Tuesday, May 6, 2014

EPAs and gift and loan back arrangements

Two possible solutions.
Following the recent post about conflict of interest provisions under an enduring power of attorney (EPA) a question came up as to whether a gift and loan back arrangement would have provided another solution. 

A summary of the general way in which a gift and loan back arrangement would work is set out in recent posts (http://mwbmcr.blogspot.com/2014/04/how-gift-and-loan-back-arrangements-work.html).

The concept raised in the scenario touched on in the recent post was as follows:
  1. The attorney could arrange for a cash gift equal to the value of the husband’s interest in the home to a discretionary trust that would ultimately pass to the control of the children of the marriage. 
  2. That trust would then lend the amount back to the husband (via his wife as the attorney). 
  3. The husband’s estate (following his death) would then be required to repay the debt to the trust effectively ensuring that only nominal assets would pass under the husband’s will and the main value of the estate would in turn be held via a more robust structure, being the previously established trust. 
Obviously the ability to implement this approach would depend entirely on whether the appropriate conflict of interest provision existed under the EPA and whether the attorney could satisfy themselves that they would not be breaching their fiduciary duties to the principal by undertaking the arrangement.

There would also be a range of commercial issues that would need to be considered, not least of which the fact that the trust involved would not be a testamentary trust and therefore would not enjoy the various advantages that testamentary trusts have as compared to standard discretionary trusts.

Until next week.

Image credit: Jens Wessling cc