Following recent conflicting decisions of the England and Wales Court of Protection, Paul Levy and James Mckean discuss varying a Will under the Mental Capacity Act 2005

 

RE LMS

The England and Wales Court of Protection’s (CoP’s) decision in Re LMS attracted its fair share of controversy. 1 It concerned an application to vary a will under the Mental Capacity Act 2005. The will made an absolute gift to LMS, 2 who lacked mental capacity. The effect of receipt would have been to disqualify LMS from a number of means-tested benefits. LMS’s mother applied to vary the gift so it took effect not absolutely, but through a Disabled Person’s Trust. The effect of this would have been to preserve LMS’s entitlement to the means-tested benefits.

The central issue was whether this amounted to a deliberate deprivation of LMS’s capital under the relevant welfare legislation. District Judge Beckley reasoned that the significant operative purpose of the variation would be to ‘better effect’ the intentions of the testator. In other words, it was not a deliberate deprivation of LMS’s capital intended to preserve means-tested benefits.

The trust was otherwise disadvantageous to LMS, relative to deputyship. However, because of its likely effect on LMS’s benefits, it was found to be in LMS’s best interests overall and the application succeeded.

The distinction between ‘better effecting a testator’s intentions’ and ‘preserving benefits’ may seem tenuous, but was not without authority per a decision of the High Court of Northern Ireland in Re The Will Trusts of Sarah McCullagh. 3

F v R

The CoP has now had a chance to consider the issue once again in F v R, 4 per a decision of Judge Hilder. The facts of the case are materially identical to LMS, save perhaps in one respect, discussed below. Once again, a will made an absolute gift to a party without mental capacity; in this case, a gift made to R of GBP400,000–600,000. R’s parents soughtto settle that sum into a Disabled Person’s Trust with the consequence of preserving R’s eligibility for means-tested benefits.

A diametrically opposite conclusion was reached to those in LMS and McCullagh, however. The judge found that a significant operative purpose of the variation was likely to be to deprive R of capital to preserve eligibility for benefits. A distinction between preserving benefits and furthering the testator’s intention was found to be ‘specious’ and amounting to ‘verbal gymnastics’; R could only benefit from the inheritance as intended by the testator if R could secure his continuing eligibility to means-tested benefits.

As the trust was otherwise less advantageous than deputyship, the application was dismissed.

Practitioners may regret that the CoP did not distinguish between, or even comment on the substance of, LMS and McCullagh. The CoP held only that it was not bound by those decisions and, in any event, that the best interests of any protected party are fact-sensitive and not to be determined by previous case law.

WHERE DOES THE LAW STAND?

The temptation may be to write off LMS as a rogue decision. The problem is that LMS was not exogenous: it followed McCullagh, itself citing earlier authority.

A higher court may give a definitive pronouncement on this case law in the future. On the one hand, the distinction between effecting a testator’s intention and preserving eligibility for benefits is at least technical and, at most, entirely hollow. On the other, there may be a distinction between intention and consequence. Where a will is rectified in the England and Wales Chancery Division of the High Court (the High Court) under s.20 of the Administration of Justice Act 1982, the High Court’s statutory purpose is to give effect to a testator’s intentions, even if the consequence (and the ‘real’ purpose of the claim) is to confer, for example, an inheritance tax (IHT) benefit. 5

Whatever the answer, the key principle remains that the best interests of a protected party are rooted in the facts of any particular case. Although that means that LMS will not bind, it also makes LMS difficult to snub out.

IS LMS THE PRODUCT OF EXCEPTIONAL FACTS?

It may be that LMS was not wrong but simply exceptional. A feature of that case was that the testator deliberately raised the issue of means-tested benefits with his solicitors when drafting his will. The solicitors failed to effect those instructions and the result was a will that failed to take into account any effect on LMS’s benefits.

In F v R, the applicant tried to make a similar argument, relying on the fact that R’s parents had raised the issue of benefits with the testator when discussing a possible gift. However, there was no reference to this discussion in the will file.

Although Hilder J rejected the reasoning of ‘furthering a testator’s intentions’, she also, as a matter of fact, did not find that the testator intended to preserve R’s means-tested benefits. The judge found that the testator was aware of the prospect of making a gift in trust and declined to do so.

