Decision-Making Capacity: What does it mean, and how is it assessed?

Decision‑making capacity is one of the most important, and most misunderstood, concepts in estate planning. It determines whether a person can make a Will, appoint an Attorney, give informed medical consent, or manage their own financial affairs.

However, capacity is not ‘fixed’ or unchanging; It is decision‑specific, time‑specific, and can fluctuate day-to-day.

What is decision-making capacity?

We can assess decision-making capacity for the purpose of preparing Power of Attorney documents based on the functional test set out in the Power of Attorney Act 2014 (VIC), which says that a person has decision-making capacity if they can:

• Understand the information relevant to the decision;
• Retain that information long enough to make the decision;
• Can use that information as part of the decision‑making process; and
• Communicate their decision (including by speech, gestures or other means).

A person is presumed to have decision-making capacity unless there is evidence to the contrary.

Comparatively, the test for capacity is more complex and nuanced when preparing a Will.  We specifically need to assess a person’s “testamentary capacity” to validly execute a Will, rather than just their decision-making capacity.

Victorian succession law continues to rely on the long‑standing principles from the English decision of Banks v Goodfellow when determining whether a person has testamentary capacity.

In that case, the court accepted that the Willmaker lived with a mental illness yet still upheld the Will because it was logically structured and reflected a sensible distribution to his closest living relative. From this judgment, the modern test for testamentary capacity was developed.

The test for testamentary capacity requires consideration of whether the Willmaker:

• Would understand the nature of the act of making a Will;
• Would understand the effect and purpose of making a Will;
• Would be aware of the extent of assets they owned; and
• Would appreciate and understand the extent of people in their life to whom they may owe a duty to provide.

How is capacity assessed?

Assessing capacity is a practical, evidence‑based process that focuses on the person’s ability to understand and make the specific decision in front of them.

Lawyers typically begin by speaking with the client directly, observing how they communicate, whether they can explain their wishes in their own words, and whether they demonstrate an understanding of the nature and consequences of the decision. This includes exploring their understanding of their assets, their relationships, and the effect of the documents being prepared.

Legal practitioners also look for indicators of cognitive impairment or undue influence, such as confusion, memory gaps, inconsistent instructions, anxiety around certain family members, or the need for prompting.

When concerns arise, lawyers may need to seek a formal medical assessment to support the client’s capacity. Medical practitioners — usually GPs, geriatricians, psychiatrists, or neuropsychologists — are well placed to evaluate cognitive functioning.

Their assessment typically involves a clinical interview, a review of medical history, and the use of cognitive screening tools. One commonly used tool is the Mini‑Mental State Examination (MMSE), which assess orientation, memory, attention, language, and executive functioning. While these tools do not determine decision-making capacity or testamentary capacity on their own, they provide valuable objective data about the person’s cognitive abilities.

A doctor assessing capacity for legal purposes will usually consider whether the person can understand the nature and effect of the decision, retain and weigh relevant information, and communicate a choice. They may ask the patient to describe, in their own words, what a Will or Power of Attorney does, who they wish to appoint or benefit, and why.

Capacity as a fluctuating and decision-specific concept

Capacity is a fluid and decision‑specific concept, meaning a person may have the capacity to make one type of decision but not another. This principle recognises that different decisions require different levels of understanding, reasoning, and appreciation of consequences.

Capacity can also change over time — sometimes within the same day — particularly for people with dementia, delirium, mental illness, or fluctuating cognitive conditions.

Many people with mild cognitive impairment or early‑stage dementia can still meet the threshold for testamentary capacity, particularly if their intentions for their Will are simple and consistent with long‑held wishes.

Similarly, preparing a Power of Attorney document requires the person to understand the role of the Attorney and the powers being granted — a task that is often achievable even where more complex decisions would be beyond their capacity.

By contrast, other legal decisions require a significantly higher level of cognitive functioning. For example, selling a home involves understanding the nature of the property, the terms of sale, the financial implications, the risks involved, and the long‑term consequences of disposing of a major asset. A person who has capacity to make a simple Will may not have the capacity to enter a binding contract for the sale of real estate.

These distinctions highlight why capacity must always be assessed in context. A person may have:

• capacity to make a Will, but
• not capacity to sell their home, yet
• still have capacity to appoint an Attorney, and
• lack capacity to instruct a lawyer in litigation proceedings.

What happens when someone no longer has capacity?

If a person loses capacity and has valid Enduring Powers of Attorney in place, their appointed Attorney(s) can step in to make:

• Financial decisions (via an Enduring Power of Attorney for Financial matters);
• Personal decisions (via an Enduring Power of Attorney for Personal matters); and/or
• Medical decisions (via an Appointment of Medical Treatment Decision Maker document).

If no Enduring Powers of Attorney exist, an application may need to be made to the Victorian Civil and Administrative Tribunal (VCAT).

When a person has lost capacity and has not appointed an Attorney, VCAT can make:

Administration Orders

These appoint an Administrator to make financial and legal decisions, such as:

• paying bills
• managing bank accounts
• dealing with property
• managing legal affairs

Guardianship Orders

These appoint a Guardian to make personal decisions, such as:

• where the person lives
• who they interact with
• access to services
• healthcare (non‑medical‑treatment decisions)

VCAT will only make these orders if:

• the person lacks decision‑making capacity, and
• the order is necessary, and
• it is the least restrictive option available for the person.

In the absence of a valid Appointment of Medical Treatment Decision Maker document, the legislation in Victoria sets out the hierarchy of medical treatment decision makers.  This is generally:

1. spouse or domestic partner; then
2. primary carer (cannot be a paid service provider); then
3. adult child (and if more than one child, then in order of age – eldest to youngest); then
4. parents; then
5. siblings.

How can we help?

Decision‑making capacity in Victoria is not a simple yes/no question. It is a nuanced, functional assessment that depends on the specific decision, the person’s abilities, and the support available.

When capacity is lost, Guardianship and Administration Orders sought through VCAT provide a protective framework — but ideally, well‑prepared estate planning documents avoid the need for VCAT’s intervention.

For my information on the topic of capacity, Powers of Attorney, and what happens if someone is experiencing cognitive decline, we invite you to listen to our recent Podcast episode:

Should you otherwise wish to discuss any of the matters raised in this article, or to make an initial appointment with one of our lawyers to discuss preparing Powers of Attorney, or a possible VCAT application, please contact our Wills, Estates & Succession Planning team on (03) 5273 5273.