Wills and Trusts: Different Standards for Capacity?

Morrison & Foerster

By Genevieve M. Moore, Morrison & Foerster LLP

It is more and more common for individuals to use a revocable trust instead of a Will as their primary estate planning document, particularly in California where we practice.  Although there is an up-front cost to establishing the trust and transferring title to assets to the trustee, many clients feel this cost is worthwhile.  Among other benefits, using a revocable trust can avoid probate costs and court filings, provide for a streamlined shift in asset management in the event of the settlor's incapacity or death, and maintain the settlor's privacy, since trust documents need not be filed with the probate court (absent litigation). 

Mental Capacity Testamentary Capacity Contractual CapacityWhen a revocable trust is drafted, most attention is typically paid to the dispositive provisions of the trust that will take effect upon the settlor's death, rather than to the provisions that will govern while the settlor is living.  This reflects the testamentary nature of a revocable trust which, for this purpose, is akin to a Will in disposing of the settlor's property upon his or her death.  However, unlike Wills, trusts are also legal contracts:  the settlor and the trustee agree that the property transferred to the trust will be managed by the trustee in accordance with the terms of the trust (and local law).  This contractual nature of trusts has led to questions about what standard to apply when evaluating the settlor's capacity upon the establishment, restatement or amendment of a revocable trust. 

Historically, the capacity standard for Wills has been relatively low.  In California the standard is codified at Probate Code Section 6100.5, which provides that a testator has the capacity to make a Will if he or she can (1) understand the nature of the testamentary act, (2) understand and recollect the nature and situation of his or her property, and (3) remember and understand his or her relations to immediate family members and those whose interests are affected by the Will.  This is known as "testamentary capacity."  The capacity standard for documents other than Wills is higher, and requires that the individual be able to communicate, understand and appreciate (1) the rights, duties and responsibilities created or affected by his or her decision, (2) the probable consequences of the decision, and (3) the significant risks of, benefits of, and reasonable alternatives to the decision.  Probate Code Section 812.  This is often referred to as "contractual capacity." 

This disparity between testamentary capacity and contractual capacity is not unique to California, and has resulted in inconsistent case law in various states (including California) about what standard should apply to settlors who establish, restate or amend their trusts.  A recent case  by the California's Second District Court of Appeal provides some guidance in this area. 

In Andersen v. Hunt, 196 Cal. App. 4th 722 (2011), the settlor ("Wayne") had established a family trust with his first wife that named their children as sole remainder beneficiaries.  Wayne's wife died and Wayne developed a relationship with "Pauline."  Wayne then had a serious stroke.  Thereafter Wayne amended his trust four times, changed the beneficiary designations for his life insurance, and opened joint bank accounts with Pauline.  These actions resulted in providing Pauline with a majority of Wayne's estate upon Wayne's death.  Wayne's children then sought to invalidate the documents he had signed after his stroke, on the grounds that he lacked the requisite mental capacity when he executed them.

The appellate court in Andersen did not apply the contractual capacity standard of Section 812 to the trust amendments.  The court held that a settlor's capacity to execute a trust instrument should be evaluated under the (lower) testamentary capacity standard of Section 6100.5 if the record establishes that the trust instrument was similar in its content and complexity to a will or codicil.  In this case, Wayne's trust amendments had merely changed the percentages of the beneficiaries of his trust, by decreasing his children's share in favor of Pauline.  Because of the amendments' "simplicity and testamentary nature," the court found that the amendments were "indistinguishable from a will or codicil." 

On the other hand, the court (relying on the testimony of medical experts) held that Wayne likely was not competent to manage his financial affairs after his stroke and therefore lacked the capacity necessary to open joint accounts or change the beneficiary of his life insurance.  Because these actions were not simple testamentary changes, they were judged by the contractual capacity standard of Section 812, and Wayne's capacity did not meet that standard. 

Estate planners in California will now need to think carefully about establishing a revocable trust - or amending or restating an existing trust - for a client whose capacity may be questionable, or whose family situations or testamentary scheme suggest that a postmortem capacity challenge is possible.  For these clients who are creating an estate plan, using a Will from the outset may be preferable to using a revocable trust, since the lower standard of  Section 6100.5 should statutorily apply to any questions of capacity.  (Query whether this is the correct result, if the Will is lengthy and complex, and the testator has mental deficits.)  For clients with existing revocable trusts who wish to make minor dispositive changes, a trust amendment might be acceptable, if the changes are drafted in simple, clear terms.  The amendment should be as short in length as possible; the Andersen court noted in dicta that a trust agreement of 16 pages was likely too complex for the testamentary standard to apply.  This also suggests that trust changes should be made in an amendment, rather than a restatement, since an amendment would almost certainly be a shorter document.

Dispositive changes that are more complex (e.g., changes to complex tax provisions or formulas, or the terms of continuing trusts) are more likely to be challenged later as having been beyond the settlor's capacity.  This might suggest that for a client who needs these changes, moving to an estate plan that is centered on a Will, not a trust, would be preferable. 

Also, from a process perspective, any changes should be accomplished as efficiently as possible, with a minimum of lengthy or complex correspondence requiring the client's review and analysis - that is, as long as attorney's other duties to the client are met. 

As to changes of non-dispositive terms (e.g., changes concerning the trustees, or changes in the trust's administrative provisions), attorneys should keep in mind that Andersen allowed the lower testamentary standard for dispositive, "testamentary" changes only.  This calls into question how a trust amendment would be treated that combined dispositive and administrative changes.  The dispositive changes could be a casualty if the provisions were not severable, and a court ruled that the higher standard applied to the administrative provisions. 

The Andersen court applied the higher contractual standard to Wayne's beneficiary designations and the joint bank accounts he created.  The case does not provide many facts or  analysis, but presumably these were deemed to be decisions that required a higher level of mental capacity than making a simple testamentary decision.  Many clients use beneficiary designations as part of their estate plans.  It is possible to imagine scenarios where a mere change of percentages among designated beneficiaries would permit the use of the lower Section 6100.5 testamentary standard, although this was not the case in Andersen

As estate planners we are already familiar with considerations of capacity.  The Andersen case illustrates that our analysis should also now include an evaluation of whether some documents are better than others as vehicles for a client's estate planning changes.

Morrison & Foerster's Trusts and Estates group provides sophisticated planning and administration services to a broad variety of clients.  If you would like additional information or assistance, please contact Patrick McCabe at (415) 268-6926 or PMcCabe@mofo.com.

© Copyright 2012 Morrison & Foerster LLP.  This article is published with permission of Morrison & Foerster LLP.  Further duplication without the permission of Morrison & Foerster LLP is prohibited.  All rights reserved.  The views expressed in this article are those of the authors only, are intended to be general in nature, and are not attributable to Morrison & Foerster LLP or any of its clients.  The information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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