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California Trusts and Estates Quarterly -- Volume 17, Issue 2 (Summer 2011)
The Andersen Twist in Trust Contests: Testamentary Capacity Standard Sometimes Applies When Document Resembles a Will
As the baby boomers turn 65, and California’s population ages, dementia caused by Alzheimer’s disease will become more prevalent in our population.1 When an Alzheimer’s patient, or anyone with significant mental infirmity, makes a material change in his or her estate plan, such as an amendment that alters the distributive provisions of a trust instrument or changes the successor trustee, the stage is set for a challenge by the disfavored family member or other disappointed beneficiary. Thus, trust and estate litigation involving mental capacity issues is likely to rise.
The Court of Appeal’s recent decision in Andersen v. Hunt2 is a must-read for estate planners and litigators because it extends the fixed and relatively low standard for testamentary capacity, as codified in Probate Code section 6100.5,3 to a trust agreement or amendment that, “in its content and complexity, closely resembles a will or codicil.”4 Surprisingly, prior to Andersen, there was no published opinion squarely addressing the capacity standard applicable to trust instruments. We now have in Andersen a rule of hazy reach that “trusts or trust amendments that are analogous to wills or codicils”5 are governed by the law of testamentary capacity. Since the outcome in a trust contest may turn on the court’s determination of which capacity standard applies, lawyers and trial courts will grapple with the scope of Andersen until the Legislature or appellate courts provide clarification.
This article will begin with an overview of the law of contractual and testamentary capacity prior to Andersen, and then will discuss the published and unpublished portions of the Andersen opinion and comment on its ramifications.
I. MENTAL CAPACITY STANDARDS BEFORE ANDERSEN
The common law and statutory rules for capacity assessments were well developed before Andersen with regard to wills and contracts, but not with regard to trust instruments.
The capacity standard for wills took shape about a century ago, long before trusts became an estate planning staple. When reviewing will contests on appeal, courts favored the validity of wills by holding contestants to a relatively stringent and specific burden of proof.
Schematically, in early cases such as Estate of Chevallier6 and Estate of Perkins,7 the Supreme Court mandated that the will contestant prove either general mental incompetence or a “specific and narrower form of insanity under which the testator is the victim of some hallucination or delusion.”8 As to the former, courts zeroed in on the question of whether, at the time the will is made, the testator
Hence, the ability to transact even ordinary business was cast aside as a standard for testamentary capacity. “[A]s every lawyer knows, a man may be capable of making a good will after he is so far gone in imbecility and mental darkness as to be no longer capable of making a valid deed or of transacting business generally.”
To invalidate a will on the basis of a hallucination or delusion, the courts essentially required proof that the hallucination or delusion caused or affected the challenged testamentary disposition.11 Long before the dawn of the Space Age, our Supreme Court commented that a testator’s belief that the moon is made of green cheese is immaterial unless that belief directly influenced his will.12
The courts emphasized that assessing capacity requires a determination of the testator’s mental condition at the time of execution of the will. If a mental disorder is continuous and becomes progressively worse, the trier of fact may infer that testamentary incompetence proven at one point in time continued later. However, if lucid periods characterize the mental disorder, the court will presume that the testator made the will during those periods.13
Thematically, our appellate courts reinforced the above rules of testamentary capacity by admonishing triers of fact to look past superficial evidence of eccentricity, weakness and decline. There are a number of pithy quotes in the case law that proponents of wills often sprinkle across their briefs. For example, in language still frequently cited today, one court observed:
Probate Code section 6100.5, first enacted in 1985, was intended to codify the common law rules that favored findings of capacity such that the preceding case law remains valid.15 Section 6100.5 provides:
While the appellate courts developed a standard that favored testamentary capacity by requiring certain proof of incapacity, they did not require the same sort of evidence with regard to contractual capacity. The courts instead examined cognitive capacity in the context of the particular contract at issue.
Former Civil Code section 39, enacted in 1872, allowed the courts to rescind a conveyance or other contract “of a person of unsound mind, but not entirely without understanding, made before has incapacity has been judicially determined.”16
The Supreme Court held in Pomeroy v. Collins17 that courts applying Civil Code section 39 should apply the following test: “Was the party mentally competent to deal with the subject before him with a full understanding of his rights? [Citation.] Did he understand the nature, purpose, and effect of the contract? [Citation.]”18 This formulation continues to be controlling law today. The test:
The standards for testamentary capacity and contractual capacity thus diverged under California law. With regard to wills, the focus was on the testator’s understanding of the nature of the testamentary act in the abstract, as well as his ability to understand what he owned and who he was related to, not on the complexity of the will itself. With regard to contracts and other conveyances, the inquiry revolved around the complexity of the document in question: contestants of more complex instruments had to prove a lesser level of incapacity.
