Limited capacity clients and their estate plans

From

Peter Townsend

Advisers can face many challenges when working with clients who they believe may have limited capacity.

What does it mean to be mentally/legally incapable? What is the test that is applicable?

“Advisers can feel like they are walking a tightrope between the law and the expectations of their client and their families when they start to question a client’s decision making abilities.

“So, how does an adviser approach the ethical concerns when dealing with clients who they believe may have limited capacity, whether mental, physical or both? We suggest that advisers apply a series of tests as shown in the following table,” said Peter Townsend, Principal, Townsends Business & Corporate Lawyers.

The 10 steps in assessing a client’s mental/legal capacity

  1. Is there any reason to believe that the client does not have full mental capacity?
  2. Is that reason based on objective evidence or assessment or just the opinions or comments of a person who stands to benefit from the outcome?
  3. If there is objective evidence or assessment available, obtain additional evidence or assessment of the situation from independent third parties including possibly the client’s doctor and lawyer.
  4. If the client is only partially or occasionally lacking in capacity, try to arrange for your dealings with the client to be when they are not suffering from the incapacity.
  5. At meetings with the client have an independent witness with you who can attest to what was said by the client and their apparent capacity.
  6. To assess their capacity, ask questions that need them to give you a considered response, rather than questions that they can guess the answer to or where the answer is apparent.  For example don’t ask questions where the answer is ‘yes’ or ‘no’, or questions such as ‘You want to give your daughter $20,000; is that correct?’ but rather ‘Can you tell me why we’re meeting today?’ ‘What did you want to do with your estate?’ ‘How much do you want to give your daughter?
  7. Having determined that the client is mentally capable and having the evidence to support your decision you can proceed to implement the client’s wishes.  If you are still not sure then you must not act until you are.  Only a Court can make a final decision.
  8. Having determined that the client is not mentally capable your next question is whether anyone has their enduring power of attorney and can make decisions about their financial strategies.  If not and if it would be materially detrimental to the client for their financial situation to be left in limbo, advise the client’s family that they should make an application for the formal appointment of a guardian to look after the client’s interests.  There are 8 separate guardianship jurisdictions in Australia (6 states, 2 territories) and the laws are different in each so you need to check the law in your jurisdiction.
  9. It is not advisable for a financial adviser to apply to be appointed as their client’s financial guardian as the potential for accusations of self interest are too high and the need to evidence complete independence too great.
  10. If you believe your client’s interests are being fraudulently undermined you can report the situation to the Office of the Public Advocate in your State or Territory or even in extreme cases to the Police.

This list of questions is a starting point and not meant to be definitive or used in a quasi-medical way.

“Advisers need to act on their concerns, collect information in a structured way and then seek action by the appropriate authorities and the family. Acting in the client’s best interest is more complex than the industry ever considered as we face an ageing population,” said Mr Townsend.

By Peter Townsend, Principal

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