In certain organisations, ‘private client’ legal matters will raise important issues for lawyers and others who make decisions within their organisations, and are tasked with maintaining good governance of the organisation. The former generally arises in organisations that deal with financial matters for their clients; the latter where the business is family or owner-managed, as well as where there are trusts or charities involved in the ownership structure. Both situations bring ‘private client’ legal matters squarely into the commercial and business setting in a potentially fundamental way.
The following looks at some of the most common private client issues to consider.
ACCESS TO ACCOUNTS AND ASSETS: POWERS OF ATTORNEY
Everyone should have a power of attorney irrespective of age or health. There is a separate power of attorney regime applicable to Scotland from that in England and Wales. The concepts underpinning each regime are the same, but the legislation, rules and ‘look and feel’ of power of attorney documents are different across the UK.
In Scotland, the Adults with Incapacity (Scotland) Act 2000 is the principal legislation governing matters and there is a separate Office of the Public Guardian in Scotland (not to be the confused with the body of the same name in England). The Public Guardian has a separate role, which includes the registration of powers of attorney, the oversight of attorneys in certain situations and an investigatory function where there are complaints about the way in which an attorney has acted. Importantly, a power of attorney must be signed before an individual loses capacity and can only be operated following the loss of capacity if the power of attorney is a ‘continuing’ power of attorney under the 2000 Act, has been registered with the Office of the Public Guardian and any ‘springing’ or ‘trigger’ provisions (eg the loss of capacity must be confirmed by a doctor) have ‘sprung’ or been ‘triggered’.
A power of attorney does not necessarily give the attorney or attorneys carte blanche to access accounts and make decisions (eg perhaps if there was evidence of the incapable adult’s wishes to the contrary). However, in most cases the operation of a power of attorney means that the selected and named attorney or attorneys ‘step into the [legal] shoes’ of the incapable adult, meaning that the attorney can access funds and make decisions about investments. Banking, financial or investment management businesses will wish to ensure they have appropriate systems in place that take account of accounts being operated by powers of attorney.
The systems should recognise key points such as:
- the differences between English and Welsh powers of attorney and those governed by Scots law;
- protecting client monies and assets by requiring appropriate processes to update systems that the attorney is empowered to make decisions and obtain information;
- anti-money laundering due diligence, confidentiality, data protection and equalities issues;
- avoiding delays for attorneys making decisions that could cause ‘execution delay’ and therefore potential risk for the financial organisation (eg if only the investment manager had accepted my valid instruction under a power of attorney a change to a share portfolio would have been made before the market turned); and
- avoiding reputational, financial and regulatory (the Financial Ombudsman Service notes significant numbers of complaints in relation to vulnerable and older clients) risks of any alterations in service associated with accounts operated under a power of attorney.
In terms of ‘look and feel’, a ‘principal’ Scottish power of attorney is traditionally issued with a plastic front and red embossed Public Guardian stamp. This still remains the case except where electronic registration of the power of attorney is carried out, which is increasingly popular and in which case, there will be no plastic cover or red embossed stamp. Instead, the power of attorney will bear the Public Guardian’s seal by way of a watermark on each page, has space to be certified as a true copy, and has details on how to electronically verify the power of attorney. Systems and teams should be aware of the two types of physical document that may be presented as evidence of authority as being the attorney.
It should also be noted that a power of attorney can be used where the adult is not incapable. There may be cases where, for example, a frail relative needs assistance with the operation of a bank account, in which instance a power of attorney could be effective.
As well as powers of attorney, there are guardianship orders. Guardianship orders tend to provide similar powers to a power of attorney, but they are court appointed. In the vast majority of cases a guardianship order will only be required because an incapable adult (and they must be incapable for guardianship to be available) has not granted a valid power of attorney. Systems and teams should again be aware of systems to update account mandates etc and recognise the documentation they will be supplied to show that a guardian has been appointed and is able to make decisions. While the documentation will be slightly different (plastic covers and red embossed stamps make a reappearance here), the scope of powers under a power of attorney and guardianship order will often be very similar in nature and extent. It is also important to be aware that the duration of a guardianship order is specific to each adult, and it is also essential to check that the guardian still has authority to act.