Trusts typically have a blend of contractual and testamentary features. Irrevocable trusts that convey property to a trustee other than the settlor seem more contractual in nature than the ordinary revocable trust where the settlor retains control over the assets in his or her capacity as trustee. Yet all trusts used for estate planning purposes necessarily have a testamentary component.
As the standards for testamentary capacity and contractual capacity diverged, the courts never had occasion to analyze the standard for trust-making capacity. For example, in Walton v. Bank of California,21 the settlor executed an irrevocable trust conveying her residence and other assets to an institutional trustee for her lifetime benefit, with the remainder on her death to her two children. She later sought to rescind the trust instrument. The court applied the standard for contractual incapacity, without considering the potential applicability of the standard for testamentary capacity, and affirmed the trial court’s ruling that she was competent when she executed the trust instrument.
Probate Code section 6100.5 codified the standard for testamentary capacity in 1985 without indicating its applicability to trusts.
The Due Process in Competence Determinations Act (DPCDA), 22 enacted in 1995, modernized California law with regard to competence determinations. The California Medical Association and the Estate Planning, Trust and Probate Section of the State Bar developed and co-sponsored the legislation.
Marc B. Hankin, one of the drafters of the DPCDA, summarized the legislative history and operative terms of the statute in an article that appeared in an early issue of this publication.23 As he explained, the DPCDA “engrafts onto the law of legal mental competence the terminology used by today’s science of the mind” and “largely codifies existing case law as it should be applied using state of the art forensic psychiatric assessment techniques regarding incapacity.”24
The DPCDA, as now codified in Probate Code section 811, requires courts to base incapacity determinations on evidence of a deficit in at least one of four listed mental functions: (1) alertness and attention, (2) information processing, (3) thought processes, and (4) ability to modulate mood and affect. Section 811 elaborates on the categories of evidence that are pertinent to each of these functions – for example, a deficit in thought processes may be shown by severely disorganized thinking, hallucinations, delusions, or uncontrollable, repetitive or intrusive thoughts. The statute further mandates evidence of a correlation between the deficit or deficits and the decision or acts in question. Section 811 expressly and broadly applies to any judicial determination regarding capacity to contract, make a conveyance, marry, make medical decisions, execute wills, and execute trusts.
Section 811 thus layered a new proof requirement onto the then-existing standard for testamentary capacity. In addition to proving the testator’s incapacity under the elements set forth in section 6100.5, the contestant must prove one or more of the mental function deficits listed in section 811, and a correlation between that deficit and the challenged will.
With regard to contractual capacity, the DPCDA introduced a burden shifting approach to capacity determinations by amending Civil Code section 39. If the contestant proves that contracting party was “substantially unable to manage his or her own financial resources or resist fraud or undue influence,” then the burden shifts to the opposing party to prove that the contracting party was of sound mind.
The DPCDA also created a standard for capacity determinations, set forth in section 812, that is applicable “[e]xcept where otherwise provided by law, including, but not limited to, Section 813 and the statutory and decisional law of testamentary capacity.” (Section 813 provides a standard for capacity assessments in the context of consent to medical treatment.)
The legislative history of the DPCDA indicates that section 812 was meant to codify the existing law of contractual capacity.26 The operative part of the section states:
While the mental function deficit analysis set forth in section 811 expressly applies to contracts, wills and trusts, section 812’s reach is not as clear. Contracts generally fall within section 812 while wills are carved out by the exception for the “statutory and decisional law of testamentary capacity.” Trust instruments are neither expressly included nor excluded.
In his article on the DPCDA, Mr. Hankin mused on the capacity standard applicable to trusts. He commented that the “testamentary data set is small (essentially who the testator and the testator’s relatives are, what the testator owns, and who will take under the will), and only a peculiarly low operational level of mental function integrity is required.” In contrast, with regard to contracts, the data set “is obviously larger and more complex” and virtually all of the mental functions set forth in section 811 must operate at a minimally acceptable level. Mr. Hankin observed that trusts have contractual features that weigh in favor of the contractual capacity standard, but also have a testamentary aspect that should be considered. He concluded that the law was unsettled and “trusts established by persons lacking contractual capacity are of very questionable validity.”
Since Mr. Hankin published his article sixteen years ago, there has been little published case law interpreting the DPCDA, and the capacity standard applicable to trusts has remained murky.Along came the Andersen court to take up the issue.
