It Depends – What do we mean when we say someone lacks capacity?

In this edition of ‘It depends’, associate Sarah Camm talks about what we mean when we say that someone doesn’t have capacity in estates matters.

Video transcript

Hi, and welcome to another episode of It depends. This week we will be talking about what we mean when we say that someone doesn’t have capacity.

What is capacity?

Broadly speaking, when we’re talking about a person’s capacity, we’re talking about issues that might affect their cognitive function and their ability to understand and enter into transactions or decisions, importantly, not every issue that might affect someone’s cognition will actually mean that they don’t have capacity to make a decision.

What is the test for capacity?

It depends. Capacity is decision specific. So, this means that whether someone has capacity will depend on the type of decision that they’re making or document that they’re entering into or signing. Just because a person lacks capacity to enter into a Will, doesn’t mean that they lack capacity to make all the types of decisions.

When is capacity important?

If a person doesn’t have capacity for a particular document or transaction or decision, then it means that that document transaction or decision might not be valid. Also, for attorneys who are acting under an enduring power of attorney, their appointment might only have effect if the principal lacks capacity. So, it’s really important for the attorney to understand when they can and cannot act. The terms of your trust or self-managed superannuation fund might remove a trustee or a director of a corporate trustee if they lack capacity and many estate disputes are about whether someone had capacity to sign a Will and we also see disappointed beneficiaries challenging decisions made by their parent while they were alive, where the parent has transferred assets out of their estate and they might argue that the parent lacked capacity to make the decision to transfer that asset out of their name. The reason that that can be important is that those decisions might reduce the value of the estate that might be available for that disappointed beneficiary. As advisors, we should be considering capacity issues at the beginning of a matter and also throughout the transaction that we’re being asked to assist in.

If you or your client have any questions that involve issues about capacity, get in touch with a member of our private clients team today.