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Settlors, Trustees, Trusts

The capacity to trust

Testamentary capacity is relatively well traversed and understood and the principles set out in Banks v Goodfellow (1870) LR 5 QB 549, which has endured the passage of time, remain the leading authority on testamentary capacity.   The following statement from p. 567 of that judgment succinctly observes the elements of testamentary capacity:

“As to the testator’s capacity, he must, in the language of the law, have a sound and disposing mind and memory. In other words, he ought to be capable of making his will with an understanding of the nature of the business in which he is engaged, a recollection of the property he means to dispose of, of the persons who are the objects of his bounty, and the manner in which it is to be distributed between them. It is not necessary that he should view his will with the eye of a lawyer, and comprehend its provisions in their legal form. It is sufficient if he has such a mind and memory as will enable him to understand the elements of which it is composed, and the disposition of his property in its simple forms.”

However, what of the capacity required to settle a trust? This question was traversed by the Singapore Court of Appeal in Re BKR where it was necessary to determine whether BKR had the capacity to settle a trust in circumstances where there were allegations that BKR was acting under undue influence of the respondents to the proceedings.

The court reviewed the apparent objects of the trust and found that these could have been achieved through BKR’s will.  However, that was not the extent of the enquiry. In a judgment that runs to some 108 pages the court considered matters such as:

  • the provisions of existing trusts settled by the settlor
  • the settlor’s inability to explain why it was necessary or desirable to settle the trust
  • whether the objectives of the trust might already be met by existing trusts
  • assessing the relative merits of a new trust over a will
  • what the settlor’s objects actually were
  • a history of inconsistent and conflicting instructions to BKR’s bankers

The court determined the matter by reference to the Singaporean Mental Capacity Act.

While there may not be a directly comparable standard in New Zealand, the case is a useful reminder to practitioners and trustees about the importance of establishing capacity before a trust is settled.  The case also provides useful guidelines regarding matters to establish when a client is settling a trust that the writer postulates have wide and relevant application – the writer’s view that reasons such as “because my friend said” “because my accountant said” or “because everyone just does don’t they?” do not necessarily represent the gold standard:

  • how will the trust work?
  • what is the benefit to the client?
  • what are the costs and risks involved?
  • why are some children more empowered than others?
  • why have some children been excluded as beneficiaries?
  • if the client’s objects could be achieved by will – what are the pros and cons?  This would the writer suggests entail a careful consideration of potential testamentary challenges

References:

  • Re BKR [2015] SGCA 26, Court of Appeal No 27 of 2014
  • Woodward v Smith [2009] NZCA 215
  • Banks v Goodfellow (1870) LR 5 QB 549
  • “A decisive moment” Lee Chiwi STEP Journal July 2015 at pp 37 – 39.

Also see:

WHO KNOWS WHAT YOU HAD BEFORE YOU LOST IT?

Excerpt from Lexis Nexis Elder Law Conference 2009 – STRUCTURING ESTATES TO BEST MEET THE NEEDS OF ADVANCED CARE by Vicki Ammundsen

Structuring estates to meet the needs of advanced care requires an appreciation of each client’s specific circumstances. There is no one-size fits all best practice template. Sometimes a good solution for one party will not be suitable for that person’s spouse or partner, particularly where there are issues regarding mental capacity.

Wills and enduring powers of attorney are commonly required by older clients. However, before these can be executed by clients of advanced age the question of capacity will often arise.

Assessing capacity

Assessment of capacity can be a relatively straight-forward matter where the client is one of long-standing. The person taking instructions will likely have substantial knowledge of the client’s affairs and circumstances and any changes in the client’s demeanour or instructions that are at odds with prior experience should signal caution.

Confirming capacity with new clients or clients whose affairs have entailed only limited or sporadic interaction can be more difficult and a more systematic and cautious approach may be indicated.

While the presence or absence of sufficient competence can be intuitively and often accurately determined, an appreciation of the tests that apply to determine capacity can not only assist in determining the margins of capacity but also highlight some of the issues that arise when dealing with older clients.

