Solicitors must adapt to a sector in flux

Fluctuating capacity, dynamic family structures and changing priorities of young beneficiaries all reflect the ways in which the world of trusts and probate is constantly evolving. With the passing down of private wealth to future generations come fresh and complex legal issues.

Law on capacity – fit for purpose?

As our understanding of mental capacity grows, there are questions about whether the test remains fit for purpose. The paradigm testamentary capacity test was set out in 1870 in Banks v Goodfellow. This no longer reflects the realities of modern life such as increased life expectancy, and changing views on dementia and mental health.

We are seeing issues arising in relation to the ‘twilight zone’: the period during which a person still has capacity (in a legal sense) but might be struggling with cognitive issues. There is a delicate balance to be struck between empowering people in this zone to make testamentary and other decisions, while ensuring they have the necessary support and are not left vulnerable to abuse.

Capacity is not just an issue for elderly people. It is a nuanced concept and can be related to not only old age and dementia, but also mental health, addiction and trauma. This can cause difficulties in assessing a person’s decision-making abilities. For example, some people experience ‘sundowning’, which is where their pattern of behaviour can change throughout the day, with their level of capacity decreasing towards late afternoon/early evening. People may also temporarily lose capacity while under the influence of drugs or alcohol, or indeed when using prescribed medication. Physical ailments can also cause temporary capacity issues through severe pain and sudden confusion.

In this context, assessing someone’s capacity can be difficult, and assessments carried out by medical professionals have their limitations. Doctors often do not have long-term relationships with individuals, making it more difficult to assess complex cases with regard to whether a patient’s behaviour is coherent or out of character. Short consultations may not be enough for a practitioner to make a holistic assessment.

The role of solicitors in supporting doctors with these assessments has therefore become all the more important. Solicitors typically have longer-term relationships with their clients, and are better placed to assess patterns of behaviour and raise capacity concerns. Capacity should be a part of any conversation with clients about their testamentary intentions, and raising potential issues in that context can help clients to reduce the risk of challenge to their dispositions further down the line.

Third-party abuse

Related to capacity issues are concerns about third-party abuse, to which individuals who are struggling with their capacity are inevitably more vulnerable. However, there are reasons why individuals might be vulnerable to abuse beyond just capacity, and it is important for solicitors to be alert to the risks.

In particular, the number of predatory marriages is increasing due to the ageing population and growing frequency of dementia. Some elderly people are sadly left isolated and end up becoming heavily reliant on specific people for care and companionship, sometimes resulting in marriage to much younger individuals at a stage when they are vulnerable. The issue with the law as it stands is that the threshold for the capacity to marry is much lower than the bar for testamentary capacity. This is particularly troubling in circumstances where a marriage invalidates previous wills.

There are potential solutions to this issue. A change in the law could effect the creation of an offence of predatory marriage. Section 18 of the Wills Act, which automatically revokes a will upon marriage, could be repealed or amended to remove the financial incentive behind predatory marriages. The capacity tests to marry or make a will should become more aligned, so that the test for marriage is subject to a higher threshold. Restrictions could be put in place so that vulnerable persons lacking capacity must apply to the Court of Protection for a statutory will. Training measures should also be introduced to improve the ability of marriage registrars to be alert to predatory marriages, with comprehensive notes and records being taken of discussions with the couple.

Lack of trust in trusts?

We have also noticed a generational shift with regard to trust structures. Many young, well-educated and often financially independent people do not necessarily want to be beholden to trustees, instead wishing to rely on their own judgement and abilities and manage their own money, or at least have more control over how it is managed.

The media fallout from the Paradise Papers has also resulted in the younger generation wanting to distance themselves from trust structures, which are (rightly or wrongly) often negatively associated with tax evasion or avoidance. As a result, some families are looking to family investment companies. These may provide for better protection and flexibility, as well as limited partnerships or outright gifts, with a view to moving wealth to the next generation and mitigating potential inheritance tax liability further down the line.

This is not to say that there is no future for trusts. The focus will, however, be on proper management and meaningful engagement by trustees to understand their beneficiaries’ priorities. A big part of this will be how the trust industry as a whole improves the messaging around the purpose of trusts, to avoid the perception of it being a tax-avoidance structure. This may be offset with philanthropy or perhaps an election to pay tax in the ‘home’ jurisdiction.

It is also important to bring the younger generation ‘into the fold’ and take into account different ideas around trusts and the way in which assets should be invested or managed. By engaging in inter-generational discussions, giving younger beneficiaries the opportunity to express their preferences and empowering them to have more say over how the trusts are run, families can ensure that there is a move towards a more collaborative approach to wealth management.

In particular, there has been a noticeable shift in the investment priorities of younger generations. Some trusts are coming under scrutiny for the ethics of their investments, and young beneficiaries may prefer more ESG-friendly investing, even if this is not necessarily as profitable. This can be at odds with the terms of the trust deed where the emphasis is on financial growth; yet it could be argued that as the world shifts, ESG investing is where profits will lie. Trustees will increasingly need to think carefully about this, to ensure that their approach is compliant with their duties and, where appropriate, in line with their beneficiaries’ priorities.

Complexity of family structures

We are seeing increasingly complex family structures and this can create divisions and dispute. For example, in situations where there are first, second and third spouses, as well as children from different marriages, litigation becomes the arena for playing out these frustrations following the death of a parent.  

Trust structures and documents are no longer always fit for purpose or reflective of the modern family. For example, the definition of children in many older trust instruments does not include adopted children, and may not allow for surrogate children or children born out of marriage. Families will want to review these documents and seek legal advice when doing so, to ensure that these structures are modernised in a way that is appropriate and fair for all family members.  

The interaction between pre-nuptial agreements and 1975 act claims has also not yet been tested in the courts. As more couples enter into pre- or post-nuptial agreements, there is likely to be developing case law in this area. There is an inherent tension between testamentary freedom and a couple’s freedom to contract versus the court’s view of ‘fairness’ and ‘reasonable provision’ between spouses. Post-death, when assets may have increased, there lies a question of to what degree such historic contractual arrangements should remain binding between spouses.

There are a range of dynamic issues for the trusts and probate lawyer to contend with, and complexities continue to increase over time. Lawyers must adapt to cater for both elderly and future generations alike.

Charlotte Fraser is a contentious trusts and estates partner at Farrer & Co