II. SUMMARY OF THE ANDERSEN DECISION
Andersen arose from a scenario common in trust and estate disputes: a dispute between children and their surviving parent’s romantic interest. Many of the background facts are included in the unpublished portion of the slip opinion. For context, the discussion below includes some facts that appear only in the unpublished portion.
Wayne Andersen and his wife Harriett established a family trust in 1992 that identified their two children, Stephen and Kathleen, as the sole beneficiaries after their deaths. Harriett died in 1993. Before Harriett died, Wayne developed a close personal relationship with Pauline Hunt. In 1996, Wayne amended his trust to name Pauline as his successor trustee in the event of his incapacity or death
Though Wayne and Pauline never married, he ultimately favored her in his estate plan. He suffered a stroke in May 2003 and thereafter moved into Pauline’s home where he lived until his death in April 2006, except for hospital and nursing home stays.31
In 2003 and 2004, after moving in with Pauline, Wayne executed the four challenged trust amendments. In the May 2003 amendment, Wayne left a 60 percent portion of his estate to Pauline, with the remaining 40 percent going to Stephen, Kathleen and a grandchild. In the November 2003 amendment, Wayne provided that if Pauline predeceased him, her daughter would receive 25 percent of the trust assets, with Stephen, Kathleen and the grandchild dividing the remaining 75 percent, and further directed the trustee to sell his residence and not allow his children and grandchild to purchase it. In the July 2004 amendment, Wayne eliminated his grandchild as a beneficiary.32
Wayne also opened several joint tenancy accounts with Pauline after he moved in with her, the largest account holding over $200,000 that he inherited from his aunt in September 2005. Further, in October 2003, he executed a change of beneficiary designation form for two whole-life insurance policies, naming Pauline as his first beneficiary and his children as subsequent beneficiaries.33
The court, after a bench trial, invalidated the four trust amendments on the grounds of lack of mental capacity and/or undue influence. The court also invalidated the joint tenancy accounts that Wayne and Pauline created after his stroke, as well as the change of beneficiary on the life insurance policies.34
The Court of Appeal reversed the invalidation of the trust amendments. In the published portion of its opinion, the appellate court found that the trial court erred in applying the “higher standard of mental functioning” set forth in the “contractual capacity” provisions of the Code, i.e., sections 810 to 812, rather than the lower standard applicable to “testamentary capacity” codified in section 6100.5.35
After recognizing that section 6100.5 refers only to “wills,” not to testamentary transfers more generally, the Court of Appeal determined that section 6100.5 nonetheless applies to trusts or trust amendments “that are analogous to wills or codicils.” This is so, the court reasoned, because sections 810 to 812 focus the trier of fact’s capacity assessment on the “person’s ability to appreciate the consequences of the particular act he or she wishes to take.” If the challenged trust instrument, in its content and complexity, closely resembles a will or codicil, then “we believe it is appropriate to look to section 6100.5 to determine when a person’s mental deficits” render that person incompetent.36
As applied to the circumstances at hand, the Court of Appeal found that the trust amendments, unlike the original 16-page trust instrument, were simple in nature in that they provided the percentages of the trust estate that Wayne wished each beneficiary to receive. Hence the amendments were “indistinguishable from a will or codicil” and should have been evaluated under the standard articulated in section 6100.5.37
In the unpublished portion of the opinion, the court went on to find no substantial evidence that Wayne was mentally incapacitated when he executed the trust amendments. The court noted that “testamentary capacity is a low standard” and rigorously reviewed the evidence received at trial. Focusing on the particular bases for incapacity set forth in section 6100.5, the court found that
The court dismissed various trial exhibits demonstrating that Wayne suffered from diminished capacity, poor memory, dementia and alcoholism in the last years of his life, noting evidence that his speech and reasoning remained intact.40 It was not even a close call: the evidence of incapacity was “much weaker than that held insufficient to justify the setting aside of testamentary documents in others [sic] cases.”The court, for example, found unpersuasive a January 2004 letter from Wayne’s doctor to the IRS stating that he “is not able to handle his own financial affairs” because the letter at most showed Wayne’s lack of capacity to handle financial matters, not a lack of testamentary capacity.
The court went on to find no substantial evidence that Pauline had unduly influenced Wayne with regard to the trust amendments.42
On the other hand, when it turned to the joint tenancy accounts and the change in designation of life insurance beneficiary, the court accepted “the testimony of both medical experts that Wayne likely was not competent to manage his financial affairs after his 2003 stroke” as providing substantial evidence to support the trial court’s ruling.Thus, evidence of general mental infirmity was adequate to invalidate Wayne’s actions with regard to the bank accounts and life insurance policies, but insufficient to knock out the trust amendments.
