Planning for loss of capacity – a diagnosis does not need to be the end of the road

By Cassandra Hurley, Daniel Butler on 07/07/2026 in Corporate trustees, SMSF cases & decisions, SMSF compliance, SMSF strategy, Succession planning, Trustee education

A discussion about capacity to make decisions can focus on what control means, how it can be maintained with assistance, and what the client wants to happen when decision-making capacity is lost. Such discussions can be used to equip individuals with the mechanisms to preserve control and agency, whilst taking advantage of assistance and delegation options.

An often-overlooked fact is that adults are generally presumed to have decision‐making capacity, unless there is evidence to the contrary. A person may still be able to retain capacity to make decisions relating to their health, lifestyle and their finances, despite a diagnosis of cognitive impairment such as diagnosis of dementia or brain injury.

Whether someone has decision-making capacity can cause disputes and issues in various settings for clients and their advisers. Similarly, third parties who need assistance or information from an individual can also be disadvantaged if they fail to act before a person loses the capacity to assist them.

This article explores some of the many ins and outs of capacity.

Role of advisers

The fear of loss of capacity can result in related discussions being avoided or left until a person is so impaired that they cannot actively participate. Financial and legal advisers can play a vital role in helping clients and their families navigate the complex legal and emotional pathway. Failing to have these conversations before a client loses decision-making capacity can result in clients and their families facing difficulties dealing with government entities, private service providers and financial institutions, especially when the person who has lost capacity held offices in private family companies and trusts.

A loss of capacity discussion will be, by its nature, heavily fact specific. It will need to be informed by the current and expected future decision-making abilities of the individual in question, the rules of the entities and assets over which they exert control (eg, private companies and trusts), and their personal and professional support networks.

Control

Capacity planning in the private wealth context requires understanding who controls entities and assets, and in what capacity. Control can be exercised over assets through the holding of certain offices (eg, a director of a corporate trustee or as a trustee in their own right), the owning of assets (eg, directly owning real estate or owning units in a unit trust that owns the real estate) and the ability to instruct advisers or third parties (eg, having the passwords and other access criteria to online share registry accounts).

A person who has an SMSF may, for instance, exert control in respect of their SMSF as an individual trustee or via holding shares in, and being a director of, a corporate trustee. (See here for an article discussing the advantages of a corporate trustee for SMSFs.) Understanding how an individual exerts control in respect of their various entities or assets is vital to planning what needs to be done in the event they lose their mental faculties.

Control needs to be examined by undertaking a detailed and careful review of the terms of each trust or company. Accordingly, a comprehensive review of the entirety of each trust and company records is highly recommended.

Depending on the terms of the trust or company, different options and consequences will be relevant. For example, where a company’s constitution allows for successor-director provisions (refer to this article noting that not all constitutions allow for successor directors), a director who is planning for loss of capacity may nominate a successor director, while they still retain decision-making capacity. This enables the nominated person to ‘step into the shoes’ of the nominating director upon their loss of capacity or a specified event (eg, the failing of specified cognitive test). Implementing such provisions assists to preserve control in regard to a director’s role in a company.

Separate power of attorney documentation can be completed to provide control over the assets owned, for example, specifying who can exercise the voting and property rights associated with the individual’s real estate and shares in companies.

Acknowledging that control over entities and assets can be held by a single individual in different capacities is also vital to an effective capacity planning discussion. For example, discretionary family trusts invariably include appointor and guardian roles, and succession to these roles also need to be considered. We offer a range of services for trusts including preparing deeds of variation for appointor and successor appointor provisions (click here).

Changing who controls a particular office, for example a trustee, will usually require both the new trustee or officeholder and the existing trustee or officeholder to consent to the change and do certain things, meaning it is much easier to do while each officeholder has decision-making capacity. We recommend that where there are individual trustees, that corporate trustees be considered as a corporate trustee provides smoother succession as well as a range of other advantages including asset protection.

Assessment of capacity

The legal framework surrounding questions of capacity is a complex area, with a history of hundreds of years, and one that is still developing and varies from state to state. A diagnosis of a degenerative condition, a mental illness or an intellectual impairment does not, in and of itself, remove a person’s ability to make decisions for themselves relating to their health, lifestyle and financial affairs.

