Understanding vulnerable clients: a growing requirement for financial advisers

Clients may become vulnerable for a number of reasons – for example, through disability, illness, or addiction, or simply through age.

It can quickly lead to problems including issues of capacity and financial abuse.

In these kinds of situations, financial advisers will need to be aware of whether their clients are becoming vulnerable, as they may not realise it themselves and family members may not want to acknowledge it. They will then need to consider issues such as protection of assets, as well as the client’s need for independence, to ensure their continued financial well-being.

Powers of attorney

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Having enduring powers of attorney in place, as well as considering enduring power of guardianship and advance health/care directives, is an important first step.

An enduring power of attorney is perhaps the most important tool to help protect people – particularly anyone who is vulnerable because of age or health problems.

Advisers should keep in mind that each state has different legislation when it comes to powers of attorney, so this may cause complications if, for example, a client moves interstate, has assets in different states, or spends their time between two or more states.

In addition, it is necessary 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 but is limited in its operation. The authority of the general power of attorney ends after set time period or condition has been completed, or if the person who implemented it loses capacity.

A general power of attorney can’t be used to make personal decisions – such as decisions to do with health matters – on someone else’s behalf. Also, be aware that different states have different definitions for what “capacity” means.

Because of the limitations of a general power of attorney, an enduring power of attorney is often the preferred option. 

There are different types of enduring power of attorney which may allow the person appointed to make personal decisions as well as legal and financial decisions on someone’s behalf.

The key advantage of an enduring power of attorney is that if a client loses the capacity to make personal decisions – including health-related decisions – then the holder of the enduring power of attorney can make them on their behalf.

Clients may also like the fact that it is possible to grant an enduring power of attorney that places limits or conditions on the decisions that can be made. 

The implications of not having an enduring power of attorney can be serious. For example, if someone loses capacity and there is no one authorised to make decisions on their behalf, then it will be necessary for an application for guardianship and/or administration to be made.   This can be stressful, not to say expensive and time-consuming. 

A better and easier solution is to ensure that clients have enduring power of attorney arrangements in place well before they may be required.

Statutory Wills

When someone loses capacity, there may be a situation where they never had a Will prepared or their original Will no longer deals properly with their estate or carries out their intentions and wishes, but they are unable to update the Will themselves.

For instance, if beneficiaries named in the Will pre-decease a client, but they no longer have the capacity to redraft a new Will to recognise these changes, a Statutory Will can be created. 

A Statutory Will allows a Will to be signed on behalf of a person who does not have testamentary capacity. 

Statutory Wills are likely to become a growing area, as Australia’s population ages and the number of people who will be affected by dementia increases.

Each state in Australia allows for Statutory Wills, which can be approved by the relevant Supreme Court for signing on a person’s behalf.

Special Disability Trusts

Another area for financial advisers to be aware of is where their clients may care for a vulnerable person – for instance, they have a disabled child – and who want to take steps to ensure that once they are no longer able, the child is looked after. 

Social welfare organisation Anglicare recently noted in the report “Caring into Old Age: The wellbeing and support needs of parent carers of people with disabilities” that most ageing parent carers in Anglicare’s program are female (81 per cent) and about a fifth (18 per cent) are aged in their 80s or 90s.

A special disability trust (SDT) might be useful to protect these vulnerable beneficiaries. Such 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.  These trusts can only be established for someone who is severely disabled.

An SDT allows for capital (up to a threshold) and income to be exempt 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.

SDTs can only receive contributions from immediate family, and contributions from a principal beneficiary or a domestic partner are also limited (such as from superannuation or an inheritance).

The majority of the funds must be used for care and accommodation and it is required to have either two trustees or a professional trustee appointed.

Income from the trust is accumulated and is taxed at the beneficiary’s marginal rate, although there are CGT concessions for assets passing in and out of an SDT. A principal place of residence exemption applies.

Another option is a protective trust, which requires that the needs of the special needs beneficiary be prioritised under the trust structure and that there should be an independent controller.  In this kind of structure, accumulation of income in the trust is allowed although there may be tax consequences.

While protective trusts have significant flexibility in terms, one negative is that assets and income are generally included in any means testing, depending on the way the trust is structured and how control is dealt with.

Another complication, for both SDTs and protective trusts, is the attribution rules which were introduced in 2002.

These 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 individual, and require an analysis of the control of the entity and the source of the funds. 

There have been cases in which a private trust has not been attributed to the special needs beneficiary, resulting in those assets to not be counted towards their asset test for Centrelink purposes. 

These rules need to be carefully considered when setting up any trusts for vulnerable beneficiaries, to ensure the best possible outcome is achieved.

As can be seen, there is no simple, one answer to helping vulnerable clients; however a few simple guidelines may help:

  • Be flexible.  It is important not to be too rigid when making plans or preparing documents. Being flexible allows plans to be adjusted to respond to future changes and helps avoid a situation where the court will step in;
  • Maintain focus.  The courts will always recognise the rights of vulnerable clients and beneficiaries as paramount, regardless of the wishes of others; and
  • Communicate.  Communication and ongoing planning is key. Regular contact and assessment of the situation will be needed - there is no ‘set and forget’ strategy that can be set up for vulnerable clients.  

Anna Hacker is the national manager, estate planning at Australian Unity Trustees, and is an Accredited Specialist in Wills & Estates.




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