Did They Know What They Were Signing? Testamentary Capacity and Settling Will Disputes in Victoria

By Paul Kenna Law

Law stated as at 21 October 2026 · Next review: October 2027

Few family disputes cut as deep as a fight over a parent’s will. Often it is not really about the money. It is about whether Mum or Dad truly meant what the will says, or whether illness, age or someone else’s influence got in the way.

This article explains, in plain terms, three things:

• how a court decides whether the person who made the will had the mental ability to make it (lawyers call this testamentary capacity)
• how a Victorian family can settle the dispute and turn their agreement into something legally binding
• what all of this means for mediators working in estate disputes.

Some words you will see.
The will-maker is the person who made the will (lawyers say testator).
The executor is the person named in the will to carry it out.
Probate is the Supreme Court’s official approval of a will, which lets the executor deal with the estate.
A caveat is a formal objection lodged with the court’s Probate Office to stop probate being granted while a dispute is sorted out.
Intestacy means dying without a valid will.

Part 1: What the court looks at

The starting point: capacity is assumed

If a will has been properly signed and witnessed, and it looks sensible on its face, the court starts by assuming the will-maker had capacity. Nobody has to prove anything at that stage.

That changes once the person challenging the will raises a real doubt, for example medical records showing significant memory loss or confusion around the time the will was signed. The job of proving capacity then moves to the person relying on the will (usually the executor). They must show it was more likely than not that the will-maker had capacity. The High Court confirmed this approach in Bailey v Bailey (1924) 34 CLR 558.

The test: Banks v Goodfellow

The test is more than 150 years old and still applies everywhere in Australia. It comes from the English case Banks v Goodfellow (1870) LR 5 QB 549. The will-maker must:

1. understand that they are making a will and what a will does
2. understand, in general terms, what they own and roughly what it is worth
3. be able to think about the people who might reasonably expect to benefit, such as a spouse, children or others who depend on them, and weigh up their claims
4. not be affected by a mental illness or delusion that distorts their feelings towards people or the way they decide to divide their estate.

The test is about understanding, not wisdom. A person with capacity is free to make a will that others think is unfair, odd or even unkind. The question is whether they understood what they were doing, not whether they did the sensible thing.

Capacity is measured against the will in question

Capacity is not all or nothing. A person may have enough capacity to make a simple will leaving everything to their spouse, but not enough for a complex will involving trusts, several properties and a family company. The more complicated the estate and the will, the more understanding is needed.

A diagnosis alone does not decide it. Many people with early dementia can still make a valid will, and a person whose condition comes and goes can make a valid will on a good day. Equally, someone with no formal diagnosis may lack capacity. The court looks at the person’s actual state of mind at the relevant time.

Timing

Capacity is usually judged at the moment the will is signed. There is one important exception, from Parker v Felgate (1883) 8 PD 171. If the will-maker had full capacity when they gave instructions to their lawyer, and the will was prepared in line with those instructions, it can still be valid even if their capacity slipped before signing. At signing they must still understand that they are signing a will prepared on their earlier instructions.

The evidence courts rely on

These cases are almost always decided on evidence about what the will-maker was like at the time. Courts usually look at:

• The lawyer’s file notes. Detailed notes made at the time, recording who was there, what questions were asked and how the will-maker answered, are often the most persuasive evidence. A careful lawyer asks open questions about the family, the assets and the reasons for any change from an earlier will.
• Medical records and assessments. A doctor’s assessment made at or near the time of the will carries a lot of weight. Expert opinions formed years later from the records alone are useful, but usually count for less than evidence from people who actually saw the will-maker.
• Family, friends, carers and neighbours. How the person was managing day to day: their conversation, memory, handling of money and awareness of family events.
• The will itself, and earlier wills. A sudden, unexplained break from a long pattern of earlier wills may raise questions. A clear and sensible reason for the change points the other way.

