Friday, 27 May 2022

Estate Planning: How a settlor’s capacity affects the rights of beneficiaries

An elderly person’s mental capacity to make decisions affecting the management, investment and disposition at death of his trust estate is often disputed in lawsuits over alleged wrongs done to the elderly person and/or his family.

Such lawsuits can involve the elderly person’s trustee, surviving spouse, surviving children and romantic relations, as relevant in the situation.

Let us consider two 2011 court of appeals cases where an elderly person’s capacity to make decisions became important.

First, consider a trustee of an elderly person who follows the elderly settlor’s instructions to buy stock in a single company even though the investment is unreasonably risky and involves a company where the trustee is both an officer and major share owner.

What duty does the trustee owe to the settlor?  What duty does that trustee owe to the settlor’s surviving beneficiaries?

In estate of Giraldin, California’s Fourth District Court of Appeals held that the trustee had no duty to investigate the mental capacity of the elderly settlor as he was not adjudicated to be unable to manage his property interests (such as is done in conservatorship or capacity proceedings).

The court of appeals was not disturbed by the conflict of interest involving the trustee investing in his own company, nor by the riskiness of the investment. The court said that the settlor of a revocable trust could do whatever he wanted with his own assets.  

The decision also said that the trustee had no duty to the death beneficiaries so long as the settlor had the power to revoke the trust, until he died, and has capacity.

Now the issue of capacity is the heart of this case. The possibility of incapacity prior to adjudication of incapacity was side-stepped by the court of appeals.

The court did not want to impose a duty on the trustee to “second guess” the settlor’s capacity to make decisions regarding his own assets.  

Next, consider an elderly person who is forgetful and decides to leave most of his assets to his long time romantic partner to the detriment of his own children, with whom he has strained relations.

He amends his trust to leave 60 percent to his romantic partner; he opens a joint bank account with her; and he changes the designation of death beneficiaries for his retirement to include her. What level of understanding is required here?

In Andersen v. Hunt, California’s Second District Court of Appeals held that the level of understanding – or capacity – required depends on each situation. That is, the nature of the activity controls what capacity is required.

Regarding the specific trust amendment, the court saw that all it did was change who received what percentages, it is like a will. Accordingly the court of appeals applied the standard associated with executing one’s will.  

Testamentary capacity to execute a will requires the lowest degree of capacity. That is, to comprehend the nature of the testamentary act; to know the type, character and situation of one’s property; and to recall one’s immediate living family relations (i.e., spouse, children and parents, as relevant).

Thus, the simple amendment was within the elderly settlor’s testamentary capacity. However, opening the joint bank account and changing the designated beneficiaries were more complicated activities.  These were evaluated using the higher standard of review required of contractual matters.

These were found to have been beyond this person’s capacity and so invalid.

The foregoing discussion illustrates the thorny issues involved in these capacity cases.

The court of appeals decisions are not controlling state wide. Anyone grappling with such matters should obtain qualified legal counsel for guidance with their particular situation.

Dennis A. Fordham, attorney (LL.M. tax studies), is a State Bar Certified Specialist in Estate Planning, Probate and Trust Law. His office is at 55 First St., Lakeport, California. Dennis can be reached by e-mail at This email address is being protected from spambots. You need JavaScript enabled to view it. or by phone at 707-263-3235. Visit his Web site at www.dennisfordhamlaw.com .

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