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Capacity Tools

Capacity

The capacity of a person is fundamental to the legality of their decisions. This page explores capacity in the context of wills, asset and estate planning, and trusts.  The level of capacity relevant to a variety of situations and appointments is considered together with the adviser risk when identifying capacity issues. The exercise of appointer powers under an enduring power of attorney is also considered together with issues associated with the removal of incapacitated trustees.

It is commonly thought that capacity is just a legal matter. This is not correct.  All advisers, whether lawyers, accountants, financial advisers need to be alert to capacity issues whenever transacting, taking instructions or giving advice.

This page contains valuable guidance regarding capacity warning signs, capacity checklists and commentary on capacity for different decisions.

Warning Signs

Signs that capacity may be diminishing include:

  • Short-term memory problems.
  • Language / communication problems e.g. vague language, trouble staying on topic, disorganised.
  • Comprehension problems e.g. difficulty following familiar concepts e.g. assets, liabilities, depreciation.
  • Lack of mental flexibility e.g. difficulty comparing recommended options you may advise.
  • Calculation / financial management problems e.g. addition or subtraction that previously would have been easy for the client / bill paying difficulty.
  • Disorientation e.g. trouble navigating office when they have visited you many times before.
  • Emotional distress e.g. anxious, pressured, distressed.
  • Delusions.
  • Poor grooming / hygiene.

See capacity checklist as a guide.

Capacity checklist

The capacity checklist below is of a very general nature. If, as accounting advisers, you have concerns regarding your client’s mental capacity, legal advice should be sought.  Capacity is a specialised area of law.  We are well equipped to provide prompt specialised advice, in this area of law.

 

Observation Sheet – Capacity
Meeting
Venue
Date/time
Client
Who requested the meeting?
Anyone else present, with the client
If so, why were they present
Advice given about the presence of others?
Relationship of others present with client?
Recent Events
Are you aware of any matters that have given rise to doubts as to client’s capacity in the past?
Are you aware of any medical or legal opinions in the past as to client’s capacity?
Are you aware of any medications, such as painkillers, which may act to deprive client of capacity?
Has client’s medical history been disclosed to you?
Has client’s doctor disclosed information to you regarding capacity?
Does client accept the need for a medical examination in relation to capacity?
How did the client present himself / herself?
Was the client’s manner consistent with any previous contact?
Dress normal or unusual?
Sober?
Voice slurred?
Attention span?
Speech coherent and rational?
Was his / her manner unusual (agitated/distracted)?
Was he / she aware of previous contact with you and did he / she recognise who you were?
Was he / she aware of how your meeting was arranged?
Communication
Was communication easy?
Did the client readily understand what was said and reply coherently?
Did the client refer to notes made before the meeting?
If so, were those his / her own notes or had they been written by someone else?
Test of capacity
Did you check answers during the meeting?   What were the results?
Undue influence
Would you consider the client to be vulnerable to undue influence?
Does anything in the discussion raise suspicions of undue influence in your mind?
Is there anything in the client’s instructions that give rise to concern about undue influence?
Further observations
Did the client exhibit any problems with memory, particularly short-term memory – record examples.
Was the client able to remember information discussed during the meeting, at the end?
Did the client take notes during the meeting and, as far as you could see, were they coherent?
Was the client distracted by trivialities at the expense of understanding important issues?
Was the client drowsy during the meeting?
Did the client have a reasonable awareness of current events and show capacity for a rational conversation?
Did the client understand the relationships between different members of his family?
Did the client exhibit any delusional or obsessive behaviour or opinions during the meeting?

 

 

 

Capacity assessment

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. 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 assist not only in determining the margins of capacity but also highlighting some of the issues that arise when dealing with older clients.

Capacity is commonly considered in the context of wills and estate planning. However, the concept of capacity has as much relevance to entering into contracts, settling trusts, signing Enduring Powers of Attorney.

Testamentary capacity

As mentioned above, capacity is arguably most commonly considered in the context of wills. A valid will requires compliance with the legislated formality.[1]  Although the will-maker must also possess the requisite mental capacity, this is prescribed by common law rather than legislation.

Elements of testamentary capacity

We only give a very brief overview to testamentary capacity. This area of law is complex and legal advice should be taken.

The judgment of Cockburn CJ in Banks v Goodfellow[2] referred to in Farn & Ors v Loosley[3] 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.”

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. As noted in Mein-Smith v Wills and Foster:[4]

“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.”

