Testamentary capacity is a term used within the legal context to refer to an individual’s ability to understand the nature and consequences of making a will. This concept is important for businesses, particularly when dealing with owners, shareholders, or other stakeholders who have considerable wealth.
For a will to be legally binding, the author must be judged to have a sound mind and memory. Testamentary capacity is used to assess whether a person is able to understand the implications of their will and whether they are able to make decisions independently. It is also used to ensure that there has not been any improper influence, coercion, or duress involved in the will-making process.
The criteria for determining testamentary capacity vary from state to state, and the legal burden of proof rests with the person challenging the will. Generally, testamentary capacity is judged based on four criteria: the individual must demonstrate an understanding of the extent of their assets and debts; they must be aware of who is likely to be included in the will and be able to explain why those individuals have been chosen; they must understand the nature of the will; and they must display mental capacity to make reasoned and independent decisions about how their assets should be distributed after their death.
For businesses, testamentary capacity is particularly important if an owner, director, or key stakeholder passes away. If there is any doubt over the validity of a will, then there could be implications for the business and it is important to ensure that any deceased stakeholder has the necessary capacity to make decisions about their assets and the legacy of their business.