In sum, the Court of Appeal’s selection of the legal standard made all the difference in the outcome. Wayne could make Pauline the primary beneficiary of his trust estate by changing the distributive provisions of his trust because the court set a high evidentiary hurdle for his contesting children, but Wayne could not make other simple asset dispositions in Pauline’s favor because the court applied a lower hurdle.
III. LESSONS, RIDDLES AND REFORM
Andersen reminds us that a party contesting a will, and now a trust instrument that is analogous to a will, must come forward with evidence that falls into one or more of the categories set forth in Probate Code section 6100.5 and overcomes the common law’s attitudinal predilection in favor of capacity. This can be a tall order if, as often occurs, the capacity assessment occurs after the testator’s or settlor’s death.
A person undergoing treatment for a mental illness, such as Alzheimer’s disease, may be under the regular care of multiple physicians, but the medical records may document little or nothing as to two of the three factors set forth in section 6100.5(a): understanding and recollection as to property ownership and family relations. For example, the Mini-Mental State Examination, a common cognitive test, does not inquire as to the patient’s knowledge of property and family.Unless such evidence is available from other credible sources, the contestant may have to prove that the testator/settlor did not have sufficient mental capacity to understand the nature of the testamentary act. Since an inability to transact ordinary business is not alone sufficient to establish testamentary incapacity, the successful contestant will have to show a relatively high level of impairment. Moreover, the contestant often has to overcome testimony from the drafting attorney who likely will testify either that he or she actually remembers the client and the client understood the concept of a will or at least that he or she has a practice of evaluating capacity before allowing clients to sign wills and would not allow an incapacitated client to sign a will.
Contestants, if they can prove incapacity under section 6100.5, will still have to prove incapacity under section 811, which requires evidence of deficit in at least one of the listed mental functions, along with a correlation between that deficit and the challenged instrument. Andersen could create confusion for practitioners and trial courts by stating that sections 810 to 812 pertain to “contractual capacity” whereas section 6100.5 pertains to “testamentary capacity.” This is a false dichotomy because portions of the DPCDA, i.e., sections 810 and 811, apply to both contractual and testamentary capacity.
Andersen leaves us with limited guidance as to which mental capacity standard will govern documents creating, restating and amending trusts.
The opinion suggests that a trial court, as a threshold question, should review the totality of the challenged document to determine whether it is simple and testamentary in nature so as to call for the application of the testamentary capacity standard. Hence, short trust amendments that do nothing more than “provide the percentages of the trust estate [the settlor] wished each beneficiary to receive” are deemed “analogous to wills or codicils” and thus the contestant must prove testamentary incapacity.On the other hand, the Andersen court observed in dicta that the original trust instrument, spanning 16 pages, was complex.
Since most instruments creating or restating trusts are lengthy and have a variety of administrative and distributive provisions, a trial court following Andersen may deem them subject in their entirety to the contractual capacity standards set forth in sections 810 to 812. The proponent of the trust, however, may argue that the testamentary capacity standard should govern distributive provisions in even a lengthy trust instrument if they are simply worded and testamentary in nature. This position may be more compelling if the distributive provisions are clear and conspicuous within the trust instrument, or called out in a cover letter or other written summary provided to the settlor, not hard to spot like the bespectacled character in “Where’s Waldo.”47 Hence, a court conceivably could decide to apply the testamentary capacity standard to some portions of a trust instrument while applying the contractual capacity standard (if required) to the other provisions.
Likewise unresolved is how trial courts will regard trust amendments that do something other than modify the distributive shares of beneficiaries. Amendments, of course, can include a myriad of elements. How might a court treat an amendment that changes a child’s distributive share from outright distribution at age 21 to a lifetime trust for that child’s benefit with the remainder to the child’s issue? How might a court treat a change in the selection of successor trustees? If an amendment contains several provisions, is the entire amendment subject to the contractual capacity standard if any of them is not testamentary in nature?
Given the imprecision in Andersen as to when a trust instrument “closely resembles” a will or codicil, and the possibility that a court could surgically apply the testamentary capacity standard to a portion of a trust instrument, we should anticipate substantial litigation on these points. Years may pass before the appellate courts provide clarification.
The planning attorney, of course, must take capacity issues into account when evaluating whether and how to create or modify an estate plan. While Andersen leaves behind uncertainty, it also highlights the need for planners to operate with capacity standards in mind and to consider employing the old-fashioned will as a backstop to effectuate client intent.
