Lifetime gifts; an update on ‘When is a gift not a gift?’
An elderly mother transfers her property to one of her children. It’s a common enough scenario. Often everyone involved has the best of intentions. But – what happens when:
- someone else has serious doubts that mum really understood what she was doing? Or,
- if mum later on falls out with her child and wants ‘her’ property back? Or
- if the transfer only comes to light after her death and other family members don’t inherit what they think they should?
Setting aside outright fraud, there are two main legal arguments to set aside the transaction that can be put forward on behalf of the mother, or the beneficiaries of her estate if she has died:
- lack of mental capacity, and
- undue influence
In law, someone is presumed to have mental capacity, until the contrary is proved.
The law in this area is set out in the 1978 case of Re Beaney where an elder daughter (the donee) was given the family home by her mother (the donor) during her lifetime. The judge found that:
“if the subject matter and value of the gift were trivial in relation to the donor’s other assets a low degree of understanding was sufficient, but, if the effect of the gift was to dispose of the donor’s only asset of value and to pre-empt the devolution of his estate under his will or on his intestacy, the degree of understanding required was as high as that required for a will and the donor had to understand the claims of all potential donees and the extent of the property to be disposed of.”
The 2014 case of Kicks v Leighconsidered whether Re Beaneywas still relevant to disputes over lifetime gifts, bearing in mind that the Mental Capacity Act 2005 had changed the law relating to mental capacity. That case concerned the estate of JS, who died in December 2011. The claimants were two of JS’s grandchildren. The defendant was her daughter, the aunt of the claimants. Prior to her death, JS sold her home and she instructed that the net proceeds of sale of £292,899.92 be transferred to a bank account in the joint names of her daughter and her husband.
The daughter claimed that the transfer of the proceeds was a giftto her to from her mother. The claimants argued that the transfer should be set aside on either of two grounds, either:
(i) JS had lacked the mental capacity to make such a gift or transfer; and/or
(ii) the gift or transfer had been a result of the defendant’s undue influence over JS.
The court ruled that the correct approach was to apply the principles set out in Re Beaney (rather than the principles set out in the Mental Capacity Act 2005). But in this case, the medical evidence did not raise a real doubt as to JS’s capacity.
So, if the case had been brought just on the basis that JS lacked mental capacity, it would have failed.
The saving grace for the claimants was that they put forward an alternative argument, that the daughter had exercised ‘undue influence’ over her mother – more of which later.
A 2017 case in Northern Ireland is also worth noting (although it doesn’t directly apply to cases in England & Wales). In Connelly v Connelly, lifetime transfers made by a farmer to his two sons, which left his wife with nothing, were set aside for lack of mental capacity. The interesting point about this case is that the judge suggested that solicitors acting for elderly persons who may be mentally vulnerable, should proceed with caution and should ensure that a medical examination to establish mental capacity ought to take place if there was any doubt. This is similar to the so called ‘golden rule’ which applies when someone who is elderly or vulnerable is considering making a will.
Those comments were supported by the judge in the High Court case of Roberts v Roberts earlierthis year. In February 2020 the judge found that an elderly mother did not have the mental capacity to make 3 substantial lifetime gifts to one of her four adult children. The case divided the family, with three siblings suing their brother.
Joan Roberts, a widow, had dementia. In July 2010 she needed round the clock care and moved in with her son Paul and his wife. It was not in dispute that Joan was well looked after; she occasionally went into respite care but was otherwise cared for by the couple.
It was agreed by the siblings that the family home should be sold. As it was still in their late father’s name, Paul acted on his mother’s behalf, to sell the property for £137,000. He was not acting under a Lasting Power of Attorney (LPA); instead it appears that his mother signed a general power of attorney in order to allow him to act as administrator of her husband’s estate, as he had died without having made a will. The judge found that at the time of this transaction (the sale of the property), Joan did not have mental capacity.
As Joan had not made an LPA, and she lacked mental capacity, an application should have been made at the time that the sale was being considered, to the Court of Protection for a Deputy to be appointed to look after her financial interests.
As Paul’s siblings discovered after their mother’s death in 2013, what actually happened was that Paul kept the proceeds of sale for himself. He claimed that the funds were a gift, but the judge held that the ‘gift’ must be set aside because of his finding that Joan lacked mental capacity.
Interestingly, the judge also found that the son was under an ad hoc ‘fiduciary duty’ to account for his dealings with his mother’s other assets during the time that she lived with him, even though he was not acting under a Lasting Power of Attorney. This may be a sign that courts will be increasingly willing to find that family members who provide care for a parent and assume financial control for them, may find themselves being forced to account for their money that they have spent.
Lawyers often refer to two different sorts of undue influence; actual undue influence and presumed undue influence. Actual undue influence is where there is over wrong doing. This is where the conduct “twists the mind of the donor”. The question is whether the victim’s free will has been overborne by coercion, threats or overt acts of improper pressure.
The vulnerability of one party and the forcefulness of the personality of the other are relevant but it’s not necessary to prove a pre-existing relationship between the parties or that the transaction was a bad deal for the person making the gift.
Far more common in cases involving families are examples of presumed undue influence. In these cases it’s not always that something has to be done to ‘twist the mind of the donor’, it’s often a case of what has not been done, e.g. ensuring that independent advice is available. The elderly, especially those who are physically dependent on relatives, friends or employees are far more likely to be susceptible than others to being victims of presumed undue influence. They may be ‘groomed’ and so may not even see themselves as a victim.
The ‘recipe’ for presumed undue influence is:-
- That the victim placed trust and confidence in the other party, or that the other party acquired ascendancy over the victim. In the case of certain categories of relationship (see below) this ingredient may itself be presumed and
- That the transaction is not readily explicable by the relationship between the parties and calls for an explanation.
If those two ingredients are established, then the defendant must argue against (or rebut) the presumption of undue influence.
The categories of relationship where undue influence can be presumed include:
- Doctor to patient,
- Parent to child,
- Trustee to beneficiary and
- Solicitor to client.
It’s important to note that the presumption of undue influence does not apply:
- as between a husband and wife,
- or where a child persuades a parent into a transaction.
To come back to the case under discussion earlier of Kicks v Leigh where the judge did not consider that the mother lacked mental capacity, he then went on to find that the mother’s gift of the proceeds of sale of her property had taken place as a result of her daughter’s exercise of undue influence.
The relationship between JS and the defendant had been one of trust and confidence and as well, one in which the defendant had been in the ascendancy. JS had been vulnerable. Even though JS had been capable of understanding the transaction, the nature, size and effect of it was such that it was out of the ordinary and called for an explanation. In those circumstances, the presumption of undue influence arose. There was no evidence before the court which could rebut (argue against) the presumption. The ‘gift’ was therefore set aside.
Of course, a substantial lifetime gift is not in itself evidence of financial abuse. It may be simply a kind and generous gesture, or a tax planning exercise. But undoubtedly there are cases when suspicions will be aroused and if the evidence is strong enough, courts will act to set aside a gift, where it’s clear that it was not a gift at all.