The object of this paper is to review the subject of mental capacity in the context of end stage asset and estate planning, highlighting the requisite elements of capacity for the purposes of wills and enduring powers of attorney.

Testamentary capacity

A valid will requires compliance with the required legislated formality (Wills Act 2007, Wills Act 1837 (UK)). Although the will-maker must also possess the requisite mental capacity, this is prescribed by common law rather than legislation.

A grant of probate does not require proof of testamentary capacity in the first instance. Where a validly executed will appears rational on its face there is a rebuttable presumption of a will-maker’s testamentary capacity. (In re White (dec’d) and Peters v Morris(CA 99/85, 19 May 1987)).

However, where there is evidence that brings capacity into question, the onus of proving capacity rests on the party seeking probate of the will (Public Trustee v Bick [1973] 1 NZLR 310; Peters v Morris).  

“Once a doubt is raised as to the existence of testamentary capacity an onus rests on the person propounding the will to satisfy the Court that the testator retained his mental powers to the requisite extent; that in the end the tribunal must be able to declare that it is satisfied of the testator’s competence at the relevant time, but that a will, will not be defeated merely because a residual doubt remains as to that matter (Peters v Morris at pp 24–25)”

As proof of testamentary capacity is generally required following death, any person taking will instructions should ensure not only that testamentary capacity is confirmed but that evidence of this confirmation is acquired and retained.

In this regard it is important to appreciate that testamentary capacity is not just a test of mental capacity simpliciter.   Rather, the test of capacity in a testamentary context requires confirmation not just of mental acuity but also confirmation of an appreciation of the object of a will and the acquitting of moral obligation and duty.

Elements of testamentary capacity 

The judgment in of Cockburn CJ in Banks v Goodfellow (1870) LR 5 QB 549, which has endured the passage of time, remains the leading authority on testamentary capacity.   The following statement from p. 567 of that judgment succinctly observes the elements of testamentary capacity:

“As to the testator’s capacity, he must, in the language of the law, have a sound and disposing mind and memory. In other words, he ought to be capable of making his will with an understanding of the nature of the business in which he is engaged, a recollection of the property he means to dispose of, of the persons who are the objects of his bounty, and the manner in which it is to be distributed between them. It is not necessary that he should view his will with the eye of a lawyer, and comprehend its provisions in their legal form. It is sufficient if he has such a mind and memory as will enable him to understand the elements of which it is composed, and the disposition of his property in its simple forms.”

The elements of testamentary capacity as determined by Cockburn CJ have been confirmed and re-stated in the recent Court of Appeal decision in Woodward v Smith [2009] NZCA 215 at para. 19. Although lengthy, the propositions stated are worth restating in full as they provide useful guidance regarding the parameters of capacity.

“(1)       Because it involves moral responsibility, the possession of the intellectual and moral faculties common to our nature is essential to the validity of a will

(2)        It is essential to the exercise of such a power that a testator:

[i]         understands the nature of the act and its effects; and also the extent of the property of which he is disposing;

[ii]        is able to comprehend and appreciate the claims to which he ought to give effect;

[iii]        be free of any disorder of the mind which would poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties; that no insane delusion shall influence his will in disposing of his property and bring about a disposal of it which, if the mind had been sound, would not have been made.

(3)        Unsoundness of mind arising from want of intelligence caused by defective organization, or by supervening physical infirmity or the decay of advancing age, as distinguished from mental derangement is equally cause of incapacity. But

[i]         though the mental power may be reduced below the ordinary standard, yet if there be sufficient intelligence to understand and appreciate the testamentary act in its different bearings, the power to make a will remains.

[ii]        It is enough if the mental faculties retain sufficient strength fully to comprehend the testamentary act about to be done.

(4)        It is not necessary that the testator should view his will with the eye of a lawyer, and comprehend its provisions in their legal form. It is sufficient if he has such a mind and memory as will enable him to understand the elements of which it is composed, and the disposition of his property in its simple forms.

