Estate Planning for Individuals with Questioned Capacity

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1 Estate Planning for Individuals with Questioned Capacity Outline prepared by Carolyn E. Henel & Agnieszka K. Adams, Roisman Henel LLP I. Definition of Capacity. There is no one definition or standard for determining a client s capacity to make decisions regarding his or her estate planning or to execute an estate planning document. A. The Due Process in Competence Determinations Act (DPCDA) (Probate Code Section Sections ) provides various standards for a court to use in determining whether a person has the capacity to make decisions and perform particular acts. i. There exists a rebuttable presumption that a person has the capacity to make a decision or perform a certain act. i A person with a mental or physical disorder may still have the capacity to perform various acts with respect to their estate planning. The DPCDA provides a roadmap for determining whether a client has the capacity to make decisions and perform acts with respect to their estate planning: 1. Can the client communicate verbally or otherwise? 2. Can the client understand the responsibilities created by the decision, the consequences and people affected by the decision, and the risk, benefits, and alternatives involved in the decision? 3. Does the client suffer from a deficit in any of the following four mental functions: alertness and attention, information processing, thought processes, or ability to modulate mood and affect? 4. If so, is there a correlation between the deficit and the decision or act? Does the deficit impair the person s ability to understand and appreciate the consequences of his or her action with regard to the type of act or decision in question? Roisman Henel LLP 1

2 B. Additional Standards with respect to particular estate planning documents. i. Advance Health Care Directive. An adult who has capacity may execute an advance health care directive (or power of attorney for health care). Unless stated otherwise in the advance health care directive, an agent s authority to act on behalf of a principal becomes effective when the principal is determined to lack capacity. Prob C Probate Code Section 4609 defines capacity in the context of health care as a person s ability to understand the nature and consequences of a decision and to make and communicate a decision, and includes in the case of proposed health care, the ability to understand its significant benefits, risks, and alternatives. A broader definition is contained in the DPCDA in Section 813 of the Probate Code. i Durable Power of Attorney for Financial Management. A natural person having the capacity to contract may execute a power of attorney. Prob C All persons are capable of contracting, except minors, persons of unsound mind, and persons deprived of civil rights. Civil C Several courts have held that the test for determining capacity to transfer and convey property is the same as the test for determining testamentary capacity (i.e., capacity to execute a will). Tuttle v Bessey (1955) 137 CA2d 725; Hughes v Grandy (1947) 78 CA2d 555. Will. Every adult (including an emancipated minor) of sound mind can make a will. Prob C 6100; Fam C 7050(e)(6). A person is not mentally competent to make a will if, at the time the will is executed, either of the following is true: 1. The person does not have sufficient mental capacity to understand the nature of the testamentary act; understand and recollect the nature and situation of his or her property; or remember and understand his or her relations to his or her living descendants, spouse, parents, and those whose interests are affected by the will. 2. The person suffers from a mental disorder involving delusions or hallucinations that cause the testator to choose a disposition for his or her property that he or she would not have chosen but for the delusions or hallucinations. Prob C (a). The standards described in Section for determining capacity to make a will are viewed as a lower standard of capacity that the standards described in the DPCDA Roisman Henel LLP 2

3 Revocable Trust. There is no clear rule on what standards should be applied in determining capacity to create a revocable trust (e.g, capacity to execute a will or capacity to contract). Case law suggests that the standard varies with the complexity and difficulty of the document. A complex contract may require a higher level of capacity than a simple amendment to a trust. 1. In Andersen v Hunt (2011) 196 CA4th 722, 126 CR3d 736, the court held that a decedent's capacity to execute trust amendments should be evaluated using the Probate Code standard of testamentary capacity, rather than the standard of contractual capacity, when the trust amendment addresses matters that are indistinguishable from those addressed in a will or codicil. In this case, the court viewed the amendment as uncomplicated and testamentary in nature because the decedent changed the percentages various beneficiaries were to receive. 2. In Lintz v. Lintz, 2014 Cal. App. LEXIS 27 (6th Dist. January 14, 2014), the court concluded that the testamentary capacity standard should not be applied to the trusts and amendments in question. In this case, the trusts were unquestionably more complex than a will or codicil. They addressed community property concerns, provided for income distribution during the life of the surviving spouse, and provided for the creation of multiple trusts, one contemplating estate tax consequences, upon the death of the surviving spouse. II. Role of Attorney What are an attorney s duties and responsibilities to a client who has diminished capacity or perhaps no capacity to execute an estate planning document? What may an attorney do on behalf of the incapacitated client? A. Duty of Attorney. California has no rule that specifically addresses the duty of an attorney representing a mentally impaired client. The duty to maintain the client s confidences, the duty of loyalty, and the duty to avoid conflicts of interest are significant issues for the attorney. i. Confidentiality. California Rule of Professional Conduct and Bus & Prof Code 6068(e) provide that an attorney may not reveal information without the informed consent of the client. The attorney Roisman Henel LLP 3

