of deputyship are a foreseeable and reasonable component of a claim for a brain-injured person, and asserted that as deputyship is the Court’s clear preference, defendants should not argue that P should mitigate their loss by applying for a trust to be approved.

In practice the Court will be unwilling to agree that inter vivos dispositions are in P’s “best interests”

The decision is also consistent with a developing line of authorities that suggest, despite the fact that the Act expressly permits gifts and settlements, in practice the Court will be unwilling to agree that inter vivos dispositions are in P’s ‘best interests’, save in a narrow range of circumstances, even if it is proposed that they retain a beneficial interest.

HHJ Marshall noted her judgment means that trusts will be approved in very few cases. Barring ‘major and unusual’ tax considerations, trusts are likely to be appropriate only in the rare case where the avoidance of the intestacy rules can be proved to be in P’s best interests (as distinct from the best interests of those seeking to displace them), e.g. where a claim is made to the Criminal Injuries Compensation Authority (CICA), which is precluded from awarding damages where the assailant would inherit from P on intestacy.

Trust deed

As protection for P is paramount, a trust deed will only be approved if the Court is satisfied that there are compelling reasons to justify it, and the draft deed must:

  • be revocable, and capable of termination by the Court
  • be a bare trust, or where there is provision for income to be accumulated its powers should satisfy s89 of the Inheritance Tax Act 1984, and no other person should be able to benefit while P is alive
  • exclude s31 of the Trustee Act 1925. Extended powers of advancement will only be acceptable if accompanied by a restriction preventing its use without P’s consent, to prevent the assets being resettled onto further trusts
  • include express provision for the production of accounts, and for the trustees to carry suitable insurance
  • provide for a minimum of one lay and one professional trustee at all times – the court will also require evidence showing that the proposed lay trustee is suitable and capable of exercising effective supervision over the professional trustee(s)
  • include a power to remove trustees, vested in P, so that the Court can exercise it on their behalf;
  • provide that on P’s death the capital either reverts to their estate or is subject to an overriding testamentary power of appointment that the court can exercise on their behalf (unless, as noted above, the CICA insists that the award reverts to it).

Comment

Kelly Greig

About the author: Kelly Greig TEP is Head of Court of Protection Services at Moore Blatch in Lymington, Hampshire. She is a member of the STEP UK Practice Committee

SM v HM: what does it mean for practitioners?

Both parties to this case agreed that, as a matter of law, a settlement can be used as an alternative to a deputyship. The Mental Capacity Act 2005 (the Act) permits the Court to authorise the settlement of P’s property, whether for P’s benefit or the benefit of others. However, as shown in HM v SM, it is only in limited circumstances that the Court will make such an order, and deputyship will be the usual option.

Each case needs to be considered on its own particular facts and I would encourage practitioners not to just accept that deputyship is the answer. To establish whether a trust may be appropriate, consider the following:

Do the intestacy rules bring about an undesired result? Is P a minor and, therefore, could a statutory will not be executed on P’s behalf?

Are there cost factors to consider? Although costs were accepted in HM v SM as a good reason for a trust, this was mainly because the personal injury award received was less than needed for P’s care and the solicitor trustee undertook to charge only what he would be entitled to had the deputyship remained and his costs been assessed by the Court.

When making an application, consider what items cannot be dealt with in the trust. For example, will you need to become appointee for any benefits, or perhaps have to ask the Court for an order allowing the trustees to sign P’s tax return? Failure to deal with these issues will result in the need to continue with dual, parallel systems – the trust but also the deputyship to deal with other items falling outside the trust.

An application is worth making if you consider there are good reasons for a trust. To have any chance of success, your application must be very clear about your reasons for creation.

Author block
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Carol McBride

Carol McBride TEP is a Solicitor in the Court of Protection team at Pannone in Manchester. She is a member of the Mental Capacity Special Interest Group Steering Committee.

Topic
Trusts
Section
STEP Journal
Region
England and Wales

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