(5)        In deciding upon the capacity of the testator to make his will, it is the soundness of the mind, and not the particular state of the bodily health, that is to be attended to. The latter may be in a state of extreme weakness, feebleness or debility and yet he may have enough understanding to direct how his property shall be disposed of; his capacity may be perfect to dispose of his property by will, and yet very inadequate to the management of other business, as, for instance, to make contracts for the purchase or sale of property.

(6)        A testator who has reflected over the years on how his property should be disposed of by will is likely to find it less difficult to express his testamentary intentions than to understand some new business.

(7)        Testamentary capacity does not require a sound and disposing mind and memory in the highest degree; otherwise, very few could make testaments at all;

(8)        Nor must the testator possess such capacity to the same extent as previously. His mind may have been in some degree weakened, his memory may have become in some degree enfeebled; and yet there may be enough left clearly to understand and make a sound assessment of all those things, and all those circumstances, which enter into the nature of a rational, fair, and just testament.

(9)       But if that standard is not met, he will lack capacity.”

Further clarity on the application of these principles is provided by case law.

Moral responsibility

The history of moral responsibility in the context of a will-maker’s obligations is well traversed in the context of proceedings brought under the Family Protection Act 1955. While any moral obligations are not limited to the context of parents and children the commentary relating to claims by adult children provides useful guidance regarding the context and concept of moral responsibility. See for example Flathaug v Weaver [2003] NZLR 730, where at para. 32 the Court notes that:

“The relationship of parent and child has primacy in our society. The moral obligation which attaches to it is embedded in our value system and underpinned by the law. The Family Protection Act recognises that a parent’s obligation to provide both the emotional and material needs of his or her children is an ongoing one. Though founded on natural or assumed parenthood, it is, however, an obligation which is largely defined by the relationship which exists between parent and child during their joint lives.”

The contemporaneous quality of morality is confirmed by the Court of Appeal decision in Re Leonard [1985] 2 NZLR 88 where Richardson J states at 921 that:

“The question of whether the testator was in breach of his moral duty to his daughters as claimants on his bounty must be determined in the light of all the circumstances and against the social attitudes of the day. Mere unfairness is not sufficient and it must be shown that in a broad sense the applicant has a need of maintenance and support. But an applicant need not be in necessitous circumstances: the size of the estate and the existence of any other moral claims on the testator’s bounty are highly relevant and due regard must be had to ethical and moral considerations and to contemporary social attitudes as to what should be expected of a wise and just testator in the particular circumstances.”

Simply put, a will-maker requires an appreciation of the social expectation that the will-maker will provide for family in a considered manner. The moral duty does not require mathematical precision in the context of even-handedness. What is required appears to be the mental capacity to appreciate the accepted social mores, whether or not these are acted on.

As a general proposition the more conventional a will the more likely that the will-maker is accepted as having had sufficient testamentary capacity, if for no other reason than because in the context of an “ordinary will” capacity will not be called to be examined.

“Where property is disposed of fairly, and in accordance with moral dictates, then only a small amount of capacity is needed. But with abrupt and unfair changes, fuller and clearer evidence of capacity is required.” (Mein-Smith v Wills and Foster (High court, Christchurch, M2/02, 24 September 2002, Young J). 

Extent of property

In making a testamentary disposition the will-maker necessarily requires an appreciation of the property available for disposal. This test can be met where there is less than perfect recall of property available for disposition. However, where a will-maker has limited or incorrect recollection of property owned further advice should be sought to confirm capacity.

Diminution through time or illness

It is accepted that there is often a diminution of mental prowess over time. Such diminution does not of itself evidence a lack of capacity.

A person can have sufficient testamentary capacity even when seriously ill. This can be the case even if the will-maker is not aware or has not accepted the imminence of death. A refusal to accept that death will eventuate is not necessarily evidence of delusion such that the will-maker does not have testamentary capacity (Kaap v Wilson (unrep, CA 97/04, 14 June 2005)).

