There are myriad reasons why clients may become vulnerable over time – be it through disability, addiction or age – and it can lead to problems, including issues of capacity and financial abuse.
All too often, the focus of advisers as clients grow old is on the unnecessarily narrow area of social security access. But as an adviser, it is important to be able to recognise when clients become vulnerable and the steps that can be taken to ensure their continued financial wellbeing should that occur.
It may also be that a client is caring for a disabled child and wants to take steps to ensure that once they are gone the child is looked after. Indeed, social welfare organisation Anglicare has noted that 150,000 parents aged over 65 are caring for one or more disabled children. Of them, 81 per cent are female and, all up, more than 18 per cent are in their 80s and 90s themselves.
With Australia’s ageing and longer-living population, this situation will occur more often. Increasingly, financial advisers will be faced with competing interests – they need to be aware of their client’s situation if they suspect they are vulnerable, and then consider issues such as protection of assets and the client’s need for independence.
There are a number of ways to help ensure that vulnerable clients and their beneficiaries are protected. These include ensuring enduring powers of attorney are in place, as well as considering enduring power of guardianship and advance care directives. The place of protective and special disability trusts should also be considered.
Powers of attorney
Each state has different legislation when it comes to powers of attorney, so it is important to be aware of this, particularly if you have clients who move interstate, have assets in different states or who spend their time between two or more states.
It is also important to understand the difference between a general power of attorney and an enduring power of attorney.
A general power of attorney grants authority to a person to make legal or financial decisions on another person’s behalf for a set period of time. However, the authority of the general power of attorney ends if the person who implemented it loses capacity. A general power of attorney can’t be used to make personal decisions – such as health-related decisions – on someone else’s behalf.
The question of capacity is a vexed one, as different states have different definitions for what constitutes capacity.
Because of the limitations on a general power of attorney, we would recommend an enduring power of attorney. Depending on your state, an enduring power of attorney can be used to make personal decisions, as well as legal and financial decisions, on someone’s behalf (it is also possible to grant an enduring power of attorney that places limits or conditions on the decisions that can be made).
The advantage of an enduring power of attorney is that if a client loses the capacity to make personal decisions – including health-related decisions – the holder of the enduring power of attorney can make them on the client’s behalf.
The implications of not having an enduring power of attorney can be serious. In this case, if a client loses capacity, there is no one authorised to make decisions on their behalf, and it is necessary to make an application for guardianship and/or administration. Family members, close friends, professionals or indeed anyone with a genuine and continuing concern regarding the person’s welfare can make the application.
On the whole, applying for guardianship can be stressful, expensive and time-consuming. An easier solution is to ensure that clients have enduring power of attorney arrangements in place.
Statutory wills
With ageing clients who have lost capacity, sometimes the original will they have drafted does not effectively deal with their estate or carry out their intentions and wishes. In this situation, a statutory will provides the power to have a will signed on behalf of a person who does not have capacity. This can be useful if, for example, the beneficiaries named in the will die before your client, but your client no longer has the capacity to redraft a new will to recognise these changes.
This involves an application being made to the court where a proposed will is authorised.
Protective and special disability trusts
Depending on the level of disability and the client’s capacity, consideration should also be given as to whether a protective trust or a special disability trust (SDT) might be useful to protect other vulnerable beneficiaries.
These trusts can be created during a client’s lifetime, or as part of a client’s will to take effect on the death of the last surviving parent.
With a protective trust, it is recommended that the special needs beneficiary be prioritised under the trust structure. There should be an independent controller, and accumulation of income in the trust is permissible.
Protective trusts have flexibility in terms. The downside is that assets and income are generally included in any means testing (although there are strategies that can potentially reduce the amount assessed).
SDTs are another option. They allow for capital (up to a threshold) and income to be exempted from means testing. This means parents and relatives are able to provide for a severely disabled beneficiary without it affecting any entitlement to the disability support pension.
