Capacity in Private Wealth and Inheritance Law—The Critical Role of Lasting Powers of Attorney

When managing private wealth and planning for inheritance, one of the most overlooked—but legally crucial—considerations is mental capacity. Capacity determines whether an individual is able to make informed decisions for themselves and this covers areas such as managing their personal finances or perhaps more seriously, their health and future medical decisions. If capacity is deemed sufficiently lost, and one hasn’t prepared appropriately with the proper legal tools (i.e. Lasting Powers of Attorney (LPAs)), the results can be costly and time consuming if an application to the Court of Protection becomes necessary. Not to mention the other more unfortunate scenarios of increasing the possibility of familial disputes, delays in financial management or even leaving the door open to potential financial abuse.

Understanding Legal Capacity

Legal capacity refers to an individual’s ability to understand, retain, and weigh up the necessary information to make a decision and to communicate that decision. In the context of wealth and inheritance, this encompasses making decisions such as:

  • Managing investments and bank accounts
  • Dealing with business interests
  • Gifting assets
  • Establishing or revoking trusts

Capacity can be affected by age-related cognitive decline, traumatic brain injury, mental illness, or degenerative conditions such as Alzheimer’s disease. Importantly, under the Mental Capacity Act 2005 in England and Wales, capacity is decision-specific and can therefore fluctuate over time. These scenarios are becoming more common and can make dealing and caring for an individual more difficult, especially if a Lasting Power of Attorney is not already in place.

Why Capacity Matters in Wealth Planning

Failing to address capacity can lead to a variety of issues in many areas of estate and wealth planning such as:

  • Wills being challenged for lack of testamentary capacity;
  • Mismanagement of finances if an individual becomes incapacitated;
  • Court involvement, such as appointing a deputy or conservator, which can be very expensive and slow to be processed;
  • Increased risk of financial abuse by unscrupulous individuals
Lasting Powers of Attorney (LPA): A Vital Tool

A Lasting Power of Attorney (LPA) is a legal document that allows an individual (the “donor”) to appoint one or more people (the “attorneys”) to make decisions on their behalf if they lose mental capacity.

There are typically two types of LPA:

  1. Property and Financial Affairs – Covers decisions like managing bank accounts, selling property, dealing with assets or paying bills.
  2. Health and Welfare – Covers decisions about medical treatment, care arrangements, and living conditions (e.g. going into care)
Benefits of Having an LPA
  • Control: You choose who manages your affairs, rather than a court-appointed deputy.
  • Continuity: Prevents disruption in financial management and healthcare decisions.
  • Protection: Reduces the risk of exploitation or neglect.
  • Efficiency: Avoids the time and cost of court proceedings.
Practical Considerations
  • Timing is critical – LPAs must be made while the individual still has capacity.
  • Registration is required – An LPA must be registered with the appropriate authority (i.e. the Office of the Public Guardian in the UK) before it can be used.
  • Choose attorneys wisely – Trust, competence, and availability are the primary concerns one should have when making this key decision.
Conclusion

In an era of increasing longevity and wealth complexity, addressing capacity issues through setting up legal instruments is not optional—it’s essential. A Lasting Power of Attorney serves as a safeguard that ensures personal wishes are respected and wealth is preserved. Families and advisors should prioritize these discussions early in any comprehensive estate plan.

For further information, or to discuss the issues raised within this case, please contact us to speak to a member of our Private Wealth and Inheritance Team.

Piers Galton-Becque
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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