Ask an Expert – The Lurking Risk of Loss of Capacity

David Glen, National Technical Manager

National Technical Manager

David Glen

Typical Adviser Question

We are presently discussing our obligations to ensure that clients prepare for any loss of mental capacity in the future. There have been reports in the media of decisions being challenged on the grounds of lack of mental capacity and that the financial adviser carries responsibility in these situations. This seems unfair as we are not experts in this specialised area.

Please clarify our responsibilities and what processes we should have in place to deal with clients losing mental capacity in the future?

Why is loss of capacity risk important?

Hopefully our clients have robust physical and mental health, and they are at an age when the prospect of suffering senile dementia is many years down the track. However, the risk of loss of mental capacity always lurks in the background. There is always the risk of suffering from the vast array of ailments, including accident and stroke, which can deprive us of our mental capacity.

What happens on loss of mental capacity?

If an individual loses mental capacity, nobody can make financial decisions on their behalf, unless the person who has lost capacity has executed a valid enduring power of attorney (“EPOA”) prior to losing capacity. In the absence of an EPOA, it is necessary to apply to court for appointment of a trustee to make financial decisions on behalf of the individual who has lost capacity. These applications often result in delays and can be costly. The application outcome may also result in the appointment of a trustee whom the client would not have chosen.

Managing the Loss of Capacity Risk

The obvious answer is for clients to instruct their solicitors to draft an EPOA appointing an attorney to manage their financial affairs in the event of suffering loss of mental capacity. The involvement of the client’s solicitor is crucial to ensure an EPOA suitable to the Client’s circumstances and an EPOA which complies with all the formalities imposed by relevant state laws. Each state has its own rules concerning EPOAs and guardianship matters. When a person loses mental capacity, the guardian makes lifestyle decisions such as choice of nursing home and care.

What is the role of the financial adviser in the EPOA?

The financial adviser should ensure that the EPOA covers the following important issues and considerations:

  • Timing. The attorney’s appointment by the Client must precede acceptance of the appointment by the attorney.
  • Beware of any special conditions. Challenge the client on the necessity of these conditions and whether they would unduly restrict the attorney in discharging duties under the EPOA.
  • If a child of the Client is being appointed as an attorney, which child should be the appointee? Multiple appointees are possible, but this increases the risk of dispute amongst the joint appointees.
  • Consider the time and effort required from the attorney. Will the attorney assume this burden?
  • Will a conflict of interest prevent the attorney from acting? A clause accepting the conflict of interest may be appropriate. For example, a spouse may be nominated to receive a death benefit under the insurance policy. Can the attorney renew or alter the nomination where the attorney is a beneficiary under the insurance policy?
  • Consider the appointment of an alternative attorney if the original appointee cannot act.
  • Remember the EPOA terminates on death. There needs to be a will, preferably drafted by a solicitor, to deal with the situation in the event of death of the Client.
  • Ensure that the solicitor reviews the signed EPOA to confirm completion of all relevant formalities.

    • What Are Financial Advisers Duties in Relation to Capacity Risk?

    Standard 6 of the Financial Adviser Code of Ethics requires the adviser to consider the broad impact of the advice being delivered. This involves the adviser taking a reasonable view of the impact of the advice over the medium to long-term. Advice will run the risk of breach Standard 6 if it does not alert the client to the lurking risk of loss of capacity and how that risk should be managed.

    Sadly, few clients consider this important issue. According to estate planning practitioners, only 14% of Queensland residents have EPOAs! The remaining 86% remain blissfully unaware of the unpleasant consequences for them and their families should this risk materialise.

     

    This information is general in nature only and has been prepared for the education of financial advisers. It is not intended to be legal, taxation or financial advice to any person. TAL Life Limited, its subsidiaries and its representatives have not taken into consideration any individual’s personal circumstances, financial needs or objectives in preparing it. If any person is intending to act on the information contained in this email, consideration should be given to the appropriateness of this general information in the light of that person’s own objectives, financial situation or needs before acting on the information. Persons acting on any matter covered in this article should seek independent professional advice on the application of that matter to their individual circumstances. In relation to any financial product referred to in this article, a copy of the Product Disclosure Statement and Target Market Determination should be obtained. This information is current as of 6 March 2024. This information has been prepared for use by advisers in their professional capacity only. We do not approve this article being provided directly to customers. This article is not legal or financial advice and cannot be relied upon as such.

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