An SDT can be established only for someone who is severely disabled. The majority of the funds must be used for care and accommodation and the trust is required to have either two trustees or a professional trustee appointed.
SDTs can receive contributions only from immediate family; within that, contributions from a principal beneficiary or domestic partner are limited (such as from superannuation or an inheritance).
Income from the trust is accumulated and is taxed at the beneficiary’s marginal rate, although there are capital gains tax concession for assets passing in and out of an SDT. An exemption for a principal place of residence applies.
Attribution rules
The introduction of attribution rules in 2002 has had a marked impact on planning for vulnerable clients and their beneficiaries, adding to what is already a complicated area.
The attribution rules allow Centrelink to attribute a percentage of the value of the assets and income of a designated private trust or designated private company to a particular individual for the purposes of means testing that person.
The rules require an analysis of the control of the entity and the source of the funds. There are compulsory principles that apply, which assess various factors, including the relationship between the applicant and the controllers of the trust or company. The control test can be passed where an associate of the applicant controls the entity.
If someone is determined to be an attributable stakeholder, the default attribution is 100 per cent.
While it is unusual, there have been cases in which a private trust has not been attributed to the special needs beneficiary, thus allowing those assets not to be counted towards their asset test for Centrelink purposes.
In the case of Elliot v Secretary, Department of Education, Employment and Workplace Relations [2008] FCA 1293, for example, the full Federal Court held that a trust set up for the benefit of a Mr and Mrs Elliot was attributable to them. Key determinants in the decision were that as it was set up by Mr Elliot’s father, the trust did not have an independent trustee and the decisions of the trustee were not seen to be made at arm’s length.
The case of Damman [2010] AATA 508 was decided slightly differently, with some key differences in the facts. The Administrative Appeals Tribunal found that the assets held by the trust set up for the benefit of the special needs beneficiary were not to be attributed to him. This was because his brother and a third party were the trustees, the special needs beneficiary was not the only beneficiary, and his brother had also contributed other funds to the trust (which had originally been established in their mother’s will). Because of this, the special needs beneficiary was still entitled to receive social security benefits, despite also being a beneficiary of that trust.
Adequate provision an overriding factor
Another impact factor for clients to be aware of is that if the courts consider that adequate provision has not been made for the vulnerable person (be they child or spouse) a will can be overturned in the courts.
The case of Abrahams v Abrahams [2015] QCA 286 provides a good example. Mr Abrahams, in his will, included no provision for his youngest child, who had Down Syndrome, and the will was contested by the Public Trustee of Queensland. During the subsequent proceedings, the Public Trustee and the applicant’s siblings reached an agreement of compromise; however, the primary judge refused to accept the compromise. On appeal it was determined that the primary judge erred by not considering the significance of the contemporary International Human Rights Instructions which recognise the rights of people with disabilities. This highlights the broad scope the court can take when assessing a vulnerable person’s claim to an estate or to support.
Likewise, well-intentioned but restrictive trusts might also be overturned by the courts. In the case of Blake v Griffiths [2015] VCC 258, the applicant was the son of the deceased and had physical and intellectually disabilities. His mother had left half of her estate to him in a discretionary testamentary trust and the remainder to various charities. The court decided he should receive the entire residuary estate due to his serious need and that this should be received absolutely, not in a trust structure.
Some simple guidelines
As these examples show, there is no one simple answer to responding to the needs of vulnerable clients. However, a few simple guidelines can help.
Firstly, flexibility is key. It is important not to be too prescriptive in any plans or documents made, as this makes it difficult to respond to future changes and can help create a situation where the court will step in.
Secondly, keep in mind that the rights of vulnerable clients and beneficiaries will be seen as paramount by the courts, regardless of the wishes of others.
And thirdly, communication and forward planning is critical. There is no ‘set and forget’ strategy that can be set up for ageing clients. Regular contact and assessment of the situation will be required.
Anna Hacker is national manager, estate planning at Australian Unity Trustees, and is an accredited specialist in Wills & Estates.
