Incapacity and Planning Ahead: Why Estate Planning Matters
Many people overlook the importance of estate planning, assuming it’s only for the rich, elderly or sick. But regardless of your age, health or how much money you have, having a plan is important.
Estate planning isn’t just about what happens to your assets after you die; it’s also about preparing for the unexpected things that might happen while you’re alive, like an accident or illness causing you to lose the ability to make decisions for yourself.
Planning ahead gives you clarity and control over how you and your affairs will be looked after. It can help reduce the costs and stress for your loved ones, and provide you with peace of mind knowing that you have taken steps to ease the burden on your family during a difficult time.
What are the essential Estate Planning documents?
A thorough estate plan may include the following:
- Will: a binding document that comes into operation after your death. A Will allows you to choose an Executor, guardian of any minor children and sets out how you want your assets to be distributed on your death. Wills can range from the relatively simple to complex Wills, such as Testamentary Trust wills, or those that set up special disability trusts, life interests and other tools to look after your loved ones.
- Enduring Power of Attorney: this document commences before your death, either when you lose capacity or at some other time you specify. It allows you to appoint someone (the ‘attorney’) who you trust to make financial, personal and/or legal decisions on your behalf.
- Appointment of Medical Treatment Decision Maker: previously called the Power of Attorney (Medical), this document operates during your lifetime. It allows you to appoint someone to make medical decisions on your behalf if you become unable to do so yourself.
- Superannuation Binding Death Benefit Nominations: this also only comes into operation upon your death. Your nominations allow you to direct where any of your superannuation death benefits are paid.
Some or all of these documents are applicable in every estate plan, and provide a solid foundation for recording your wishes. Depending on your circumstances, there are various other documents that may be helpful. For example, if you are involved in a company or business, a partnership or shareholder agreement could specify what should happen if one of your partners dies, while a company power of attorney could allow the company to keep operating even if one of the Directors is incapacitated. If you have a trust, you will want to ensure you have dealt with the succession of important roles such as trustee and appointor to ensure that the correct people have control.
When is the right time to get started?
When is the right time to start thinking about your estate plan? Ideally, every adult should regularly consider their estate plan and update it if necessary. It is generally a good idea for people to consider their estate plan when big events occur like having children, getting married or separated, or purchasing a home.
People often think that they’re too young to need these documents, or that they’ll come and speak to us when the doctor tells them to start worrying. What they may be overlooking, however, is that if they wait too long they may lose the legal ‘capacity’ to make these documents.
If somebody loses capacity without valid estate planning documents, they also lose the ability to choose who will make decisions on their behalf while they’re alive, and who will benefit from their estate on their death. While the law provides back-up mechanisms in such situations, these options often do not align with an individual’s wishes and can be costly, stressful, and unnecessarily difficult for family and friends. We explore what happens when someone loses capacity in more detail in the other articles within our Incapacity Series.
What is incapacity in the legal context?
The term capacity refers to a person’s ability to make a decision or a legal document. In the context of estate planning, the test for ‘capacity’ varies but generally requires you to be of reasonably sound mind, have sufficient memory to know what you are doing, and the ability to make choices and understand the consequences of your choices.
What many people don’t know is that it is possible for a person to be affected by dementia or Alzheimer’s and still have capacity to make certain decisions or estate planning documents. In each case, it is a question of the form and degree of impairment.
For legal purposes, the relevant test of ‘capacity’ depends on the type of estate planning document in question.
Capacity to make a Will
The test for testamentary capacity was set out in the 1870 English decision of Banks v Goodfellow[1] where the Court held that a will was valid even though the will maker had suffered a mental illness. Following cases in Australia have provided further examples of how the test is applied. A person has testamentary capacity provided they can satisfy a four-part test:
1. They are capable of understanding what a will is and what its effects are. This does not necessarily mean that they have discussed every single clause with their lawyer and could explain them in full, but they must be capable of understanding what it achieves.
2. They are capable of knowing what assets they have and what they are worth. Depending on the circumstances, a fairly high-level understanding of the assets may be sufficient. For example, a person who has passed most of the management of their assets to an Attorney is not expected to have the same understanding as a person who is still taking an active role.
3. They are capable of being aware of the people who have a ‘moral claim’ on them. Typically, this means their family, but could include anyone else who would reasonably expect to be included in the will. Being aware of these people and their claims does not necessarily mean one is required to make provision for them.
4. They are capable of evaluating and discriminating between the respective strength of those claims. This means that they are not suffering from conditions or disorders that prevent them from making rational decisions about their will.
Each of these factors is on a spectrum. For example, a person who has early-stage dementia may nonetheless be entirely capable of making a will.
If there is doubt about whether a person had capacity when they made a will, the Probate Office may require further information about the person’s health and capacity at that time. Typically, there are a number of years between a person making a will and them dying and the Will being submitted for Probate. This can make it very difficult to obtain evidence about the person’s capacity and understanding of the will.
To make this task easier, it is strongly recommended to engage a lawyer to prepare the will, and to inform the lawyer of any potential concerns about the will-maker’s capacity. The lawyer can then ensure that they document the process in such a way that it will be easier to address any queries the Probate Office may raise. The lawyer may also recommend that the person’s doctor provide an evaluation, as the Probate Office may ask for medical evidence. While these steps may be inconvenient, it can be far more difficult and time-consuming to establish capacity later.
Capacity to make an Enduring Power of Attorney
The relevant test from the Powers of Attorney Act 2014 considers whether a person can:
- Understand the information relevant to the decision and the effect of the decision, which includes understanding:
a) That the person may place conditions on the power given to the Attorney and give instructions the Attorney about how they are to act;
b) When the Enduring Power of Attorney commences (ie, when the Attorney can start acting);
c) That once the Enduring Power of Attorney is active, the Attorney has the legal ability to make decisions about the relevant matters as if the Attorney were the person;
d) That the person may revoke the Enduring Power of Attorney while they have capacity to do so;
e) That the Enduring Power of Attorney continues even if the person subsequently loses capacity; and
f) That if the person does not have decision making capacity in relation to the Enduring Power of Attorney, the person is unable to effectively oversee its use. - Retain that information to the extent necessary to make the decision.
- Use or weigh that information as part of the process of making the decision.
Communicate the decision and the person’s views and needs about the decision in some way (including by speech, gestures or other means).
The Incapacity Series
Throughout our Incapacity Series, we will explore the importance of capacity in an estate planning context. We will look at the various estate planning documents such as Wills and Enduring Powers of Attorney and explain what mechanisms the law provides to deal with circumstances where someone has lost capacity without having these documents in place. We will also examine what happens where trustees, directors or executors lose capacity and how that can impact on the operation of businesses, trusts and companies.
By the end of our series, we hope our readers will have an appreciation for the importance of planning ahead while you have capacity.
Other articles in the Incapacity Series
- The Incapacity Series: The Importance of Planning Ahead
- Enduring Powers of Attorney: What if I can’t make decisions for myself?
- Appointments of Medical Treatment Decision Maker: What if I can’t make medical decisions for myself?
- Guardians and Administrators: What if I lose capacity and haven’t appointed anyone to make decisions for me?
- Statutory Wills: What if I lose capacity to make a Will?
How can Novum Law Group assist you?
If this series is relevant to you and you want to learn more, or if you have a query that our Wills and Estates lawyers could assist you with, we welcome you to contact our office by phone on 9063 0300, send us an email, or click here to make an appointment.
[1] Banks v Goodfellow (1870) LR 5 QB 549
Authors
Sheredyn Legg