 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.[5]

The terms of the will itself may offer some guidance as to incapacity, but are unlikely to be of assistance proving the will-maker was of sound mind. In Bishop v O’Dea[6], Tipping J explained that:

[ir]rationality of a will on its face, either as to content or as to expression, is often an indication of greater or lesser force that the will maker lacked capacity. But the rationality of a will on its face does not necessarily provide much evidence of capacity, especially if the will is professionally drawn, in which case one can expect it to be at least rationally expressed.

 Hearing and speech impairment

 An inability to hear or to communicate verbally is not determinative of incapacity. However, where a person is hearing impaired or unable to 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.

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

The PPPR Act (unlike wills) 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 personal care and welfare until it can be demonstrated that this is not the case (s 93B PPPR Act).  Section 93B PPPR Act was inserted to the PPPR Act by s 6 of the Protection of Personal and Property Rights Amendment Act 2007.

Section 94 of the PPPR Act (interpretation section for Part 9) defines when a person is mentally incapable:

(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. 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.”[7]

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. The lower threshold of capacity required for the purposes of the PPPR Act is demonstrated in the case of Re “Tony”[8] where the court was satisfied that it was sufficient for a person executing an enduring power of attorney only to 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: Treneary v Treneary.

It is also important to appreciate that the tests of capacity for property and personal care 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.  A person may also have capacity in some matters but not others:

“One may be incompetent to make decisions (or communicate them) in 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

The threshold of what constitutes sufficient capacity to enter into an enduring power of attorney is not high and we suggest that the threshold is met where there is an ability to understand and process relevant information, appreciate at least in general terms the choices available, and at least a general understanding of the implications of decisions made: Treneary v Treneary.

As was noted in the introduction to this paper, it is easier to assess capacity with long-standing clients whose character and business are familiar. It is more difficult where the client is new or less well known. A cautious and more systematic approach is required in these circumstances.

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

Exercising powers of appointment to remove an incapacitated trustee

The decision in Marshall Family Trust[9] may require some reconsideration of how powers of appointment can be exercised following the appointor’s loss of capacity.  In that case, the surviving appointor, who was also a trustee, lost mental capacity and quite properly needed to be removed as a trustee.

The court was required to determine whether the trustee’s property attorney could exercise her powers of appointment and remove the incapacitated appointor and appoint a new trustee in her place. While it has generally been accepted that this is a power that can be exercised by a property attorney, Nation J expressed the considered view that this is not building on the arguments made in Godfrey v McCormick [10] and noting at [12] to [14]:

“[12] In the recent judgment of Godfrey v McCormick, I held that the attorney under an EPO does not have the ability to act for an incapacitated trustee in relation to the exercise of trustee powers, rights or obligations as a trustee.

[13] The reasoning for that conclusion also applies to the power which a settlor or other named person has to appoint new trustees under a trust deed. Section 97A(2) of the PPPR Act provides that the “paramount consideration of the attorney is to use the donor’s property in the promotion and protection of the donor’s best interests”. As with a trustee exercising trustee powers, a person who has the power of appointment under a trust deed must at all times have the best interests of the beneficiaries in mind.

[14] For this reason and the reasons discussed in Godfrey v McCormick, the PPPR Act must be read as not extending to an attorney the power to act for a person in relation to their power of appointment of new trustees under a trust deed. This power cannot be considered as a personal property right of the person who has granted the EPA because associated with the power are the fiduciary duties owed to the beneficiaries.”

As the power of appointment could be not exercised by the Appointor’s attorney, it was necessary for the court to appoint a new trustee pursuant to s 51 of the Trustee Act 1956 and a vesting order under s 52 of the Trustee Act.

Capacity to settle a trust, enter into deeds of variation, memoranda of wishes, appoint and remove beneficiaries

Issues of capacity are important considerations when trustees, donors, settlors or appointors are exercising powers that they may no longer be equipped to make due to advanced age, dementia or other diminishment in mental acuity.

However, capacity can be a relevant consideration at an earlier point in the life of a trust. A starting consideration can be whether a person who intends to settle a trust has the capacity to do so.  While some trusts arise from circumstances where the law will find that an asset is held on trust – for example a constructive or resulting trust that arises in circumstances where a property is found to be held on trust for the parties who contributed to the purchase.

In the context of a “formal” trust recorded in a deed of trust, it is important that the adviser who is drafting and preparing the trust deed is satisfied that the settlor and any person transferring property to the trust has the capacity to do so.

Later in the life of a trust, any trustees who are no longer able to carry out their responsibilities need to be removed. While this can be a straight-forward process (presuming suitable trust terms or enduring powers of attorney), there are still practical issues around the vesting of trust assets.

The relevant principles in relation to testamentary capacity are set out above. However, what level of capacity is required for the exercise of trustee powers or to enter into a memorandum of wishes?