Generally, the law considers the question of capacity to be time‐specific, domain‐specific, and decision-specific – meaning that at a given time, a client may have capacity for some decisions but not others. That is to say that a person may have decision‐making capacity to make some decisions and not others, or that a person may not have decision‐making capacity if left on her own to consider specific matters such as their superannuation affairs but may have decision‐making capacity to deal with these matters if provided with certain forms of assistance, explanation and time. For example, a person may lack the decision‐making capacity to consider specific matters such as how a specific sum is invested in their SMSF, independently, but may be able to do so if provided with certain forms of assistance, explanation and time. Alternatively, they may not have the capacity to make investment decisions at all but may retain the ability to decide if they want their death benefits to be paid to their partner or their estate.

Identifying if a person has the necessary capacity to do something is legal determination, however often the advice of a medical practitioner or other expert as to the person’s ability to understand the scenario and make their decision, or the person’s family as to the person’s usual behaviour and values will be sought to inform this determination.

The leading case on capacity remains Gibbons v Wright [1954] HCA 17 but the legislation in each state and territory in Australia means that there are differences in how capacity is defined and dealt with in different jurisdictions in Australia. There are various government and legal representative bodies and resources available to help advisers.

Evidence

The matter of van Camp v Bellahealth Pty Ltd [2024] NSWSC 7 (22 January 2024) provides important lessons for advisers when considering a person’s capacity to make a Binding Death Benefit Nomination. It also reinforces the value of keeping good records and file notes. Relevant to this matter was that the death benefit nomination reflected a change in Dr Nespolon’s prior instructions to some advisers and showed a different intention to statements in his will.

The court relied on documentary evidence, specific evidence as to the medication Dr Nespolon had in his system at the time of making the death benefit nomination and the recollections of a number of witnesses. Dr Nespolon had various advisers and many were required to give evidence as to the advice they had given him and details relating to his capacity. A large number of private emails, phone calls, text messages and meetings that Dr Nespolon had with his advisers also formed part of the evidence.

When questioned as to why Dr Nespolon was making the changes to his death benefit planning, Dr Nespolon responded that it was to avoid his partner being ‘taxed out of her brains’. The court saw this as supporting a finding that that Dr Nespolon understood the general nature and effect of the nomination as at paragraph 199:

… it indicates that Dr Nespolon appreciated that Ms van Camp would receive the member benefits, understood that his member benefits could be reduced by the incidence of taxation and knew there was an advantage from a tax perspective in using the BDBN to pay the benefits directly to Ms van Camp. …

The court declared that the death benefit nomination was valid and binding and directed the trustee to pay out the death benefits to Ms van Camp.

Timing

Waiting until a medical practitioner provides a medical opinion that a person has reduced decision-making capacity may result in options not being available to the individual and families to appropriately plan for the loss of capacity. For example, a person who has been diagnosed with an especially advanced stage of dementia may not have the capacity to understand what a change of trustee means or what signing a binding death benefit nomination form relating to their superannuation means. Thus, failing to plan and prepare clients for the loss of capacity reduces the options available.

Third parties who need information from a certain individual can also be disadvantaged if they fail to act before a person loses the capacity to assist them — this was evidenced in the recent case of Barden (Trustee), in the matter of the Bankrupt Estate of Khattar [2026] FCA (Barden). In the matter of Barden, a trustee in bankruptcy was not able to force a bankrupt to give evidence, as he had waited too long and the court found that by the time the evidence was sought, questions of the bankrupt’s capacity and fairness prevented the trustee from forcing the testimony under bankruptcy laws. Had the trustee acted 8 months earlier, when he had last interacted with the bankrupt, it is likely the trustee would have received the sought testimony.

Conclusions

Advisers that are aware of the potential for declining mental capacity but fail to act with appropriate haste to offer options to ensure smooth succession may be placing themselves at risk.

When clients proactively consider the matter of capacity (whilst everyone still has decision-making capacity):

cognitive decline can be less distressing;
the new decision makers can be better equipped to manage their new tasks; and
advisers will be ready to assist as and when needed.

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