ACCESS TO ACCOUNTS AND ASSETS ON DEATH
In Scotland, executors do not have title to access monies and assets until Confirmation (akin to probate) has been granted by the relevant sheriff court. Without Confirmation, some financial institutions will be content to release restricted funds on the signing of an indemnity. This is a well-known system with some statutory underpinning and seems to work well in practice.
Perhaps a more interesting (and risky) situation is that of share portfolios being held in an investment manager’s nominee company. Title to the shares will be held in the nominee company (ie the deceased interests and the item stated in the Confirmation will relate principally to the nominee company not the underlying holdings). In such a situation, particularly where cash is needed to pay an Inheritance Tax liability, an executor may seek to have some of the underlying holdings sold and cash remitted directly to HMRC. This request is usually allowed by investment managers but they should take precautions to ensure they are taking correct instructions from the correct executors. The investment manager may also wish to consider ensuring that an overpayment of tax is repaid to the investment manager’s account or a solicitors’ client account (to avoid the risk of an unscrupulous executor instructing more tax to be paid than is required and giving repayment instructions to HMRC that route the overpayment to the executors). In many cases the risk associated with such decisions will be partly driven by knowledge of the family and solicitors involved in the executory administration, which may drive the ultimate due diligence required before instructing the sale and remittance of the proceeds. Similarly, there may be situations where an investment manager may consider it prudent to accept instructions to sell investments due to market considerations. Stemming from the nominee company holding title to the assets, with appropriate due diligence and retention of cash proceeds, it may be suitable for an investment manager to sell stock prior to the grant of Confirmation.
Survivorship destinations can be very dangerous and can crop up when and where least expected.
The classic situation is where a house is owned by ‘A and B and the survivor of A and B’. On the death of A, B automatically becomes the owner; A’s will does not govern succession to the house. However, survivorship destinations can be attached to any assets in theory, and to make matters more complicated, the default English and Scottish law positions on the issue are opposite of each other. That means that adopting what is thought to be the ‘correct’ English law approach to this matter could cause unexpected problems under Scots law.
Survivorship destinations can arise anywhere. It could be the basis for ownership of a share portfolio, which means that the manner in which the investment management account could affect inheritance of that asset. Accordingly, thought must be given to what is discussed with clients and the terms of documentation associated with the account.
Often survivorship destinations are considered in the context of the title or ownership of the asset in question, be it a house, cash in a bank, or share portfolio. However, the effect of a survivorship destination can be separately or additionally contained in the contractual arrangements affecting an asset. A situation could be an investment management agreement which provides, for example, that a husband and wife agree that on death the account should transfer to the survivor. This is not an automatic transfer of ownership but rather the creation of a contractual entitlement on the part of the surviving spouse to take on that set of investments. However, the practical effect will be very similar; estate and succession planning can be disrupted by a survivorship destination ‘trumping’ what is contained in a will. Thought needs to be taken by professionals setting up accounts, and documentation needs to be checked to make sure it does not cause reputational or financial risks for the financial institution. It also underlines the benefits of professionals working together on estate planning matters to best fit separate but connected matters together, such as the most appropriate way to hold assets to fit in with wishes contained in a will and other estate planning strategies.
LIFE POLICIES: THE ‘RIGHT’ VALUES
It appears to be a less common issue nowadays, but it is still important when dealing with the valuation of life policies on death to recognise any value a policy may have notwithstanding whether there is no pay out due on, for example, the first death. To provide incorrect information or to incorrectly interpret information from a policy provider can risk incorrect information being supplied to HMRC (and tax not being paid) and the Sheriff Court, incorrect payments being made to beneficiaries, and incorrect information being given to family members with ‘legal rights’ entitlements. The latter can be potentially the most serious issue in practice as a family member who is upholding their legal right entitlement is unlikely to be ‘on-side’ with the rest of the family, and failure to provide the correct information to them may cause legal, financial and emotional issues in settling their claim efficiently.