A delusion or partial unsoundness of mind that does not appear on reasonable grounds to affect decisions made with respect to any testamentary disposition is not of itself determinative of a lack of capacity (In re White (dec’d)). It is well accepted that a person can retain testamentary capacity while subject to delusion (Banks v Goodfellow). However, if the nature of the delusion is in respect of the property at the will-maker’s disposal or relates to the potential beneficiaries the requisite testamentary capacity may not exist.

Fluctuating capacity

Where a will-maker has previously lacked testamentary capacity it is important to be able to demonstrate if required that the will was made during a lucid interval, as in this instance for the purposes of probate there will be a presumption against testamentary capacity, the more so if the will displays any lack of moral responsibility in the nature of the dispositions (4 Halsbury’s Laws of England, vol 17 at para 904 and Squires v Squires & Public Trustee (unrep, HC, Auckland, CP 138-SD02, 1 October 2003, para 13; French v Public Trust (unrep, Auckland, M167/02, 29 October 2003)).

Visual impairment

A visually impaired person can make a valid will so long as the will-maker has clear knowledge of the contents of the will. It is not absolutely necessary that the will be read over to the visually impaired person at the time of execution if it is proved that the document contains that person’s instructions and that he or she had knowledge of its contents. That said, to avoid all difficulty, good practice would dictate that the will should be read over to the will-maker at the time of execution to make it clear that he or she understands and approves its contents.

Hearing and speech impairment

An inability to hear or to communicate verbally is not determinative of incapacity. However, where a person is deaf or cannot talk it is important to establish the cause of the disability and to confirm whether or not alternative means of communication allow the person to:

  •  satisfactorily demonstrate capacity; and
  • provide adequate instructions.

Where a person can communicate only by signs, care and attendance by specialist translators will be required.

Evidence of capacity

Instructions from a will-maker and any assessments as to capacity should be retained together with the will (rather than in a file that may reach its destruction date) for the event of a future challenge to capacity. Particular care is required where communication was assisted (for example with hearing or speech impaired client) to evidence for the form of the assistance.

Good practice also requires the retention of revoked wills in the event that a subsequent will is found to be invalid.

The importance of attention to these matters is highlighted in the Hansen J’s decision in Rameka v Wikatene (2008) 27 FRNZ 149 at para 54:

“Much of this uncertainty could have been avoided if a copy of the earlier will had been available and Ms Sando had retained the notes she made of Ngahuia’s instructions. Regrettably, the earlier will was destroyed after the new will had been executed. Ms Sando said this was done in accordance with the established procedures of her employer. At the same time, again in accordance with established procedures, she destroyed notes of the instructions given by Ngahuia. I can only express my astonishment that any law firm should adopt such procedures. While I did not hear expert evidence on the subject, my understanding is that law firms routinely keep previous wills as well as a record of instructions received and advice given. Such precautions are necessary in the event of a successful challenge to the validity of a later will and are desirable if reasons for dispositions are later called into question. On this point see also ss 11 and 11A Family Protection Act 1955 and LexisNexis Wills and Succession (NZ) at 9.9 where the author observes that it is good practice to retain revoked wills which have not been destroyed.”

Duty of care

The decision whether or not to make a will rests ultimately with the will-maker.

Questions regarding testamentary capacity are the exception to normal circumstances, as would be expected given the prevailing presumption of testamentary capacity. However, when a professional adviser has doubts or concerns as to capacity, any duties of care owed to potential beneficiaries must be considered (Ryan v Public Trust [2001] 1 NZLR 700).

That said, when questioning capacity it is important to act within the terms of the retainer and to ensure that further enquiries are not undertaken without the client’s instruction.

Enduring powers of attorney

Enduring powers of attorney (“EPAs”) are governed by Part 9 of Protection of Personal and Property Rights Act 1988 (“PPPR”).

Unlike with wills, the legislation that applies to EPAs specifically addresses the matter of competence. For the purposes of Part 9 of the PPPR Act a person is presumed to be competent for the purposes of the PPPR Act to manage that person’s property and welfare until it can be demonstrated that this is not the case (s. 93B).

