An Estate Plan allows an arrangement of your affairs in the way that is desired how your estate will be distributed once you are no longer around.
However, in the event the mental capacity of the testator comes into question, creating or making updates to your Estate Plan may give rise to its own sets of challenges.
While cognitive decline is not exactly a light-hearted topic to discuss, it’s very important to consider when it comes to how you want to distribute your property and other financial assets while you still retain your legal capacity.
As we age, the unfortunate reality for some of us is that our cognitive abilities can begin to decline. when our memory and awareness do not align with the requisite criteria for testamentary capacity, problems may arise when we desire to execute legally binding documents, such as those relevant to an estate plan.
if issues do arise regarding your decision-making capacity during your lifetime, having an up-to-date estate plan allows the people you trust to make financial and health-related decisions on your behalf.
Types of capacity issues and their relevance to Estate Planning
At law, testamentary capacity refers to possessing the mental ability to understand the nature and effect of the document which make, to execute your testamentary intentions. this includes your capacity to make, alter or revoke a valid will.
Decision-making capacity refers to the mental ability to make decisions. This can include decisions about where to live, paying bills, and consenting to medical treatment.
Estate Plans are uniquely structured to best reflect the financial and health care requirements and protections for the individual. The documents and their contents will vary depending on the specific circumstances of the person making them, considering the extent of their financial wealth and/or their care and health needs.
Estate planning, or “Succession planning”, may include the implementation of testamentary trusts, discretionary and unit, business and asset holding, superannuation funds, and binding death benefit nominations,”[1] to name a few.
However, an Estate Plan is not limited to any one set of documents, but is catered to the needs, wishes, and circumstances of the individual. With professional assistance, the tricky territory that comes with ageing and possibly with cognitive decline, can be skilfully navigated.
Generally, a standard Estate Plan will consider at least three fundamental documents (or their equivalents, depending on the legislation in the state or territory in which the person lives). These three primary documents are:
- a Will,
- Power of Attorney (POA) (or Enduring Power of Attorney (EPOA)), and
- an Appointment of an Enduring Guardian (AEG).
Will
The right of a person to be able to make any arrangements they want regarding their will, is in tension with the legal policy issue of having to make appropriate provisions for those persons in need as well as those who are entitled to make a claim on the testator’s (the person who makes the will) bounty.[2] The leading authority that sets out the capacity test for making a will is the decision of Cockburn CJ in Banks v Goodfellow[3](“Banks”). The cases of Timbury v Coffee,[4] and Bull v Fulton,[5] two cases from the early 1940s, further elaborate and apply the principles from Banks.
The elements of the capacity test require that the testator…
- Must understand the nature and the effect of the will at the time it is made
- Must understand the extent of their property
- Should consider moral claims made by any potential beneficiaries
- Must not be influenced by insane delusions
Power of Attorney [EPOA] and Appointment of Enduring Guardian [EGA]
Generally, a POA gives another person or persons (as appointed by you) the power to make financial decisions on your behalf. While not the only reason, the appointed attorney’s powers can come into play if, for example, the appointor suffers from cognitive decline to the extent that they lack legal capacity to make their own decisions rationally. Those appointed, then, may make financial decisions, either solely or together with another attorney, on your behalf when you are not in the position to do so yourself. The capacity test requires that the person making the EPOA understands its nature and effect.
On the other hand, a guardianship appointment generally provides the appointees the power to make health and lifestyle decisions on your behalf. Their powers can come into effect when you are no longer mentally or physically capable (or are otherwise not in a position) to carry out these wishes yourself. The appointed guardian/s must act in a way that serves your best interests, and their powers will vary based on the particular provisions you allocate to them when you execute the document.
Once again, the same test applies as for the EPOA. The appointer must understand the nature and effect of the document.
POA’s and AEG’s are often described as “living wills” because they are designed to protect your personal wishes best while you are still alive. It is best to prepare the person whom you appoint to act on your behalf to manage your affairs before becoming unable to take care of those matters yourself.
So why does Cognitive Decline impact your Estate Planning abilities, and what is the legal test for capacity?
As we age, we may experience our mental sharpness gradually decline, such that it is not be as strong as it once was.
