Legal Capacity Standards
You should be familiar with the legal tests of capacity for common legal transactions. Most Wills & Estates lawyers are of course familiar with the testamentary capacity test from Banks v. Goodfellow. For some other planning documents (Enduring Power of Attorney; section 7 or section 9 Representation Agreement, and Advance Directives) there is legal test of capacity set out in the relevant statutes.
For other common law tests of capacity (contracts, gifting, making beneficiary designations, nominating a committee, to marry, to enter into an unmarried spousal relationship, to live separate and apart, to retain counsel), and for a good review of mental capacity and standards of legal capacity more generally, see the BCLI Report On Common Law Tests of Capacity.
For instance, the capacity required for entering into a retainer or other contract is higher than that required to execute a will. A standard definition of “testamentary capacity” for wills from Banks v Goodfellow is as follows:
- understand and carry in mind, in a general way, the nature and situation of her property;
- understand in a general way, relations to those persons who would naturally have some claim to her remembrance;
- freedom from delusion which is the effect of disease or weakness and which might influence the disposition of her property; and
- ability at the time of execution of the alleged will to comprehend the nature of the act of making a will.
This is a relatively “low threshold,” meaning that signing a will does not require a great deal of capacity. The fact that the next day the will-maker does not remember the will signing and is not sufficiently “with it” to execute a will then does not invalidate the will if she/he understood it when she/he signed it.
As setting up a living trust is similar to making a bequest (gift) under a will, the maker of the trust (settler) must understand the nature and effect of the trust (the settlement).
Power of Attorney
The Power of Attorney Act in BC sets out a form of capacity test for making an enduring power of attorney. In order to be capable of making a legal power of attorney, the adult must understand all of the following:
- the property the adult has and its approximate value;
- the obligations the adult owes to his or her dependents;
- that the attorney named will be able to do on the adult’s behalf anything in respect of the adult’s financial affairs that the adult could do if capable, except make a will, subject to the conditions and restrictions set out in the enduring power of attorney;
- that, unless the attorney manages the adult’s business and property prudently, their value may decline;
- that the attorney might misuse the attorney’s authority; and
- that the adult may, if capable, revoke the enduring power of attorney.
There are two types of Representation Agreements under the Representation Agreement Act, named after the sections (section 7 and section 9) they come from. There are different capacity requirements for each.
Section 7 RAs
A section 7 (standard) Representation Agreement can be made by an adult with “diminished capacity.” With a section 7 agreement, the representative makes decisions with respect to simple financial matters, legal matters, health care and certain business matters. With diminished capacity, the adult still needs to:
- communicate a desire to have a representative make, help make, or stop making decisions;
- be able to express choices and preferences and can express feelings of approval or disapproval of others;
- be aware that making the representation agreement or changing or revoking any of the provisions means that the representative may make, or stop making, decisions or choices that affect the adult; and
- be in a trusting relationship with the person who is to be appointed a representative.
Section 9 RAs
For a section 9 (‘non-standard’ or enhanced) Representation Agreement the adult must have capacity to understand the nature and consequences of the proposed agreement.
The standards for entering into a contract are different because the individual must know not only the nature of her property and the person with whom she is dealing, but also the broader context of the market in which she is agreeing to buy or sell services or property. The following quote contrasts competency to sell property with the capacity to make a will, the latter requiring only understanding at the time of executing the will:
Competency to enter into a contract presupposes something more than a transient surge of lucidity. It requires the ability to comprehend the nature and quality of the transaction, together with an understanding of what is “going on,” but an ability to comprehend the nature and quality of the transaction, together with an understanding of its significance and consequences.
Independently managing one’s financial matters, in a manner consistent with personal self-interest and values, require a certain level of functioning known as ‘financial capacity‘ or ‘executive functioning.’ This is more than the ability to pay bills and complete a cheque register. It includes the judgment that optimizes financial self-interest. This is the basis for determining alternative decision making to conserve an estate, including enduring power of attorney or committeeship if necessary. Financial capacity issues arise often in adults with cognitive loss and dementia. Family members will often raise concerns about new problems managing household finances, making poor financial decisions, or being exploited or scammed (e.g. – lottery scams that prey on older adults). This type of incapacity can be easily overlooked, as an older adult might otherwise have a robust memory and verbal skills.