The Grand Court of the Cayman Islands recently confirmed In the Matter of the O Trust (23 February 2018) that the legal test for establishing mental capacity for the exercise of an impugned legal power, in this case a reserved power under a discretionary trust deed, is the same as for the making of a will.
A discretionary trust was established which initially provided for the settlor’s niece and nephew to be the ‘remaindermen’. However only shortly after settlement of the trust, the settlor changed the remaindermen from the niece and nephew to the first defendant, a trusted friend, using a power vested in the settlor under the trust deed.
In 2012 the settlor sought to exercise the power once again to make the second defendant, another trusted friend, the remainderman. The trustee, who pursuant to the trust deed was able to decline to accept an exercise of the power by the settlor, declined to give effect to the amendment. This was because the trustee feared the settlor may not have been mentally capable of exercising the power. The settlor subsequently attempted again to exercise the power in favour of the second defendant by declaration to the trustee in 2015. The trustee however asked for the settlor to be examined by an independent physician before acquiescing to the amendment. The settlor provided medical records from her own doctors but was never examined by an independent doctor agreeable to the trustee before her death later that year.
Despite the trustee’s unfettered power to decline the proposed amendments by the settlor, due to the trustee’s relative unfamiliarity with the parties and a desire to be prudent, they asked the court to determine who the true beneficiary was under the trust. The issue was whether the settlor had had the capacity to exercise the power of amendment in either 2012 or 2015.
Kawaley J heard from a large number of factual and expert witnesses before concluding that the settlor did have the requisite mental capacity to amend the trust deed in 2012 and 2015.
The legal test for capacity
The Court held that the test comprised of two limbs:
- What does the law recognize as the essential requirements for establishing capacity; and
- How should that test be applied depending on the factual matrix of the case?
Kawaley J confirmed that the essential requirements for establishing capacity are the same whether the question is posed in the context of making a will or exercise of any other impugned legal power. The judge cited Gibson LJ in the English case of Hoff-Atherton  EWCA Civ 1554 who summarized the relevant test and in doing so drew on the words of Cockburn CJ in Banks v Goodfellow (1870) LR 5 QB 549:
“it is essential … that a testator shall understand the nature of his act and its effects; shall understand the extent of the property of which he is disposing; shall be able to comprehend and appreciate the claims to which he might give effect …”
This did not go so far as to require the settlor always to have the level of understanding and lucidity required to exercise the power in question, merely that they had such an understanding at the requisite time. This was evident from Banks v Goodfellow where the testator had spent many years prior to executing his will in a mental asylum, but nevertheless possessed the capability to execute his will at the relevant time.
Burden of proof
Despite the usual presumption of capacity, the Court adopted a ‘practical approach’ and held the burden of proof fell on the second defendant to discharge. This was so because she was asserting that capacity had existed at the relevant times. The judge also addressed another important issue in this case, which was that the second defendant’s husband was in fact the settlor’s lawyer and drafted the 2012 and 2015 documents purporting to make the second defendant the beneficiary. It was therefore submitted that the standard civil burden of proof was insufficient and should be raised to reflect the fact that the person preparing the relevant instrument could be expected to benefit from its implementation. Kawaley J however rejected this submission and confirmed that the civil standard remained the standard of proof citing Fuller v Strum  EWCA Civ 1879 in which Chadwick LJ had held that while the Court must be suspicious of circumstances where the author of the instrument stands to benefit from it, and seek to ensure that the testator approved of the instrument’s contents, this did not necessitate a higher standard of proof in every case.
Level of understanding required
The Court also reiterated the principle that the requisite level of understanding a settlor needs is dependent on the facts of each case. Kawaley J relied in this regard on the judgment of Martin Nourse QC (as he then was) in re Beaney  1 W.L.R 770 who set out the principle that the requisite degree of understanding required is “relative to the particular transaction which it is to effect“. Therefore an act relating to a minor or trivial asset may require a lower degree of understanding than an act which purports to deal with the entirety of the trust assets. The Court also stated that this is to be viewed in parallel with the important principle set out In re Walker (deceased)  EWHC 71 (Ch) that the evidential threshold for capacity in the context of elderly testators should be low “so as to not deprive elderly persons of the ability to make wills in their declining years.”
In concluding that the settlor did indeed have the requisite capacity at the relevant times the Cayman Court relied on a number of factors:
- The settlor changed the principal beneficiary to the first defendant, a geographically local friend rather than distant relatives, shortly after establishing the trust;
- The settlor’s decision then to nominate the second defendant instead was entirely rational given the support that she had provided to the settlor for many years;
- The settlor also changed her will in 2012 to make the second defendant her beneficiary and this was not challenged by the first defendant;
- The first defendant took no active role in the proceedings, nor did he challenge the impugned exercise of power in 2015 despite being afforded the opportunity to do so; and
- The impugned exercise involved simple assets and two individuals who were known to the settlor for many years prior to the exercise of the power.
This case demonstrates a welcome clarification of the position relating to mental capacity in the Cayman Islands as well as providing interesting analysis on a number of points and principles from cases of this nature. It however most usefully demonstrates that the legal test for establishing mental capacity is uniform whether the case concerns the making of a will or the exercise of inter vivos powers.