Expanding the advisor’s capacity toolkit

From time to time, private wealth professionals may encounter a situation where they have doubts about whether a client possesses the required level of mental capacity to support the decisions they are making. As the proportion of older people in society increases, so too does the likelihood of clients having issues that impair their mental capacity. This is generally a complex area that requires a carefully considered approach, particularly since the capacity of a person is fundamental to the legality of that person’s decisions.

The legal position on mental capacity

There is no single definition of capacity nor is there a general test to apply for establishing mental capacity. Capacity is decision-specific, time-specific and situation-specific in every instance, meaning legal capacity can fluctuate. There is a legal presumption of capacity, unless and until that presumption is rebutted.[1] Determining whether a person has the capacity to make a certain decision is a medical/legal determination and it depends on a number of factors.

In Hoff v Atherton,[2] Lord Justice Gibson stated that for a juristic act to be valid, the person performing it should have the mental capacity to understand the nature and effect of that particular act. To make a valid will, or to exercise a legal power, the law requires testamentary capacity and, as a separate requirement, knowledge and approval. The latter requires proof of actual knowledge and approval of the contents of the will. The former requires proof of the capacity to understand certain important matters relating to the will. What those matters are were stated by Chief Justice Cockburn in the widely accepted 150-year-old decision in Banks v Goodfellow.[3] The decision stated that it is essential that a testator understands and appreciates the:

• nature of their act and its effects;
• extent of the property they are disposing; and
• claims to which they might give effect.

This three-limb test for testamentary capacity has been consistently relied on by the courts. One recent example is the England and Wales Court of Appeal decision in Hughes v Pritchard and others,[4] where Lady Justice Asplin stated that as long as the Banks test is satisfied, a testator is entitled to leave their estate as they see fit, however unkind or unfair the dispositions may seem, and they do not need to provide reasons.

Additionally, the level of understanding that is required depends on the circumstances of each case. As Martin Nourse QC (as he was then) stated in Re Beaney (decd),[5] the degree or extent of understanding required in respect of any instrument is relative to the particular transaction that it is to effect. If the value of the asset being disposed is trivial in relation to the individual’s other assets, a low degree of understanding will suffice. However, if its effect is to dispose of the individual’s only asset of value then the degree of understanding required is higher. Further, the individual must understand the claims of all potential beneficiaries and the extent of the property being disposed. This position was echoed in Scott v Scott,[6] where the New South Wales Supreme Court stated it was not a matter of imposing a different ‘standard’ of mental capacity in evaluating the validity of different transactions, but rather requiring an appreciation that the concept of ‘mental capacity’ must be assessed relative to the nature, terms, purpose and context of the particular transaction.

The courts generally apply a low threshold designed to enlarge rather than narrow the scope of the dispositive powers of elderly individuals. This approach was illustrated in Re Walker (decd), Walker v Badmin,[7] where Nicholas Strauss QC (as he was then) stated:

‘… the threshold for testamentary capacity has been kept fairly low, so as not to deprive elderly persons of the ability to make Wills in their declining years. The question is … were his mind and memory sufficiently sound to enable him to know and to understand the business in which he was engaged at the time he executed his Will?’

It is also worth noting that while an individual might suffer from conditions that deprived them of capacity under some circumstances, they might enjoy full capacity in other circumstances. In such instances, the crucial question is whether testamentary capacity existed at the time the relevant instrument was executed or the crucial decision was made.[8]

Although it is necessary to know how the courts approach the determination of mental capacity, this may not be helpful when dealing with a client who is suspected of experiencing only a certain degree of mental impairment. The prodromal phase is the period when a person can still be found to have capacity, according to the legal tests presently used by the courts, although dementia or some other disease might still be affecting that person’s cognitive abilities, personality and emotional state. Persons deemed not to have crossed that threshold of losing full capacity can be treated as if they possess full capacity and full agency to make all of their decisions, which attracts a number of risks. Unfortunately, there is no easy diagnostic test for that stage of mental impairment because the person can fluctuate between being cognisant and rational, and struggling to make decisions and understand information provided.

In relation to a person suffering from dementia, provided the advisor can show, under the present legal tests, they had capacity at the relevant time when creating their will, the law will uphold the will. However, given the fluctuating nature of this condition and the greater exposure to undue influence, the approach presently adopted by the courts risks not taking into consideration factors that may adversely impact the person’s decisions.

Practical considerations

The following is a non-exhaustive list of indicators that a client’s capacity may be diminishing, so requiring further investigation. The individual may experience:

• short-term memory issues;
• ongoing communication issues (e.g., difficulty staying on topic);
• lack of mental flexibility (e.g., difficulty comparing options);
• inexplicable difficulty with simple calculations;
• disorientation;
• unusual delays in responding during in-person discussions;
• emotional distress (e.g., anxiety, frustration); or
• the individual is accompanied by another to meetings but has limited opportunity to speak for themselves.

General principles

It is recommended that advisors keep the following principles in mind when attending to a client who may have mental capacity issues:

• Always presume a person has mental capacity.
• Remember that mental capacity is decision-specific.
• Remember that mental capacity is fluid. It can fluctuate over time or in different situations. For example, where a person lacked the ability to make a certain decision, they may be able to make that same decision sometime later due to having regained or increased their mental capacity over that time period. In addition, factors such as stress, depression, medication, reversible conditions or temporary sensory impairment can affect a person’s decision-making ability at a particular moment.
• Avoid making assumptions about a person’s mental capacity.
• Assess a person’s decision-making ability not the decision they make. It is not uncommon for a person to take risks with certain decisions or occasionally make a ‘bad’ decision.
• Respect a person’s privacy. Generally, a client must consent to their personal information being used or provided to others.

Keeping records

It is important for advisors meeting with a client suspected of having mental capacity issues to take detailed, contemporaneous and comprehensive file notes of all discussions. Such notes will be invaluable where a client’s capacity is queried or challenged, which was acknowledged and appreciated by the court in Hughes v Pritchard and others,[9] particularly since proceedings may not arise for some time after such notes are taken. Such notes may also be of assistance to a clinician who is engaged to undertake an assessment of that individual’s mental capacity.

Conclusion

Although issues concerning mental capacity are complex and challenging to navigate, bearing in mind the well-established legal principles and best practices, there are several practical steps that private wealth professionals can easily adopt to ensure their clients’ best interest is safeguarded while capturing an accurate record of their intentions. The recommendations set out above are intended to expand the advisor’s toolkit when dealing with such issues.