4 has a duty to maintain the client's confidences and preserve the client's secrets. The only exception to this duty allows the attorney to reveal confidential information "to prevent a criminal act that the attorney reasonably believes is likely to result in death or substantial bodily harm." i Duty of Loyalty. The attorney has a duty of undivided loyalty to the client. What an attorney may believe is the best interests of a client may conflict with the attorney s duty of loyalty to the client. Duty to Avoid Representing Adverse Interests. A corollary of the duty of loyalty is the duty to avoid representing adverse interests. In the estate planning context, representation of multiple parties typically occurs when members of the same family become clients. Cal Rules of Prof Cond 3-310(A). This becomes especially relevant when family members or friends want the attorney to take certain actions or provide certain information on behalf of a potentially incapacitated client. Duty to Keep a Client Informed. Consider how an attorney can maintain the duty to keep a client reasonably informed about significant developments relating to the representation when a client is potentially incapacitated. Cal Rules of Prof Cond 3-500(E). B. Protecting the Client from Abuse, Undue Influence or Fraud, and the Duty of Confidentiality and Loyalty. The current authority in California contained in ethics opinions states that an attorney is prohibited from seeking appointment of a guardian or conservator for an impaired client, or even seeking the consultation of a physician, without the client s written consent. This position is contrary to that of a majority of jurisdictions in the United States. i. The State Bar Standing Committee on Professional Responsibility and Conduct (COPRAC), in California State Bar Formal Opinion No , determined that an attorney who institutes conservatorship proceedings on a client s behalf without the client s consent violates the duties to protect client secrets and to avoid conflicts of interest. It expressly rejected ABA Model Rules of Prof Cond 1.14(b), which permits such an action in certain circumstances. COPRAC also found that an attorney would be acting competently by not seeking appointment of a conservator, but would likely be allowed to withdraw. Roisman Henel LLP 4

5 i San Diego Bar Ass n Ethics Opinion No determined that an attorney must be satisfied that the client is competent to make a will and is not acting as a result of fraud or undue influence. The opinion suggests that once the issue of capacity arises in the attorney s mind, it must be resolved. The attorney should schedule an extended interview with the client alone, keep a detailed and complete record of the interview, and, if the attorney is still not satisfied that the client has capacity and is free of undue influence and fraud, decline to act. Then the attorney should permit the client to seek other counsel, or recommend a conservatorship. The Legal Ethics Committee of the Bar Association of San Francisco, in Opinion , disagreed with COPRAC s Opinion No and concluded that an attorney who reasonably believes that a client is substantially unable to manage his or her own financial resources or resist fraud or undue influence may, but need not, take protective action with respect to the client s person and property. The ABA Model Rule of Professional Conduct 1.14 and Comments to it specifically address the issues of estate planning and protecting for a client with diminished capacity. The ABA rules allow an attorney to seek an appointment of guardian or take other protective measures on behalf of a client if the attorney believes that the client cannot act in his or her own interest. C. Attorney s Obligation to Determine Incapacity. Does an attorney have an obligation to determine the capacity of the client? The answer is unclear and some of the ethical opinions cited above may lead one to conclude that an attorney has at least an ethical obligation to determine the capacity of the client. Two cases address this issue in the context of whether the attorney has a duty to the beneficiaries of the client s estate to determine capacity. In Moore v Anderson Zeigler Disharoon Gallagher & Gray (2003) 109 CA4th 1287, the court found that an attorney who believes that the client has testamentary capacity by his or her own observations and experience, and who drafts the will accordingly, fulfills the duty of loyalty to the testator. The court held that the attorney does not owe a duty to beneficiaries under an earlier will or trust to ascertain and document a client s competence when the client makes amendments. In Boranian v Clark (2004) 123 CA4th 1012, the court held that an attorney who drafted a will for a dying testator who was taking morphine and subject to hallucinations did not owe a duty of care to individuals who were to receive the testator s estate under an earlier will. Roisman Henel LLP 5

6 D. Good Practices. i. Remember that the presumption in California law is that a client has capacity. Because testamentary freedom is an important value, an attorney should try various methods to ascertain and support a client s wishes. i Obviously, the best practice is to do as much planning with the client when the client has capacity. Discuss with a competent client a plan for when client becomes incompetent. When describing documents that become effective on incapacity (e.g. an advance health care directive or durable power of attorney) and include roles that become effective on incapacity (e.g., successor trustees), discuss with the client options for determining capacity (e.g., doctor s certification, a committee of trusted friends and relatives) and whether the fiduciary s authority should become effective on signing rather than on incapacity. Include an authorization for release of information under HIPAA so that trusted persons are authorized to receive medical information. If the client directs the attorney to divulge information to certain individuals when the attorney believes that client is no longer competent, question whether the attorney can ethically provide that information when attorney determines that client is incompetent. Even is the client previously gave the attorney the authority to act, have circumstances changed such that providing the information is now a conflict of interest? And if the attorney is to determine capacity, what standard should the attorney use and what documentation is required for the determination of incapacity? If the client s capacity is in question, meet with client alone multiple times to determine whether there is consistency in the client s wishes. Keep meetings short (which also will result in multiple meetings). Determine whether there are better times of the day to meet and whether to meet at a client s home to provide a more comfortable environment for the client. (Note that the extra time with the client will likely result in a larger bill for the client.) v. Ask the client to repeat important issues that you have discussed. Review documents with the client and try when possible to shorten the documents and print in larger type if necessary. vi. Find out whether the client is taking medications and how that medications may affect the client s ability to communicate and Roisman Henel LLP 6

7 understand various decisions. Consider asking the client for permission to discuss his or her medical situation with his or her doctor. v vi ix. Videotaping the signing of a document is usually not advisable. Consult with a litigator before videotaping to understand how the videotape could be used to thwart your client s wishes. Take good notes of your discussions with your client. If the attorney feels that the client is incompetent or subject to undue influence, is withdrawing from representing the client in the client s best interest? One ethics opinion suggests that the attorney should decline to prepare the requested documents or suggest that the client seek other counsel. Is this really the best course of action? E. Helpful Resources i. Capacity and Undue Influence: Assessing, Challenging, and Defending (CEB Action Guide). Guide to the California Rules of Professional Conduct for Estate Planning, Trust and Probate Counsel. Published by the State Bar of California Executive Committee of the Trusts and Estates Section of the State Bar (TEXCOM). Roisman Henel LLP 7