If the client has no will or trust, the planner might consider preparing a will instead of a trust for a client who likely has testamentary capacity but may not be able to fathom a complex trust instrument. The will also serves as a fallback means to get assets to intended beneficiaries instead of relying solely on the validity of nonprobate and nontrust transfers of assets, such as pay-on-death beneficiary designations, which might fail if subjected to the standard for contractual capacity.
If the planner decides that the client can understand a trust instrument, but there is still appreciable risk of a capacity-based challenge, the planner presumably may use a pourover will that incorporates by reference the terms of a separate trust instrument as permitted by Probate Code section 6130.
Here’s a thought that may be more practical in the context of smaller estates: planners could set aside their usual long form of trust instrument in favor of a streamlined document that within the space of a few pages provides for the distribution of assets to named beneficiaries upon the settlor’s death. If a judge can read through and understand a concise trust instrument within a few minutes, and the trust was obviously meant to substitute for a will, the judge may well rule that Andersen applies.
If a client with questionable capacity has an existing trust, the planner should pause before restating it. If the client’s primary concern is to change the distributive provisions of the trust, the planner might limit his or her work to an amendment on that narrow issue. Or the planner might compartmentalize amendments so that one contains a simple change in the distribution formula while another contains other more elaborate modifications; the former might be analyzed under the more forgiving testamentary capacity standard even if the latter calls for contractual capacity.
Simple trust instruments that take effect on death are not the only documents that, in content and complexity, closely resemble a will. While the Andersen holding applies only to trust instruments, the rationale of the case logically would extend to other documents such as beneficiary designations on life insurance policies and pay-on-death designations on bank accounts. Why is a pay-on-death designation on a bank account with a 50-50 split to two beneficiaries any different than a contemporaneous trust amendment with the same allocation to occur on the settlor’s death? Following the rationale of Andersen, lawyers may seek to stretch the testamentary capacity standard to “simple” nonprobate and nontrust transfers.
A person’s capacity to comprehend a document of course depends on the subject and complexity of the document in question. Our courts recognized this when they developed the common law standards for contractual capacity discussed above. The Legislature likewise recognized the situational nature of capacity when it enacted the DPCDA. Hence, section 810(c) speaks of determining whether a person “under the circumstances . . . should be deemed to lack the legal capacity to perform a specific act.” (Emphasis added.) Section 811 looks for a correlation between a mental deficit and the particular “decision or acts in question,” and requires a significant impairment in the “person’s ability to understand and appreciate the consequences of his or her actions with regard to the type of act or decision in question.” (Emphasis added.) And section 812 requires that capacity assessments occur in the particular context of “the decision” at hand.
Our law, however, applies an initial filter. Wills, and now trust instruments deemed to resemble wills, are governed by a set of rules that favors findings of capacity by setting the same relatively low level of capacity regardless of the complexity of the document in question. Hence, because the law smiles on all wills, a disappointed child contesting a one-paragraph holographic will that leaves everything to a cousin at least theoretically bears the same burden of proof under Probate Code section 6100.5 as does a disappointed child contesting an elaborate 50-page will.
A strong argument exists that a single unified capacity standard, like the one expressed in sections 810 to 812, should apply across the board to contracts, trust instruments and wills. If the Legislature were to repeal section 6100.5 and override the common law of testamentary capacity, the complexity of the particular document, not its categorization as a will or something akin to a will, would take center stage. While such a reform could lead to more contests, it would be consistent with the Supreme Court’s sound observation almost a century ago that: “A contract may be so complex and intricate as to require keener discernment of intellect and understanding than would be required to execute an ordinary, simple will. And vice versa.”48 It seems unlikely, however, that the time-honored standard for testamentary capacity will be jettisoned anytime soon.
Assuming the Legislature is not inclined to create a unified standard for capacity assessments, it might at least clarify the application of the testamentary capacity standard to trust instruments. If wills are reviewed under section 6100.5 regardless of length and complexity, perhaps the same approach should be taken with respect to trusts that are testamentary in nature. To achieve greater consistency, beneficiary designations and other nonprobate, nontrust transfers on death might also be screened under section 6100.5.
For now, until the Legislature addresses the reach of section 6100.5 beyond wills, complexity does matter when a settlor’s trust-making capacity is disputed. And, while the complexity assessment may be outcome determinative, our appellate courts have yet to supply measuring criteria. The Andersen case thus adds another layer of uncertainty to capacity determinations for parties, counsel and trial court judges.
©2012 State Bar of California, Trusts and Estates Section. Article initially appeared in California Trusts and Estates Quarterly, Volume 17, Issue 2 (Summer 2011). Republished with permission.
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