What happens when a settlor or powerholder loses capacity?

Abstract

Abstract Capacity issues are a common feature of the landscape of wills and estates. However, such issues tend to arise much less frequently in the context of discretionary trusts. This relative absence is perhaps attributable to (often) the lack of direct benefit to anyone alleging the existence of mental incapacity issues in relation to a discretionary trust. There are significant consequences that can arise from successfully challenging capacity in the context of, say, a specific legacy under a will, whereas a discretionary beneficiary who raises mental incapacity issues usually remains merely a discretionary beneficiary. However, in the climate of ever increasing life expectancy and rising rates of dementia diagnoses, mental capacity issues in the trusts context are on the rise, and it is essential to understand what happens when settlors and power holders remain in place despite questions over their mental capacity. After all, “having capacity to exercise a power is ‘of the essence of a power’”.1 In this article, we look at the sorts of mental capacity issues that can arise in the trusts context and what can be done about them.