It is to legal rights that we now turn. It is an important topic that connects those within financial institutions and those in family or owner-managed businesses.
As many will know ‘legal rights’ are the automatic rights of succession given to spouses/civil partners and children. Legal rights arise irrespective of what a deceased provided for in a will. While actions in financial institutions can affect legal rights entitlements and the amount of them, it is in the context of family or owner-managed businesses that they deserve real attention. Overlooking legal rights can impact the stability of the business financially through cash flow issues, management distraction and can cause disruption in dealing with the legal rights entitlement (it may involve negotiation with a ‘hostile’ family member (who may even be in a competitor business)) and medium/longer term impact on shareholder value. These issues will be amplified where the major asset in the family is the business and there is no other ready or attractive source of cash, as legal rights are, in the first instance, payable in cash.
Legal rights are an entitlement for a spouse/civil partner to one-half and for children, as a class, one-third of the net moveable estate. Land and buildings held in a personal name are out with the entitlement; broadly everything else is ‘in the pot’. As with matrimonial property, there can be situations where corporate restructuring can convert assets from being outwith the legal rights pot into assets subject to the entitlement. Pensions and death benefits should be structured to avoid legal rights.
Legal rights must not be forgotten. They only arise on death, but can have significant business and commercial consequences. Planning can be undertaken by the family and business to minimise the impact or size of a legal rights and planning will at least ready the business’ governance systems for dealing with the issue.
FAMILY BUSINESS OWNERSHIP
The interaction of commercial issues with private client matters is a topic in its own right. At the highest level, it is vital that those both inside and outside the business who provide guidance and advice must have regard to the different categories and interests involved: family and non-family members, directors and non-directors, shareholders and non-shareholders, leadership and succession planning, technical skills, management opportunities (eg buy-out), young children, family estrangement (where legal rights come to the fore), pensions, investment risk and financial planning to name a few.
It is essential that the interaction of corporate arrangements, financial and investment planning and private client legal matters is dovetailed. If there is not proper synchronisation of the will, articles of association, shareholder agreement, investment portfolio or financial plan then this could be the cause of unexpected outcomes, business disruption and family disharmony.
We should mention that there is Scottish succession law on the horizon with a Scottish Parliament Bill and a wider consultation. Financial institutions and family business will wish to keep abreast of developments.
If one of your fellow shareholders or partners dies or suffers from a severe illness, your business may well be faced with serious questions about retaining control among the other shareholders or partners. At the same time, the beneficiaries of your deceased business partner will expect a fair value for their interest in the business.
Many businesses will have insurance policies in place to produce the necessary cash. However, equally important is making sure that this cash is available in the ‘right’ way, at the ‘right’ time for the ‘right’ people and the business. It is this latter issue that may need particular attention. From time to time we find that the cash is not available for the ‘right’ people and often crucially (inadvertently) the business does not benefit at all.
The insurance policies referred to above might go under a whole gamut of names: ‘shareholder protection’, ‘partner protection’, ‘keyman’, ‘group life assurance’ or anything else. The policy (as with any policy), simply, is a method of producing cash on the occasion of a certain agreed event happening. The more important issues (and questions) perhaps are then where does that cash go, for whose benefit, and who is in control of it? Again, the proper interaction of financial planning, succession planning and corporate documentation is critical to effectively and efficiently implement the business’ aims with such protection.
OWNERSHIP BY CHARITIES
This is not a new phenomenon (I discussed this in The In-House Lawyer in December 2014 (issue 226, page 37). I simply highlight it again. For businesses owned by charities, the fact of that type of ownership is an area of risk for the commercial business. It needs to understand the parameters in which the charity operates and appreciate key governance drivers for the charity such as investment rules.
TRUSTEES SIGNING DOCUMENTS
Care should be taken to make sure trustees sign documents correctly. The starting point is ordinarily that Scottish trustees cannot delegate authority or grant powers of attorney, although in certain circumstances they can make decisions by majority. It also vital to ensure that changes in trustees over the years have been documented correctly otherwise the trustees may be different from what is expected. Regularising the position can be time consuming.
By Alan Eccles, partner, Brodies LLP.