Mental capacity can be at issue in the context of EPAs when an EPA is granted and (subject to the terms of the EPA) if it becomes necessary to determine whether the donee has lost mental capacity such that the EPA is effective. It is only when the latter is to be determined that the terms of the EPA can govern who will determine any loss of capacity.

Section 94 of the PPPR Act defines when a person is mentally incapable providing that:

“(1)       For the purposes of this Part, the donor of an enduring power of attorney is mentally incapable in relation to property if the donor is not wholly competent to manage his or her own affairs in relation to his or her property.

(2)        For the purposes of this Part, the donor of an enduring power of attorney is mentally incapable in relation to personal care and welfare if the donor—

(a)        lacks the capacity—

(i)         to make a decision about a matter relating to his or her personal care and welfare; or

(ii)        to understand the nature of decisions about matters relating to his or her personal care and welfare; or

(iii)       to foresee the consequences of decisions about matters relating to his or her personal care and welfare or of any failure to make such decisions; or

(b)        lacks the capacity to communicate decisions about matters relating to his or her personal care and welfare.

A decision that a person lacks capacity for the purposes of the PPPR Act is not one that is made lightly. This reflects the fact that the naturally occurring range of such competencies is wide and that as noted regarding testamentary capacity, if the bar is set too high who amongst us could demonstrate sufficient competence? For this reason in the context of the PPPR Act, impairment such that a lack of capacity is founded is required to be significant rather than subtle.

“… mental incompetence or incapacity involves an inability to understand and process relevant information, to appreciate at least in general terms the choices available, and at least a general understanding of the implications of decisions to be made about personal welfare or property matters. It implies serious impairment of the power of abstract reasoning.” (Treaneary v Treneary 18/12/08 Andrew J. HC New Plymouth CIC 2006-043-000773 at para. 32).

See also Re G [2000] NZFLR 139 at 143.

There is no distinction between the expressions competence and capacity for the purposes of the PPPR Act (see Re “Tony” (1990) 5 NZFLR 609).

However, a distinction can be drawn between the threshold for meeting the test of competence for the purposes of the PPPR Act, and the tests for testamentary capacity. Given that testamentary competence is almost invariably reviewed when the will-maker is no longer alive to give evidence, and that EPAs are contested during a donee’s life-time, this distinction appears justified.

The lower threshold of capacity required for the purposes of the PPPR Act is demonstrated in the case of Re “Tony” where the court was satisfied that it was sufficient for a person executing an enduring power of attorney to only understand the broad essentials of it including the understanding property was being placed in safe hands.

The level of incapacity in the context of personal welfare is more absolute than that required to found a property management order (Treaneary v Treneary).

It is important to also appreciate that the tests of capacity for property and welfare are both different and independent. This means that a finding of incapacity for one purpose will not necessarily mean a finding for the other. Accordingly care is required to view EPAs for welfare and property as separate matters.

Fluctuating capacity

Identifying the junction of a partial and a total lack of capacity will not always be easy to determine (Guardian Trust v Young [1991] NZFLR 282 at 283). Also difficult is the situation where capacity fluctuates. However, it is important to appreciate that each situation turns on its own facts and determining whether or not the requisite level of capacity exists or not will always be a question of fact.

A person may also have capacity in some matters but not others:

 “One may be incompetent to make decisions (or communicate them) I relation to one aspect of life, but not others, because different decisions will involve assimilation of information at different levels of complexity. An individual who is naïve in dealing with financial matters may have a lower threshold of incapacity in relation to financial matters [in one] who had a lifetime of professional involvement in dealing with money, and retained a vestige of those skills. It is a matter of assessment of each individual” (Treneary v Treneary at para. 32).

Although case law provides useful guidance, wherever there is doubt as to capacity, the prudent approach is to seek expert opinion from a suitably qualified professional.

Donor’s subsequent mental incapacity

A validly granted enduring power of attorney is not revoked by the donor’s subsequent mental incapacity (s. 96)

Closing note

Duress has not been canvassed for the purposes of this paper. However, that said, any person taking instructions must remain alert to such a possibility in the context of older clients.

 

 

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