When the Mind Steps Back: An Estate Plan That Survives Incapacity

Most estate plans are built around a single event. The will is drafted, the nil rate band is mapped, the trusts are settled, and the whole structure is designed to operate on the day the testator dies. It is an orderly assumption, and a misleading one. The period between a diagnosis and a death can stretch across a decade, and during that interval the plan requires decisions to be made by someone. If no one has been authorised to make them, the machinery stops.

That is the capacity cliff: the point at which a person can no longer sign, instruct or consent, and the documents that were meant to protect the family suddenly have no hands to work them.

Capacity is not a single switch

The Mental Capacity Act 2005 is often misread as a broad test of soundness of mind. In practice it is decision-specific. A person may be unable to manage a share portfolio while remaining perfectly able to decide where they wish to live, what they wish to eat, or whom they wish to see. Capacity can also fluctuate, and it must be assumed unless there is evidence to the contrary.

The clinical reality reinforces the point. Roughly one in eleven people aged 65 and over in the UK lives with dementia, and the figure rises sharply with age. Add stroke, acquired brain injury, severe mental illness and the ordinary cognitive decline of very old age, and the likelihood that at least one member of a family will face this question becomes substantial rather than remote.

Two documents, two distinct jobs

A lasting power of attorney is not one instrument but two, and they do different work.

The property and financial affairs LPA covers bank accounts, investments, property, pension income and the payment of bills. It can be used while the donor still has capacity, if the donor consents, which makes it useful for a person who is physically frail but mentally sharp. The health and welfare LPA covers where the donor lives, day-to-day care and consent to medical treatment, and it can only be used once the donor lacks capacity for the relevant decision.

Neither can be signed by someone who has already lost capacity. Neither operates after death, when the executor's authority takes over. Both must be registered with the Office of the Public Guardian before use, and registration is routinely measured in months rather than weeks. A document signed in a hospital corridor the week before it is needed is, in practical terms, no document at all.

Where the tax planning quietly depends on it

Inheritance tax planning is not a single act but a sequence of decisions: using the annual exemption, making gifts out of normal expenditure from income, transferring assets between spouses, settling a trust, lending to the next generation, or varying a will within two years of death. Every one of those steps requires either a capable donor or an attorney with the authority to act.

An attorney's gifting powers are narrower than many families assume. Under section 12 of the Mental Capacity Act, an attorney may make gifts to charity, and to people connected with the donor on customary occasions such as birthdays and weddings, provided the value is reasonable and the gift is in the donor's best interests. Substantial lifetime transfers, the kind that start a seven-year clock, generally require the authority of the Court of Protection.

The consequence is a planning gap that is easy to overlook. A strategy built on giving away capital during life will stall at the moment capacity is lost, even though the tax exposure continues to grow.

The alternative is slower and more expensive

Where no LPA exists, the family must apply to the Court of Protection to be appointed as a deputy. Deputyship works, and the court supervises it conscientiously, but it is slow, publicly recorded, subject to annual reporting and fees, and constrained in what it permits. Gifts, trust arrangements and tax-motivated transactions usually require a separate application, with legal costs attached. For a family already managing care, this is an unwelcome second burden.

There is also the question of the will itself. If a will needs to be made or rewritten for someone who lacks capacity, the route is a statutory will application to the same court, a process that can take many months and involves notification of interested parties.

Care fees, gifting and the deprivation question

Local authority means-testing for care brings its own scrutiny. Deliberately disposing of assets to reduce a care bill can lead to them being treated as notional capital, and an attorney who gives away a donor's home or savings for that purpose risks breaching the duty to act in the donor's best interests. Inheritance tax planning and care-fee avoidance are different questions with different tests, and advisers should be explicit about which one is being addressed.

A practical checklist

• Register both LPAs at the earliest opportunity, not at the point of need.
• Decide whether attorneys should act jointly, or jointly and severally. For complex or contentious estates, consider a professional co-attorney alongside a family member.
• Leave written guidance for attorneys: a letter of wishes, a gift policy, contact details for solicitors, accountants and financial advisers, and an inventory of business interests.
• Review the appointments after marriage, divorce, bereavement or a falling-out, since an unsuitable attorney is harder to remove than to appoint.
• Check that a financial attorney will have practical access to digital accounts, and record where credentials or a password manager can be found without compromising security.
• Note that an advance decision to refuse treatment is a separate document from a health and welfare LPA, and covers refusal only.

Planning for the person, not only the estate

The will is the instrument for the estate. The lasting power of attorney is the instrument for the person who owns it. A wealth transfer strategy that functions only on the assumption of continued good health is not, on close inspection, a strategy at all; it is a hope with paperwork attached. Families who address capacity at the same time as inheritance tax tend to find that the conversation is calmer than they expected, and that the documents, once registered, ask nothing further of them until the day they matter.