Two arguments that often come with a capacity challenge

Knowledge and approval. The person relying on the will must show the will-maker knew and approved what it said. This is normally assumed where a capable person has read and signed the will. But where the circumstances are suspicious, especially where someone who benefits significantly helped prepare the will, the court will want clear proof that the will-maker understood and approved it.

Undue influence. In the law of wills, undue influence means coercion: pressure that overpowers the will-maker’s own wishes. Persuasion, pleading or appeals to affection are not enough. It is hard to prove, and it is up to the person alleging it to prove it.

If the will fails

If the court finds the will invalid, the estate goes under the will-maker’s last valid will. If there is no earlier valid will, it passes under the intestacy rules in the Administration and Probate Act 1958 (Vic). Anyone thinking of challenging a will should check which of these outcomes would actually leave them better off before they start.

Where a living person has already lost capacity, the Supreme Court can authorise a statutory will (a will made by court order) under section 21 of the Wills Act 1997 (Vic). This can sometimes head off a dispute that would otherwise arise after death.

Part 2: Settling the dispute in Victoria

Most contested estates settle, usually at mediation, and the Supreme Court routinely sends estate disputes to mediation before any trial. But reaching agreement is only half the job. The agreement then has to be put into a legally effective form, and in estate matters that is less simple than many people expect.

Why agreement alone is not enough

Whether a will is valid is a question for the court, not the family. Family members cannot simply agree between themselves that a will is invalid. A grant of probate (or, where there is no valid will, letters of administration) is an order of the Supreme Court, and the court must be satisfied before it makes one.

Many disputes begin with a caveat lodged with the Probate Office to stop a grant being made. The caveat, and any court case, has to be dealt with as part of the settlement.

The four usual ways to put a settlement into effect

A Victorian settlement will usually use one or more of these:

1. Terms of settlement. The parties sign a written record of exactly what has been agreed, normally at the mediation: which will goes to probate, who applies for the grant, what each person receives, who pays which costs, withdrawal of any caveat, and an agreement that no one will bring further claims (called mutual releases). This is the roadmap for everything that follows, so it must be precise.
2. Consent orders. The parties ask the court to make orders they have agreed on, for example admitting a particular will to probate and dismissing the challenge. The court usually makes orders in the agreed form, but it keeps an oversight role and may want evidence before deciding which will stands.
3. A family provision order. A common, practical approach is to leave the will in place and change who gets what through a court order under Part IV of the Administration and Probate Act 1958 (Vic). Part IV lets certain people (called eligible persons in section 90, such as spouses, children and some dependants) ask the court for a bigger share of an estate. The court can make that order by consent. A claim must usually be started within six months of the grant (section 99). Because the change happens by court order, it is treated as if the will itself had been varied, which usually makes the tax and stamp duty treatment simpler.
4. A deed of family arrangement. The will goes to probate, or the challenge is dropped, and everyone affected signs a deed agreeing to divide the estate differently. This is the most flexible option and the one most often used to turn a mediated agreement into a binding outcome. It is explained in more detail below.

The deed of family arrangement

Courts have long favoured family arrangements that settle disputes and keep the peace, and will generally uphold them where they are fairly made. A deed of family arrangement is a formal agreement between the executor, the beneficiaries and anyone making a claim. It records how the estate will be divided instead of, or as well as, what the will says.

It is made as a deed rather than an ordinary contract so that it binds everyone who signs, even those who are giving up more than they get. In Victoria an individual signs a deed in front of a witness, and the document must make clear it is meant to be a deed.

A deed only works if every person whose share is affected signs it and is legally able to. If the arrangement affects a child, an adult who lacks capacity, or a future beneficiary under a trust (for example grandchildren not yet born), a deed alone is not enough and the court must approve the settlement. Where a court case or Part IV claim is already under way, the deed is usually paired with consent orders that finalise it.