So, the CoP may still be prepared to vary a will to settle an absolute gift in a Disabled Person’s Trust, with the consequence of preserving benefits, but only in particular (and rare) factual scenarios. It may be that cogent evidence is needed that the testator intended to preserve eligibility for benefits in making the gift. It may be that nothing less than evidence of the testator informing the will drafter of this intention will suffice.

PRACTICAL POINTERS

• Best interests are specific to the particular circumstances of any protected party. The case law is a guide to how the court will exercise its discretion. It does not provide ‘authority’ as in a civil court.
• That said, in almost all cases, a judge will need a tangible incentive to prefer a trust to deputyship (see Watt v ABC). 6
• It is unclear if LMS is exceptional or simply wrong. Either way, the leading decision is now F v R. The senior judge has definitively rejected an attempt to preserve eligibility for benefits through variation. Only a brave judge (or higher court) will sail into that headwind.
• If a practitioner seeks an LMS-style result for their client, they need to manage expectations. The outcome in LMS may never be repeated but, if it is, clear factual evidence of a testator intending to structure a gift so as to preserve means-tested benefits appears to be a prerequisite.
• Do not forget the potential IHT or capital gains tax (CGT) benefits of varying a will, or their strict timeframes. IHT/CGT incentives did not apply in LMS or F v R. There may be other reasons to vary a will or trust: see the Jersey case of Re Elizabeth K Gates Estate Trust, 7 where an absolute gift stood to incur heavy tax consequences in another jurisdiction.
  Mistakes made by will drafters are the backdrop to much of this litigation. Practitioners need to consider whether the best claim lies in negligence against the firm that drafted the will. Following F v R, it may be doubtful whether solicitors (or their insurers) will be prepared to pay for speculative claims to vary wills in the CoP.
• Consider also the possibility of a claim under the Inheritance (Provision for Family and Dependants) Act 1975, if the protected party qualifies, or a claim to rectify the will under s.20 of the Administration of Justice Act 1982. Either should be brought within six months of probate.

POST-SCRIPT: THE STEP PROVISIONS

An issue mooted in F v R was whether para.18(2) of the STEP Standard Provisions (the STEP Provisions) 8 provided an alternative to the variation. These provisions, which were incorporated in standard form in the will in that case, may have allowed the trustees of the will to advance capital to a settlement.

The logic here was that, if the transfer of the beneficiary’s interest can be effected by the trustees of the will, 9 it may be harder to argue that the beneficiary (or the decision maker on their behalf) had effected an intentional deprivation.

The position is, however, not straightforward. Unlike a child, who cannot call for capital to be transferred until their 18th birthday, the beneficiary (if acting by direction of the CoP or their deputy) is entitled to call for the transfer of capital immediately. Therefore, a failure by the CoP or deputy to exercise that power on their behalf could arguably be considered to amount to a deliberate deprivation.

The STEP Provisions state: ‘Where capital is payable to a beneficiary who does not have the mental capacity to appoint an attorney under a lasting power of attorney which relates to the property and affairs of the beneficiary, the Trustees may (subject to the directions of the Court or a deputy appointed under the Mental Capacity Act whose powers include receiving such capital) apply that capital for the benefit of the beneficiary.’ On the facts of F v R, the judge did not consider this action to be in R’s best interests, but it is not to be ruled out as a possibility in future cases.

Two issues will be uppermost in the mind of a trustee:

• Which court is referred to by para.18(2)? The CoP or the High Court? F v R seems, impliedly at least, to point to the former, but the point was not settled.
• The tax consequences of a trust deriving from this provision and whether it might amount to a relevant property trust.

In any event, F v R illustrates once again that the benefits of obtaining specialist advice should not be understated, especially in the context of estate planning. 10

1 [2020] EWCOP 52 2 Under an ‘absolute trust’, the beneficiaries are named at the outset on the deed and cannot be changed at a future date. 3 [2018] NICh 15 4 [2022] EWCOP 49 5 It should be said that this analogy was put in oral submissions in F v R
but not accepted. 6 [2016] EWCOP 2532 7 [2000] 3 ITELR 113 8 2nd edition 9 Rather than by an order of the CoP under s.18(1)(h) of the Mental Capacity Act 2005. 10 Paul Levy was instructed by the applicant in F v R and James McKean appeared for the applicants in Re LMS and F v R.

Paul Levy and James McKean, ‘The law in an LM-mess’, STEP Journal (Vol31 Iss2), pp.68-69