The answer is – it depends.
At the end of last year, the NSW Court of Appeal considered a Judge’s finding that an 85 yr old gentleman Mr Croft, who died in 2016 retained the required capacity to make his Will in 2013. Mr Croft suffered from hallucinations and delusions and the medical reports suggested he had a mild cognitive impairment around the time the Will was made. However, after carefully considering the circumstances, the Court of Appeal agreed with the primary Judge’s finding and upheld the decision.
A case from 1870 is still the ‘go-to’ case regarding the test for capacity to make a Will. The primary judge referred to a passage from Banks v Goodfellow (1870) often quoted in capacity cases:
“It is essential to the exercise of [a power to make a will] that a testator shall understand the nature of the 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 ought to give effect; and, with a view to the latter object, that no disorder of the mind shall poison his affections, pervert his sense of right, or prevent the exercise of his natural faculties – that no insane delusion shall influence his will in disposing of his property and bringing about a disposal of it which, if the mind had been sound, would not have been made”.
The challenge to the later Will focussed on whether Mr Croft appreciated the claims which he ought to give effect and whether his hallucinations or delusions impacted his ability to appreciate the claims which he ought to give effect.
The reason the 2013 Will was being challenged, is that it significantly favoured one child over five other children (significantly as in five of the children received $40,000 each and the other child received about $3 million!!). If this 2013 Will could be struck out due to Mr Croft not having the capacity to make it, the estate would be governed by an earlier Will that he made which distributed his estate more evenly amongst the children.
The Court held that the “non-medical” evidence confirmed the contemporaneous medical evidence that Mr Croft’s underlying dementia did not deprive him of testamentary capacity. It also demonstrated that more probably than not his hallucinatory or delusional beliefs about his daughters were episodic rather than continuous. Had he held such beliefs when he gave instructions for his will it is likely that he would have expressed them when they discussed the provision he proposed for his children. The “non-medical” evidence confirmed that the hallucinatory or delusional beliefs that Mr Croft expressed from time to time did not affect his testamentary dispositions.
More information on the Court of Appeal decision refer to Croft v Sanders  NSWCA 303.