A well-drafted deed usually covers:

• Who is signing – the executor (both as executor and personally, if they also benefit), every beneficiary whose share changes, and everyone who has made or could make a claim
• Background – the will and any earlier wills, the grant or pending application, the dispute, any caveat or court case, and that agreement was reached at mediation
• The probate outcome – which will goes to probate, who applies, and the withdrawal of any caveat or court case
• Who gets what – a clear schedule of specific assets and cash sums, the order they are paid in, and how any shortfall or change in asset values is shared
• Instructions to the executor – an authority to administer the estate in line with the deed, with protection (an indemnity) for the executor who does so
• Costs – whose legal costs come out of the estate, whether as a fixed or capped amount, and who pays for preparing the deed
• Tax and duty – who bears any capital gains tax, stamp duty or transfer costs
• Releases – each party gives up any further claims against the estate, the executor and each other
• Independent legal advice – confirmation that each party has had the chance to get their own legal advice, and either got it or chose not to
• Practical matters – deadlines, confidentiality, signing separate copies, and what happens if someone does not do what they agreed.

A word on tax and stamp duty

This is where families can be caught out. When assets pass to a beneficiary under a will, or under a court order that varies the will, there is generally no capital gains tax at that point, and in Victoria the transfer is generally exempt from stamp duty.

A private deed is less certain. The Australian Taxation Office (ATO) says that where a deed of arrangement settles a genuine claim on the estate, is made before the estate is fully administered, and the only thing given up is that claim, the asset can be treated as if it passed under the will. If those conditions are not met, for example if a beneficiary pays the estate to keep the family home, it may be treated as a sale, with capital gains tax consequences. Victoria’s State Revenue Office takes a similar case-by-case view of stamp duty where a Part IV claim is settled privately rather than by court order.

Get tax advice before the deed is signed wherever land, shares or a business is involved.

When the court must approve the settlement

If any party is a child, or an adult who cannot manage their own affairs, the settlement is not binding unless the court approves it as being in that person’s interests. In the Supreme Court this falls under Order 15 of the Supreme Court (General Civil Procedure) Rules 2015. The same caution applies where the settlement affects beneficiaries who cannot yet be identified, such as future grandchildren under a trust in the will.

Executors need to be careful too. An executor who settles a claim without the agreement of all affected beneficiaries, or without court approval where it is needed, risks being personally liable.

Other practical points

• Spell out costs. It is common for each party’s costs, or an agreed share, to be paid from the estate, but this must be written down clearly.
• Check knock-on effects. A change in who receives what can affect Centrelink payments, superannuation and family trusts.

Part 3: What this means for mediators

Estate mediations are among the most emotionally charged a mediator will run. Grief, old sibling rivalries and a feeling that a parent was taken advantage of all sit alongside the legal questions. Understanding the capacity rules and how a settlement is put into effect helps the mediator keep the process realistic and makes sure any agreement actually holds.

Before the mediation

• Get the right people in the room. Everyone whose share could change needs to be a party, or the agreement may not be able to be carried out. That usually means the executor, the beneficiaries who share in what is left after specific gifts (the residuary beneficiaries), anyone whose gift may be reduced, and every claimant. Check early whether anyone affected is a child or lacks capacity. If so, someone must be formally appointed to act for them in the case (a litigation guardian), and any settlement will need court approval.
• Confirm authority to settle. The executor must be able to agree on behalf of the estate. If the executor is also a beneficiary or a party to the dispute, keep their two roles clearly separate.
• Encourage early sharing of the key evidence. The lawyer’s file notes, the medical records and any capacity assessment usually decide these cases. Parties who have seen that material come with more realistic expectations.

During the mediation

• Reality-test against the law, without deciding it. It is not the mediator’s job to rule on whether the will-maker had capacity. But a mediator who understands the starting assumption of capacity, how the burden of proof shifts, and the weight courts give to evidence from the time can ask useful questions about how strong each side’s case really is.
• Put costs on the table. In estate cases, legal costs often come out of the estate, so the family is paying for both sides of its own dispute. Helping people see how fast the estate shrinks as a matter heads towards trial is often the turning point.
• Make room for what is not about money. Many will disputes are really about recognition, fairness or grief. Outcomes such as returning personal items, keeping the family home in the family for a time, or acknowledging a carer’s contribution can unlock a settlement where dollars alone cannot.
• Watch each party’s own capacity and wellbeing. Elderly surviving spouses and grieving family members may be vulnerable. The mediator should be satisfied that each person can understand, and freely agree to, what is proposed. This is a core skill in elder mediation.

