Planning for the future is one of the most important steps you can take to protect yourself, your assets and the people you care about. Having a valid and up-to-date Will is essential, particularly if you have children, dependants, significant assets or specific wishes about how your estate should be handled.
Estate planning is not limited to what happens after you die. It also involves preparing for situations where you may lose the ability to make decisions for yourself. Documents such as an Enduring Power of Attorney and Enduring Guardian appointment allow you to choose trusted people to make decisions on your behalf if you lose capacity in the future.
These documents serve different purposes. An Enduring Power of Attorney generally relates to financial and legal decisions, while an Enduring Guardian appointment relates to personal, lifestyle and healthcare decisions.
However, there is one important requirement that applies to all of these documents: you must have legal capacity at the time you make them.
If you lose capacity, your family members cannot simply create a Will for you, appoint a Power of Attorney on your behalf or choose a guardian without formal legal authority.
| Estate Planning Document | Purpose | When It Operates |
|---|---|---|
| Will | Sets out how your assets should be distributed after your death. | After you pass away. |
| Enduring Power of Attorney | Allows someone to make financial and legal decisions on your behalf. | During your lifetime, including if you lose capacity. |
| Enduring Guardian | Allows someone to make personal and lifestyle decisions for you. | When you need assistance with personal decisions. |
The NSW Civil and Administrative Tribunal (NCAT) provides information about guardianship and financial management arrangements where a person can no longer make certain decisions independently.
What Is Legal Capacity?
Legal capacity refers to a person’s ability to understand information, consider available choices, appreciate the consequences of decisions and communicate their decision.
Capacity is required when making important legal decisions, including:
- Preparing or changing a Will.
- Buying or selling property.
- Entering contracts.
- Managing financial affairs.
- Appointing an Enduring Power of Attorney.
- Appointing an Enduring Guardian.
Australian law generally starts with the assumption that every adult has the capacity to make their own decisions. This principle protects an individual’s right to control their own affairs.
However, this presumption can be challenged if there is evidence that a person cannot understand or evaluate the information required to make a particular decision.
A person may experience impaired capacity because of:
- Dementia or other age-related cognitive conditions.
- An acquired brain injury.
- An intellectual disability.
- A mental illness affecting decision-making ability.
- Other medical conditions affecting cognition.
Capacity Is Decision-Specific
A common misconception is that a person either has capacity or does not have capacity. In reality, legal capacity is assessed on a decision-by-decision basis.
A person may have capacity to make one decision but not another. The level of understanding required depends on the complexity and consequences of the decision.
| Decision | What the Person Must Understand |
|---|---|
| Making a Will | The nature of their assets, who may have a claim on their estate and the effect of the Will. |
| Appointing an Enduring Power of Attorney | The authority being given, who will receive that authority and the potential consequences. |
| Managing financial affairs | Complex financial information and the impact of decisions. |
For example, someone may have enough capacity to prepare a straightforward Will but may not have the capacity to manage complex investments or appoint another person to control their financial affairs.
How Do Solicitors Assess Testamentary Capacity?
When preparing a Will, solicitors generally begin with the assumption that their client has the necessary capacity.
However, if concerns arise, a solicitor may need to take additional steps before finalising the Will. This may include:
- Asking questions to confirm the person’s understanding.
- Recording detailed attendance notes.
- Obtaining medical evidence where appropriate.
- Ensuring the person understands the effect of the document.
The assessment focuses on whether the person understands the specific legal decision they are making, rather than simply whether they have a medical diagnosis.
This distinction is important because a medical condition does not automatically mean a person lacks legal capacity. Likewise, a person without an obvious medical condition may still have difficulty understanding complex decisions.
What Happens If Someone Loses Capacity Without Planning Ahead?
A common situation occurs when a family member begins losing capacity but has not prepared an Enduring Power of Attorney or Enduring Guardian appointment.
In these circumstances, relatives cannot automatically step in and manage the person’s affairs. They may need to apply to NCAT for a formal appointment as guardian or financial manager.
This process can involve additional time, paperwork and legal costs. It may also mean that decisions are made through a formal process rather than by someone the person personally selected.
Why Is Planning Ahead Important?
Preparing estate planning documents while you have capacity gives you control over important future decisions.
A properly prepared estate plan can:
- Allow you to choose who manages your affairs.
- Reduce uncertainty for your family.
- Help avoid disputes about decision-making authority.
- Ensure your wishes are clearly documented.
Estate planning is particularly important for people with complex family circumstances, significant assets, business interests or concerns about future health issues.
Planning Ahead Can Protect Your Future and Your Loved Ones
Legal capacity is a fundamental part of estate planning. A person must have capacity when preparing a Will, appointing an attorney or making guardianship arrangements.
Understanding the requirements for capacity can help you plan ahead and ensure your wishes are respected in the future.
If you have concerns about your own capacity, the capacity of a loved one, or preparing estate planning documents, obtaining advice from an experienced estate lawyer can help protect your interests.
This article provides general information only and does not constitute legal advice. You should obtain advice that considers your individual circumstances.
If you need assistance with Wills, Powers of Attorney, Guardianship or estate planning, please contact our experienced team on (02) 4987 3344 or email [email protected].