The Issue of Capacity

Although most people over 65 will not suffer cognitive impairment, for a large minority, dementia and other age-related conditions will enter their lives at some stage.

According to statistics gathered by the National Centre for Social & Economic Modelling, currently, 250 people are diagnosed with dementia every day, and this is likely to increase to 318 people per day by 2025. Among Australians aged 65 and over, almost 1 in 10 has dementia, and among those aged 85 and over, 3 in 10 have dementia.

The term dementia is an umbrella term used to refer to a collection of symptoms which are caused by disorders affecting the brain. Dementia affects thinking, memory, behaviour and the ability to perform everyday tasks. Although most people with dementia tend to be in the older age bracket, it is not a normal part of ageing but rather a manifestation of some underlying disease.

Some of the underlying diseases are:

  • Alzheimer’s Disease;
  • Vascular Dementia;
  • Parkinson’s Disease; and
  • Fronto-temporal lobe degeneration.

In any discussion of capacity or its loss, it is important to understand that:

  • because a person has been assessed as having dementia, this does not mean that they cannot make a decision about a particular issue. Mental capacity has to be assessed in the context of a particular transaction;
  • at law, a medical diagnosis or absence of diagnosis will not determine whether a person is considered to have the capacity to make decisions; and
  • a medical diagnosis is useful evidence, but it is for a Court or Tribunal of competent jurisdiction to make declarations of capacity or incapacity, as the case may be.

From a legal perspective, mental incapacity is a more far-reaching life event than death. It could be considered to be a Clayton’s death – the death you have when you don’t have a death because life continues after this “death”. The complexity of incapacity is illustrated by the fact that a person’s death instrument, their Will, is a direction for their executor to transmit their assets to beneficiaries. The Will is therefore prescriptive in this transfer of assets and normally does not require decision making on behalf of the executor in that transfer. By comparison, a person’s incapacity instrument, their Enduring Power of Attorney, is not prescriptive, but the delegation of discretion to someone else, namely their attorney. This discretion is exercised during the life of a mentally incapable person and will impact on the ultimate death of that person and the disposition of that person’s wealth.

The discretion is only controlled by three factors, as follows:

  1. fiduciary duties;
  2. statutory restrictions; and
  3. the terms of the Enduring Power of Attorney instrument.

The first two controls are of limited impact when it comes to the ambit of the attorney’s discretion and the ability of an EPA to re-engineering estates during the life of the donor as a consequence of the donor’s death. It is common for the third control to be overlooked or disregarded in the drafting of an Enduring Power of Attorney. The consequence of this is that the potential for abuse of the power by an attorney is enhanced in the wrong hands. The rise in the number of cases coming before the Courts on this issue is demonstrative of the problem. It is also probable that the vast number of attorney maladministration, if not fraud, goes undetected.

It is to be hoped that in most cases, an attorney will do the right thing. However, because it is an instrument that gives a third party the right to control your financial affairs and therefore deal in, manipulate, enhance or damage your wealth assets, care should be taken in deciding who to appoint and what directions are to be given to that person in the care of your financial affairs. After all, in what other situation would we give a third party an untrammelled discretion to manage your financial affairs?

For more information, please contact:
Mark Minarelli

Mark Minarelli
p.   +61 8 8124 1808
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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