Recording the agreement: heads of agreement

It is rarely practical to finalise a full deed of family arrangement on the day. The usual practice is to sign heads of agreement (a short document setting out the essential terms) at the mediation, with the formal deed and any consent orders to follow. How the heads are worded matters a great deal.

In Masters v Cameron (1954) 91 CLR 353 the High Court described the different ways people can reach agreement while planning a later formal document. At one end, they are bound straight away and the formal document just records it. At the other, nothing is binding until the formal document is signed. If the heads of agreement are unclear, a party who has second thoughts after the mediation may argue they were never bound.

Heads of agreement in an estate mediation should therefore state clearly whether they are binding immediately, and set out:

• which will goes to probate, or what happens to the challenge and any caveat
• how the agreement will be put into effect – deed, consent orders, a Part IV order, or a combination
• who will prepare the deed and any court documents, and by when
• the essential terms on who gets what, costs and releases, in enough detail that the deed can be drafted without further negotiation
• that the agreement is subject to court approval where anyone affected is a child or lacks capacity
• any condition about tax advice, and what happens if that advice reveals an unexpected cost.

Knowing the limits of the role

Mediators who are not lawyers should not draft the deed of family arrangement or advise the parties on its legal effect. Lawyer-mediators also need to take care not to slip into advising any one party. Where a party has no lawyer, the mediator should strongly encourage independent legal advice before the heads of agreement become binding, and the heads should record that this opportunity was given. A settlement that later falls apart because someone says they did not understand it helps no one.

Prevention is better than a court case

Most capacity disputes could be avoided. Where a will-maker is elderly or unwell, or the will departs significantly from earlier wills, the lawyer should take detailed file notes, see the will-maker alone, and ideally get a capacity assessment from a doctor at the time. For families, the best protection is a will made early, while there is no doubt about capacity, and reviewed regularly.

If you are worried about a will, or have been named as executor in a contested estate, early legal advice and a well-run mediation can save the estate, and the family, a great deal.

Where to go from here

• Looking for a mediator with elder and estate experience – meet Mi’s Elder Mediation Specialists, or search the Mi Find a Mediator directory.
• Checking someone’s credentials – the AMDRAS national register shows which mediators hold the AMDRAS Elder Mediation specialisation.
• Mediators wanting to specialise – read Are you eligible for the AMDRAS Elder Mediation Specialisation?
• Not yet a Member – join Mediation Institute.

Frequently asked questions

References

Cases

• Bailey v Bailey (1924) 34 CLR 558
• Banks v Goodfellow (1870) LR 5 QB 549
• Masters v Cameron (1954) 91 CLR 353
• Parker v Felgate (1883) 8 PD 171

Legislation (Victoria)

• Administration and Probate Act 1958 (Vic), Part IV (family provision), including s 90 (eligible persons) and s 99 (time limit)
• Wills Act 1997 (Vic), s 21 (statutory wills)
• Supreme Court (General Civil Procedure) Rules 2015 (Vic), Order 15 (persons under disability, approval of settlements)
• Supreme Court (Administration and Probate) Rules 2023 (Vic) (caveats and probate procedure)
• Duties Act 2000 (Vic), s 42 (transfers from deceased estates)

Guidance

• Australian Taxation Office, How CGT applies to inherited assets (deeds of arrangement)
• State Revenue Office Victoria, Revenue Ruling DA-051, Transfer of dutiable property from a deceased estate
• Supreme Court of Victoria, Wills and probate
• Victorian Law Reform Commission, Succession Laws: Final Report (2013), chapters on statutory wills and family provision

This article is general information for mediators and families. It is not legal, tax or financial advice. Seek advice about your own circumstances. The law is stated as at 21 October 2026. Next review: October 2027.