Introduction

Power of Attorney - Legal capacity

A power of attorney, including an irrevocable or enduring power of attorney, is an instrument by which a principal appoints an attorney, pursuant to the Powers of Attorney Act 2003 (NSW).

A power of attorney gives the appointed person almost unlimited power to deal with the appointor’s financial affairs and property. If it is an enduring power of attorney it continues to operate even when the person loses mental capacity.

Legal capacity to appoint a power of attorney is the specific application of the principles of legal capacity as applied to the question of appointing someone to have the power to act for a person in managing their financial and property affairs. The Act deals with mental capacity but does not create a code.

The general principles applicable to the assessment of legal capacity are set out in the Field of Expertise page “Legal capacity - Introduction and overview” which may be read with this page.

The principles specifically relevant to the related issues of legal capacity to appoint an enduring guardian or make, amend or revoke a will are set out in the Field of Expertise pages “Legal capacity - appointment of enduring guardian” and “Legal capacity - testamentary capacity”.

What is the legal capacity to appoint a power of attorney?

As the concepts behind a power of attorney are not as familiar to most people as those of a will, and as the effects can be more significant since it operates during the person’s life, it appears that greater care is required in the assessment of capacity, and a higher level of cognitive ability and capacity is required for the execution of a power of attorney than for a will, and that this is particularly so for an enduring power of attorney.

In Ranclaud v Cabban [1988] NSW Conv R 55-385 Justice Young said that: “Such a power permits the donee to exercise any function which the donor may lawfully authorise an attorney to do. When considering whether a person is capable of giving that sort of power one would have to be sure not only that she understood that she was authorising someone to look after her affairs but also what sort of things the attorney could do without further reference to her.”

In Szozda v Szozda Justice Barrett summarised the common law position in NSW at [34]:

“The central concept is thus one of complete and lasting delegation to a particular person, albeit with the ability to put an end to the delegation while capacity to do so remains. That concept of empowering another person to act generally in relation to one’s affairs raises two basic questions.

First, is it to my benefit and in my interests to allow another person to have control over the whole of my affairs so that they can act in those affairs in any way in which I could myself act – but with no duty to seek my permission in advance or to tell me after the event, so that they can, if they so decide, do things in my affairs that I would myself wish to do (such as pay my bills and make sure that cheques arriving in the post are put safely into the bank) and also things that I would not choose to do and would not wish to see done – sell my treasured stamp collection; stop the monthly allowance I pay to my grandson; exercise my power as appointor under the family trust and thereby change the children and grandchildren who are to be income beneficiaries; instruct my financial adviser to sell all my blue chip shares and to buy instead collateralised debt obligations in New York; have my dog put down; sell my house; buy a place for me in a nursing home?

Second, is it to my benefit and in my interests that all these things – indeed, everything that I can myself lawfully do – can be done by the particular person who is to be my attorney? Is that person someone who is trustworthy and sufficiently responsible and wise to deal prudently with my affairs and to judge when to seek assistance and advice? The decision is one in which considerations of surrender of personal independence and considerations of trust and confidence play an overwhelmingly predominant role: am I satisfied that I want someone else to be in a position to dictate what happens at all levels of my affairs and in relation to each and every item of my property and that the particular person concerned will act justly and wisely in making decisions?”

Specific power of attorney

While it is possible to undertake a general assessment of capacity to understand the concepts behind a power of attorney, in order for the expert to assess and confirm the person’s actual understanding of the specific transaction it is necessary for the expert to have a copy of the draft power of attorney. The expert can then go through the document with the person and confirm whether or not they actually understand the transaction.

Risks to solicitors, trustees and their clients

“The demographic reality of an aging population means that the likelihood of challenges to wills on the ground of testamentary capacity is increasing.” Ryan v Dalton at [101]. The identical risks apply to the execution of powers of attorney and for similar reasons. As noted in that case:

“the effort involved in paying attention to questions of capacity at the time instructions for a will are taken and the will is executed (including, where necessary, obtaining an assessment of the client where it is thought one is called for) pales into insignificance with the expense, delay and anxiety caused by litigation after the testator’s death”.

In addition to a client’s intentions being defeated, a solicitor acting for a person later found to have not had legal capacity faces both civil actions and sanction for unsatisfactory professional conduct.

At the bottom of this profile are brief details of a number of the experts that Expert Experts represents. Call our office to discuss your requirements and to obtain a recommendation that suits your needs and budget.

Expertise in Action

When should an independent assessment be conducted?

The principles set out in Ryan v Dalton regarding testamentary capacity would appear to apply equally here. His Honour noted that care should be taken with “anyone:

  1. over 70;
  2. being cared for by someone;
  3. who resides in a nursing home or similar facility; or
  4. about whom for any other reason the solicitor might have concern about capacity.”

Actual and constructive notice

Three main scenarios arise:

1. Constructive notice: When there are circumstances giving rise to constructive notice. In Ryan v Dalton these were identified at [107] as: “anyone: (a) over 70; (b) being cared for by someone; (c) who resides in a nursing home or similar facility; or (d) about whom for any other reason the solicitor might have concern about capacity.”

It is anticipated that this will become an accepted minimum standard of constructive notice.

The other situation of constructive notice is a significant change of a will which benefits a person who may be in a position to unduly influence the testator.

2. Actual notice: When a person presents with a diagnosis of dementia or similar, when a family member or other person raises capacity as an issue, or when it appears clear to the person taking instructions that there is or may be reduced capacity.

3. Notice of a likely challenge: When familial or other circumstances including the nature of the transaction make it more likely that a transaction will eventually be challenged. This may include complex family structures, multiple partners and children, strained family relations, or the preferencing of some family members through gifts or as beneficiaries when it is anticipated this will upset other family members. Other circumstances may include large estates and complex trust structures where there is a high perceived potential reward for successfully challenging the transaction.

Qualifying an appropriate expert

The main difficulty in finding a suitable expert to assess legal capacity is in finding an expert who has both the expertise required to assess mental capacity and an understanding of the above principles.

Expert Experts has addressed this by developing products, processes and training programs to enable appropriately qualified experts to understand the legal issues involved so that they may address all of the issues required to conduct these assessments.

We also work with clients to ensure the briefing process adequately instructs the expert about the particular transaction, so that an assessment can be conducted and an admissible expert report produced in accordance with the expert witness code of conduct which addresses all relevant issues.

Different assessment types

The expert selected and assessment conducted will depend upon the condition of the examinee, the complexity and nature of the transactions being entered into, and where the examination takes place.

Sample Reports

For some fields of expertise we have some sample sections of de-identified reports. Please contact our office if you are interested in a sample.

Cost

The overall cost of expert opinion depends on the services required. Some of the key factors that affect the cost of advice include:

  • The need for a view or inspection of a location
  • The quantity of documentary material to be reviewed
  • Whether there are reports of other experts to be reviewed and commented on in detail
  • Whether there is a need for conferences with the expert either in person or by telephone/Skype
Relevant Cases POWERS OF ATTORNEY ACT 2003 (NSW)

Act regulating Powers of Attorney in NSW.

Szozda v Szozda [2010] NSWSC 804

Power of attorney. Capacity required.

Ryan v Dalton; Estate of Ryan [2017] NSWSC 1007

"Postscript" - Rule of thumb re capacity at [101] and seq.

Legal Services Commission (Qld) v Ford 2008 LPT 12

Unsatisfactory professional conduct. Solicitor ought to have been aware of cognitive impairment.

Related Blog Articles
Related Area of Legal Practice Related Area of Insurance

    Profiles of Experts in Legal capacity - power of attorney

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