As established previously, if you are held to be legally incapable (i.e., you lack testamentary capacity), with the exception of a court-granted statutory will, you cannot validly execute your Estate Planning documents.
When it comes to one’s cognitive ability, “[t]o determine whether an individual has the capacity to make a particular decision at a particular point in time, it is necessary to consider the:
- meaning of legal capacity;
- relevant standard of capacity; and
- means of assessing whether the person can meet the required standard.”[6]
What is the difference between testamentary capacity and decision-making capacity?
As established, testamentary capacity is important when executing a valid will and/or other documents in relation to Estate Planning.
A special and long-standing historical case, which addresses tests for making a will, shows us the essential difference between the capacity to make a testamentary instrument and decision-making capacity.
For most other legal commitments, documents and instruments and transactions, there is a more general test which arises from the High Court case of Gibbons v Wright.”
Gibbons v Wright
The case of Gibbons v Wright[7] is the leading case in Australia regarding the issue of capacity when entering into agreements (but not wills) that are legally binding.
The case notes that “[t]he law does not prescribe any fixed standard of sanity as requisite for the validity of all transactions. It requires in relation to each particular matter or piece of business transacted, that each party shall have such soundness of mind as to be capable of understanding the general nature of what he is doing by his participation.”[8]
In other words, there is no “one size fits all” approach to assessing capacity, and such an assessment is to be made on a case-by-case basis. With that said, it must be established that each person privy to the agreement is capable of understanding the nature and effect of what the agreement entails.
What is the General Test for Capacity?
The following table[9] provides guidance regarding different types of decisions and their corresponding general capacity tests, which are also relevant to decisions made in accordance with an Estate Plan:
| DECISION | GENERAL CAPACITY TEST |
| Making a guardianship appointment | Understand the nature and effect of the document at the time it is made |
| Advance care directive | Understand the nature and effect of the document at the time it is made |
| Medical and dental treatment | Understand the nature and effect of the actual treatment being proposed at the time consent is required. |
| Contracts | Understand the nature and effect of the specific contract at the time it is made |
| Financial decisions | Can the person manage their own affairs? If not, is there a risk of disadvantage or loss or waste of money? |
| Making a power of attorney | Understand the nature and effect of the document at the time it is made |
| Making a will | Understand the nature and effect of the will at the time it is made. That includes: Who would normally be expected to benefit?Who of family and friends would expect a benefit?Who might claim a benefit?Is the will made freely and voluntarily?Is the will made with the testator’s knowledge and approval? |
| Capacity to marry | The capacity to marry is dependent on being able to understand the nature of the relationship of marriage |
| Capacity to make gifts – for example: transfers for nil or nominal consideration | Same test as for making a will |
Our experience team of solicitors at Elder Law Services can help you resolve disputes concerning capacity to make decisions and sign documents.
Furthermore, whether it is a complex will, or a minor update to your existing estate plan, we are ready to assist you with your estate planning.
At Elderlaw Legal Services, we recognise the importance of an appropriate and well-structured Estate Plan that can ensure that your affairs are taken care of both while you are alive and when you are no longer around— such that your estate can be efficiently passed on to your intended beneficiaries. If you are ready to create or make updates to your Estate Plan, the team at Elderlaw Legal Services are ready to assist you. Contact us today on 02 9979 1009.
Please note that the content of this article is for general informational purposes only and not for the purpose of providing specialised legal advice.
[1]Lewis, Rodney, ‘Capacity, Decline and Ageing Clients’ (2020), Television Education Centre, Armidale, Sydney, Australia.
[2] See Lewis, R, Elder Law in Australia, 2nd edn, Lexis Nexis, Sydney 2011.
[3] (1870) LR 5 QB 549.
[4] (1941) 66 CLR 277.
[5] (1942) 66 CLR 295.
[6] Lewis, Rodney (2021) ‘“Now Where Was I? Dealing with Capacity, Cognitive Decline and Ageing Clients’ (Draft Paper for Ten Armidale – Capacity etc V2 15.01.2021).
[7] Ibid; (1954) CLR 423 at 437 per Dixon CJ, Kitto and Taylor JJ.
[8] Ibid.
[9] See Lewis, (n 2); see also Guthrie v Spence [2009] NSWCA 369 at [174].