Regrettably the answer is not always entirely clear cut as evidenced by the Court of Appeal decision in Green v Green.[11] This case related to decisions that Hugh Green made following a diagnosis of cancer in 2010 including the appointment and removal of directors and trustees and the execution of a new will.  Hugh Green’s capacity to make these decisions and exercise the relevant powers was challenged.  In a decision upheld by the Court of Appeal, the High Court found that Hugh Green was found to have capacity and to know and understand the effect of his actions.  However, he was also found to have been subject to undue influence regarding decisions including entering into a new will.  The decision in Green v Green also highlighted the need for independent advice for vulnerable clients. That said, Green v Green turns on its own unique facts as do so many cases where capacity or exercise of powers are in issue.  Care should be taken not to slavishly rely on judicial decisions, where common sense and fact sensitive analysis would be of more utility.  How then should questions around capacity and older people be decided?

Part 9 of the PPPR Act provides some guidance on capacity in the context of Enduring Powers of Attorney (see earlier section in this paper).

The existence of four threshold tests in the PPPR Act highlights the difficulties incumbent in determining capacity. Although there is a presumption of capacity (referred to as the “presumption of competence” in section 5 of the PPPR Act) for the purposes of the PPPR is it appropriate to apply the same test to trustees?

In the context of trusts where there is no presumption for or against competence, when should an older trustee (or any trustee for that matter) be deemed to be incapacitated?

Some trust instruments attempt to deal with this issue. Consider for example the following clause:

 

“Settlor’s Power of Removal of Trustees

 

1        The Settlors jointly or the survivor of either of them will have the right to remove a Trustee by notice in writing effective from the date of the notice, unless the Settlors or Settlor is suffering from mental incapacity.

2       Where one Settlor suffers from mental incapacity, then the other Settlor will have the right to remove a Trustee by notice in writing effective from the date of the notice.”

However, in the absence of a definition of mental incapacity or any directions as to how this is to be determined the above clause is not entirely helpful.

The Trustee Act 1956 provides some guidance in s 51 (2), that:

(2)     In particular and without prejudice to the generality of the foregoing provision, the Court may make an order appointing a new trustee in substitution for a trustee who—

(c)     Is a mentally disordered person within the meaning of the Mental Health (Compulsory Assessment and Treatment) Act 1992, or whose estate or any part thereof is subject to a property order made under the Protection of Personal and Property Rights Act 1988; or

 

The Trusts Bill also addresses the issue of capacity at s 86 where the question of who may be a trustee is addressed.

90 Who may be appointed as trustee

(1) Any person may be appointed as a trustee of a trust, unless the person is disqualified.

(2) The following persons are disqualified from being appointed as a trustee:

(a) a child:

(b) an undischarged bankrupt:

(c) a person who lacks the capacity to perform the functions of a trustee:

(d) a body corporate that is subject to an insolvency event.

 

As the definition is not exhaustive, capacity in a trust context will likely need to continue (in the event the Trusts Bill is enacted in current form) to be determined on a case by case basis.

 

As a matter of prudence, it is suggested that where trustee powers are being exercised, it would be appropriate to use testamentary capacity as a measure by which capacity is determined.

Varied to replace moral concepts with fiduciary obligations, and connotations of property with trust property, it is suggested that testamentary capacity (addressed above) could be an appropriate cipher for trustee capacity. It is suggested that such a test should be employed, if necessary before trust documents are entered into or trustee discretions exercised.  These might be documents or decisions relating to:

  • appointment and removal of trustees;
  • appointment and removal of beneficiaries;
  • nomination of appointor;
  • gifting – whether making or receiving;
  • variations of trust; and
  • exercise of dispositive powers.

Where a person is amending (or drafting) a memoranda of wishes, as these reflect a settlor’s personal wishes, and are not generally binding on trustees (S R Hamilton Corporate Trustee Ltd v White[12]), it is suggested that a slightly lower level of capacity may suffice. However, this has not yet been confirmed by the courts.

[1] Wills Act 2007.

[2] (1870) LR 5 QB 549

[3] [2017] NZHC 317, [2017] 3 NZLR 383.

[4] High Court, Christchurch, M2/02, 24 September 2002, Young J

[5] Kaap v Wilson [2005] NZCA 152

[6] (1999) 18 FRNZ 492

[7] Treneary v Treneary 18/12/08 Andrew J. HC New Plymouth CIC 2006-043-000773.  Also see Re G [2000] NZFLR 139 at 143

[8] (1990) 5 NZFLR 609

[9] [2017] NZHC 472

[10] [2017] NZHC 420

[11] (2016) 4 NZTR ¶26-021; [2016] NZCA 486

[12] [2016] NZHC 1408

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