By Genevieve M. Moore, Morrison & Foerster
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).
When 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
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."
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) [enhanced version available to lexis.com subscribers], 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.
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
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.
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
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
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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