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What is mental capacity as it applies to the preparation of wills, enduring powers of attorney and other legal documents?

Published on December 16, 2024 by Adelaide Ryan

Estate planning is a crucial aspect of ensuring that your assets and wishes are properly managed and executed after your death. A fundamental element in this process is the concept of mental capacity. In New South Wales (NSW), the concept of mental capacity is fundamental for the validity of wills, enduring powers of attorney, and other legal documents related to estate planning. Understanding mental capacity, how it is assessed, and its implications in estate planning is essential for both individuals and legal practitioners.

Defining mental capacity

Mental capacity, in the context of NSW law, refers to an individual’s ability to make decisions and understand the consequences of those decisions. It encompasses the cognitive ability to comprehend information relevant to a decision, weigh the pros and cons, and communicate the decision effectively. In NSW, there is no single legal definition of mental capacity and rather the legal definition depends on each case on the type of decision that is being made of the type of transaction that is involved [1].

Mental capacity involves:

1. Understanding the nature of the document – the individual must comprehend what the document is and what it does. For example, when making a will, the person must understand that they are creating a legal document that outlines how their assets will be distributed upon their death.
2. Understanding the effect of the document – the person must appreciate the consequences of signing the document. This includes understanding who will benefit from the will, the scope of the assets involved, and the potential impact on those who might expect to benefit from the estate.
3. Rational decision-making – the individual must be able to evaluate information, weigh the pros and cons of different options, and make a reasoned decision. This involves a logical thought process and the ability to consider relevant factors.
4. Ability to communicate the decision – the person must be able to convey their decision clearly, whether verbally or through other means of communication.

The NSW legal framework

In NSW, there is no legal definition of mental capacity. There is a basic presumption arising from court cases that every adult person has mental capacity to make their own decisions.  However, questions about the person’s mental capacity may arise if there is a dispute about a legal document signed by that person.  There are variety of legal tests of mental capacity which have been developed by court cases and others in legislation such as Guardianship Act 1987 (NSW).  The primary statutes involving the creating of a will and decision-making documents include:

1. Succession Act 2006 (NSW) – this Act outlines the requirements for a valid will. The legal test for mental capacity is set out in Banks v Goodfellow (1870) LR 5 QB 549 which remains relevant today and reaffirmed in a number of recent Supreme Court of NSW cases.  That test states that a person making a will has testamentary capacity if they understand the nature and effect of the will and its effect, the extent of their assets, the claims of those who might expect to benefit from their estate, and are free from any delusion of the mind that would effect the dispositions under their will.
2. Powers of Attorney Act 2003 (NSW) – this Act covers the appointment by a person to another person or persons to make financial and legal decisions on their behalf. At the time of appointing a power of attorney, that person must have the mental capacity to understand the nature and effect of the authority they are granting and this is endorsed by a solicitor’s certificate contained within that document. The legal test for mental capacity for this particular transaction is set out in Scott v Scott [2012] NSWSC 1541.
3. Guardianship Act 1987 (NSW) – this Act provides for the appointment of enduring guardian to make personal and lifestyle decisions for individuals who are unable to make these decisions themselves due to a lack of capacity. At the time of appointing an enduring guardian, that person must have mental capacity to understand the nature and effect of the authority they are granting and this is endorsed by a solicitor’s certificate contained within that document.

Each of these Acts acknowledge the importance of creating a valid legal document for a particular purpose such as a will, enduring power of attorney or appointment of enduring guardian.  While there are variety of legal tests of mental capacity developed by court cases or defined in the Guardianship Act, determining whether a person has mental capacity inevitably depends in each case on the type of decision which is being made or the type of transaction involved.

Assessing mental capacity

Determining mental capacity can be complex, particularly when there are doubts about an individual’s cognitive abilities. The assessment often involves:

1. Understanding the decision – the person must understand the nature and purpose of the decision they are making.
2. Appreciating the consequences – they should appreciate the potential outcomes and consequences of the decision.
3. Confirming rational thought process – the individual should be able to weigh the information and alternatives logically.
4. Confirming ability to communicate the decision – they must be able to communicate their decision clearly to satisfy that the intention for the decision is their own.

Implications of lack of mental capacity

If a person is found to lack mental capacity at the time of making a will or any other estate planning document, the document may be deemed invalid. This can lead to significant legal disputes and unintended distribution of the estate. For example, in the case of an invalid will, when a will made by someone without testamentary capacity can be challenged, resulting in the estate being distributed according to intestacy laws or a previous valid will. In the context of an Enduring Power of Attorney, if the principal lacked capacity when signing the power of attorney, any decisions made by the attorney could be legally questioned and overturned.

Protecting against challenges

To mitigate the risk of challenges based on mental capacity, it is always recommended that you:

1. Seek professional advice – you should engage legal during the estate planning process to ensure your capacity is properly assessed and documented.
2. Keep detailed documentation – you should maintain thorough records of the decision-making process.
3. Regular reviews – you should regularly review and update estate planning documents to reflect any changes in your circumstances.

Mental capacity is a cornerstone of valid estate planning in NSW. It ensures that individuals’ wishes are respected and are legally enforceable. By understanding the legal requirements and taking proactive steps to document and assess mental capacity, individuals can safeguard their estate plans and minimise the risk of a dispute.

Please note that this article does not constitute legal advice. If you are seeking professional advice on any legal matters, you can contact Carroll & O’Dea Lawyers on 1800 059 278 or via our Contact Page and one of our lawyers will be able to assist you.

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[1] Gibbons v Wright [1954] HCA 17.