The unsettling experience of the Covid-19 pandemic led many of us to question long-held certainties, from how and where we worked to the extent to which we could rely on our health.
Bizarrely, one of the more pragmatic solutions to these concerns has been an increase in the number of people registering a lasting power of attorney (LPA). These legal documents give a named individual the power to make decisions about someone else’s finances if they don’t have the mental capacity to do so themselves – because of age, illness or injury. LPAs usually cover property and financial affairs, or someone’s health and welfare, and they can be either temporary or permanent.
According to the Office of the Public Guardian, which administers the process, 1 million LPAs and EPAs (enduring power of attorney) were established in 2021, compared with 700,000 in 2020. And towards the end of 2022, the number of LPA applications reached record levels, at more than 4,000 a day.
What’s different now, though, is that business owners are increasingly joining this rush to secure LPAs. Sue Wakefield, a director at estate planning firm Zedra, explains that specific business LPAs are a hybrid of the property and financial affairs LPAs and are drafted to cover someone’s business interests. Without such an LPA in place, if a person loses the capacity to make decisions, then staff and suppliers may not get paid, the bank may freeze business accounts and investors may ask for their money back. That could be seriously bad for business.
How LPAs can see off business risks
Despite this risk, LPAs have not historically been in high demand from business owners. “Most have tax-efficient wills in place, but they haven’t sorted out what to do if they don’t have the capacity to work,” Wakefield adds. “After Covid, business owners saw their vulnerability. LPA demand has increased, notably among younger entrepreneurs.”
Harriet Atkinson, a private client specialist at Bellevue Law, estimates that pre-Covid, business LPAs accounted for between 1% and 2% of all LPA enquiries. That figure has now increased to around 20%, she explains. And when looking at young people, around 40% to 50% of those enquiring about LPAs are looking specifically for business LPAs.
“Post-Covid, there’s greater awareness among younger people of the potential for incapacity and the impact that could have on business and personal affairs,” says Atkinson. “The practical benefit of a business LPA is that it enables a business’s continuity, taking care of the company’s ability to pay staff, complete transactions and settle tax. But crucially, it will also help to safeguard a business if the owner loses mental capacity.” Indeed, a business LPA attorney can also be given the power to wind up or sell the business if the owner’s condition is irreversible.
Loss of capacity could be the result of illness or even a physical accident where someone is on strong medication and unable to focus and concentrate. But it may also be because an owner is stranded abroad during a sudden Covid lockdown or geopolitical incident and unable to be present to sign off on a deal or that month’s payroll.
Personal grief can also lead to owners struggling to make vital business decisions. Young entrepreneur Samantha Kingston, a co-founder of virtual reality marketing agency Virtual Umbrella, lost her mother in 2018. “I’d never thought about what would happen if something happened to me and my business. But then I experienced mental health issues, depression, burnout – and, of course, grief – while running a business,” she says. “In the past year, I’ve been looking into organising my will. My business partner and I have also spoken about setting up a business lasting power of attorney. I’m 32 and it can feel too soon to be thinking about these things, but it’s really important.”
“Business LPAs should be used across the board, no matter what age you are,” says Phillipa Bruce-Kerr, a private client partner at Harrison Clark Rickerbys. “If you have sufficient assets to think about making a will, then you should be making an LPA. Sadly, accidents don’t just happen to older people. I’ve had business clients in their late 20s and early 40s have car accidents and end up in a position where they were just not able to make any decisions. One was for well over 12 months, but the other never recovered their mental capacity. You may need help at any time, and you can’t predict when that time might be. Covid has made people think they need to do this now.”
Bruce-Kerr adds that another factor in this trend is that banks increasingly ask to see what disaster planning and LPAs businesses have in place. “If they don’t have them, then there is a worry that their loans are at increased risk,” she says. “Post-Covid, there is more focus on whether businesses are viable or not during times of crisis.”
Why you shouldn’t keep it in the family
Family and friends are usually appointed as attorneys for personal matters, but for business LPAs the choice is more likely to be a business colleague or peer.
“Not everyone will feel that closer family members would have the skills to be involved in running their business,” says Bruce-Kerr. “Just relying on your 21-year-old son giving it a go could put your business at risk.”
She adds that it is important to understand the nature of the business before taking on this responsibility, particularly where control of the business is not entirely under one person. The attorney named in the LPA only has control over the incapacitated director’s shares. The exact details will depend on their contract and the company’s memorandum and articles of association.
“The reality of a business owner being unable to continue the day-to-day running of their business is very concerning and is often overlooked,” says Wakefield. “Who would assume control or have the authority to make decisions should a business owner be unable to?”
And it’s worth knowing that without a business LPA in place, an application to the Court of Protection to appoint a deputy would have to be made. There would be no guarantee that the court would appoint the person chosen, and the process is usually time-consuming and costly.
“Putting a business LPA in place should be an integral part of a business continuity or disaster plan and will bring peace of mind to business owners and their families,” says Wakefield. “It has become a necessity.”