High Net Worth Family Structures – The Spectre of Incapacity and Undue Influence
Increasing frailty of an elderly matriarch / patriarch can often be the touch paper for disputes around the division of family wealth. Differing senses of entitlement among the younger generation’s siblings, and grievances of those who feel passed over, are so often emotive. Assertions of incapacity and undue influence are their common bedfellows.
That nature of conflict is probably as old as mankind, and there is a long line of court cases addressing testamentary incapacity and undue influence in the context of disputed wills.
What is perhaps a more modern trend is the frequency with which assertions of incapacity and undue influence are impacting High Net Worth dynastic wealth planning structures while an elderly matriarch / patriarch is still living.
This is probably to be expected. After all, it’s no revelation that the trend of prolonged life expectancy which many societies are experiencing is not matched by longevity of physical or mental good health.
A 2014 report produced for the Alzheimer’s Society identified that 1 in every 14 of the U.K. population aged 65 years and over, lives with dementia. The report also identified that, if the prevalence of dementia remained the same, the number of people with dementia in the U.K. was forecast to increase to 1,142,677 by 2025 and 2,092,945 by 2051.
If an individual has, for a generation or more, been the instigator and guiding light for a family wealth structure (e.g. a trust’s settlor and protector), the spectre of alleged incapacity or undue influence can place the professional service provider in an unenviable position.
Most often, an allegation of incapacity and undue influence is taken as a vigorously refuted affront. Understandably so, given the personal implications for the individual whose powers have been challenged, and for those others accused of manipulating them. In such a scenario, the professional fiduciary can face particularly acrimonious family dynamics, potentially coupled with an expectation that it will seek to mediate.
Whether or not the allegations made are ultimately substantiated, once such a matter has been raised it will likely have to be put to proof. The question of how that should be done may, of itself, not be entirely straightforward. For example, the choice of an appropriate assessor, where both medical and legal components are critical.
Cross-jurisdictional aspects could well come into play. The concepts of incapacity and undue influence, in the common law sense, are not universally recognised in all legal jurisdictions. Disagreement as to the correct legal tests to be applied can arise if the jurisdiction, the laws of which govern the family wealth structure, differs from the home jurisdiction of the person alleged to be suffering incapacity and undue influence.
Once identified, the implications are not only prospective. Historical transactions (e.g. additions of assets to a trust) may be susceptible to challenge. At what time in the past might the alleged incapacity / undue influence have affected the validity of prior decisions? A HNW family’s financial transactions can be frequent and complex. Even if a clear line can be drawn to demarcate those potentially susceptible to challenge, the implications of unpicking them could prove equally difficult, and costly.
Making ongoing operational decisions for the structure pending the outcome of the investigations can also be challenging. All the more so in the absence of counsel from the individual who has been a key source of guidance over the years, and where consensus of the various other stakeholders cannot be achieved. Especially so, if the dispute is ultimately predicated on competing financial interests and power plays surrounding the future direction of the wealth structure itself.
There are measures that can be taken to prevent or at least mitigate the effects of such potentially unsettling events. Implementing a robust, but sufficiently flexible, governance framework for the structure, which provides for timely transition of influence to the next generation. Ensuring clarity and openness in the family’s expectations for operation of the underlying assets and investments, and the transfer of wealth from one generation to the next.
If an individual is of very advanced years, opting for regular cognitive assessments, especially ahead of key decisions for the structure, can be evidentially important in countering assertions of incapacity. Maintaining regular communications with family members, not just collectively but also by way of individual meetings, (so that conversations can be had free from the influence of others), can help to identify, or allay fears of, potential undue influence.
All that being said, for a professional service provider to identify conduct symptomatic of cognitive impairment or elder financial exploitation may be difficult.
As Cranworth LC observed in a 19th century English case addressing the assessment of legal capacity, “There is no mistaking midnight for noon; but at what precise moment twilight becomes darkness is hard to determine”.
Nevertheless, those administering wealth planning structures are likely to see a rise in circumstances where they face such issues, as well as potentially greater regulatory involvement in this space. U.K regulatory bodies have been increasing their focus on the effects of an ageing population and the link with vulnerability.
The U.K. Financial Conduct Authority, for one, has set out its expectations of financial services providers. In its paper issued in relation to venerable consumers (including those with mental health conditions), the FCA identified that, among other measures, firms should implement specific policies around cognitive impairment / decline, and ensure that client facing staff are sufficiently trained to spot signs of vulnerability and refer on to specialists where necessary.
If you require any further information, advice or assistance on this subject or regarding trust law in general please contact Mason Birbeck on firstname.lastname@example.org