The need for a holistic approach

Although the Cayman Islands has a statutory regime that defines the concept of ‘mental impairment’, being the Mental Health Act (2023 Revision), there is no statutory definition of ‘incapacity’ under Cayman Islands law. Rather, as in many other jurisdictions, the principles for assessing the capacity of a donor to make gifts under a will or inter vivos settlement continue to be based on the 19th-century case of Banks v Goodfellow.[1] Many practitioners will be familiar with the key elements of the Banks test, which, in summary, require the relevant person to understand the:

• nature and effect of the document being signed;
• nature and extent of the assets involved; and
• individuals who may have ‘moral claims’ on their estate.

Banks has long stood the test of time throughout the common-law world and continues to be applied in the Cayman Islands, as seen in the recent case of In the Matter of the Poulton Family Trust.[2]

Poulton epitomises the classic family trust dispute whereby the patriarch (Poulton) excludes his children from the family wealth in favour of their stepmother. Poulton, who was of advanced age and declining health, was the settlor of a family trust that had originally been intended to benefit his children. However, facing a terminal cancer diagnosis, he took steps to remove his children as beneficiaries and terminate the trust, with the assets being appointed to him and his wife jointly. Poulton died shortly thereafter and his wife became the sole owner by survivorship, excluding Poulton’s children entirely.

Poulton’s children (the Plaintiffs) commenced litigation on five main grounds; however, the focus of the case and its lengthy judgment was on issues of mental capacity and undue influence. Although the Plaintiffs failed in their primary argument that Poulton lacked capacity, the Grand Court of the Cayman Islands (the Court) found in the Plaintiffs’ favour on the grounds of undue influence. The judge concluded that, although there was insufficient evidence to support a finding that Poulton lacked capacity, much of the evidence raised more cogent concerns of undue influence.

This included evidence relating to Poulton’s declining health. Although the Court accepted Poulton may have suffered from temporary cognitive impairments, the judge found there was no reliable evidence of any permanent impairment. It is notable that the changes to the beneficial class and termination of the trust were carried out as part of a relatively planned process, with advice of legal counsel and coordination from the professional trustee, which had conducted an assessment of Poulton’s capacity. Witness statements from the trustee’s representatives presented Poulton as ‘forgetful and confused’ but, nonetheless, understanding of his actions and acting of his own free will.

However, despite its finding on capacity, the Court concluded that Poulton’s medical conditions made him particularly vulnerable to undue influence, observing that:

‘He was largely bedridden, frail and heavily dependent on [his wife] to manage his financial affairs. He was legally blind and suffered from anxiety, a psychological condition which was clearly exacerbated by conflictual situations.’

The judgment goes on to describe a situation of intense familial conflict and circumstances that are inferred as having been causative of the undue influence, leading to the impugned transaction. In reaching its finding, the judge was reluctant to attribute blame to Poulton’s widow, rejecting the Plaintiffs’ characterisation that she was a malicious actor motivated by greed. In articulating the legal principles of undue influence, the Court was clear that undue influence is primarily concerned with the protection of a vulnerable person whose interests have been compromised in the particular circumstances, rather than seeking to attribute blame. The judge observed that the ‘crucial circumstances which I find amounted to undue influence are far more nuanced and indirect than the high point of the Plaintiffs’ case suggested’.

A shift in cases concerning vulnerable clients

Like all cases of this nature, Poulton was fact-sensitive. However, it may foreshadow an evolution in how similar cases are decided and argued. Deciding the case on the basis of undue influence appears to have allowed the Court scope to take into account a much wider variety of factors than would otherwise be applicable to strict determination of mental capacity. In this regard, it will be interesting to see whether Poulton marks a shift in cases of this nature, with courts and plaintiffs seizing the opportunity to frame more nuanced arguments as to why transactions should be impugned rather than relying on a more rudimentary assessment of mental capacity.

The shift may be consistent with the changing attitude toward issues of mental impairment more broadly, where it is increasingly recognised that such matters are far from clear cut. The medical profession, in particular, now recognises a more fluid concept of mental competency. Whereas a diagnosis of dementia may have historically been cause to deprive someone of their civil rights, as with other mental impairments it is more appropriately viewed on a spectrum. Increasingly, there are calls to respect the rights and decision-making capacity of persons who may be suffering from cognitive impairment.

Guided by doctors as expert witnesses, the legal system is likely to move in the same direction as the medical profession in this regard. This may mean that it becomes increasingly difficult, and courts may be increasingly reluctant, to establish that a person is or was incapacitated. A shift toward undue influence will allow courts to consider more nuanced and circumstantial factors as to whether a particular transaction should be set aside so that they can seek to effect substantive justice without having to determine mental competency.

Cayman’s POA regime

The Cayman Islands is in the process of fixing a gap in its legislative regime with regard to incapacity and powers of attorney (POAs). At present, the jurisdiction does not have an enduring POA regime, meaning that any POA granted is no longer effective once the donor (the person granting the POA) loses capacity. This is inconsistent with modern practice where, particularly for clients of advanced age, this is the exact circumstance they are planning for in putting in place a POA.

Fortunately, planning for the introduction of enduring POAs under Cayman Islands law is well underway and, although the change is overdue, it means the jurisdiction now has the opportunity to implement a ‘gold standard’ enduring POA regime, which appropriately addresses issues of mental incapacity.

Key takeaways

Trust and estate practitioners should be increasingly alive to the potential for undue influence and should take care to learn about their client’s situation as a whole, not only viewing medical conditions as a concern but also considering social circumstances such as isolation, changed family dynamics or conflict, which can make a client more susceptible to coercion.

If a vulnerable client requests considerable changes to their trust structures or succession planning that have the effect of excluding family members, it would be prudent to:

• meet one-on-one with the client in a series of meetings to ensure they have consistent instructions for any proposed restructure or planning, and be sure to take accurate and appropriately detailed attendance notes;
• have an assessment of the client’s capacity carried out when executing any restructure documents; and
• provide thorough advice to the client to ensure they have fully understood their decision.

Advisors should also carefully consider how best to protect vulnerable clients’ interests (and determine what those interests are). Although it is important to respect a client’s wishes, advisors also have a key role to play in educating clients as to alternative options, which may be less likely to end in expensive litigation.