A corollary to planning for higher income in retirement is planning for the time when one physically or mentally may begin to lose capability in managing one’s own care. If a person is lucky and has a long life, mental acuity begins to diminish. People become less able to distinguish between the claims of hucksters and con men and those of legitimate creditors. In the case of many with fading capacity, the answer to the question of competency to manage one’s affairs isn’t always black and white.
Fading, marginal or diminished capacity is increasingly common as Americans are living longer, but not necessarily free of disability. This raises issues in representing a client when we see changes occurring over time, or we meet a new client for the first time and notice patterns of behavior that raise questions.
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Some clients handle fading capacity gracefully and with minimal impact to their estate plans or other legal matters. For others, the results can be difficult or even catastrophic as they combat family and friends trying to help, or fall prey to those who see an easy source of money. An attorney’s role in this area is often not clear, and neither ethics rules nor case law are fully satisfactory in clarifying what steps, if any, are appropriate to the individual circumstances we confront.
Medical and Legal Perspectives Can Differ Greatly
The American Bar Association’s Commission on Law and Aging has worked with the American Psychological Association to create two handbooks. The first, a handbook for attorneys dealing with older clients, was published in 2005, reprinted in 2007 and is entitled, Assessment of Older Adults with Diminished Capacity: A Handbook for Lawyers.
The second, published in 2008 by the ABA Commission on Law and Aging and the American Psychological Association, is entitled, Assessment of Older Adults with Diminished Capacity: A Handbook for Psychologists. Both contain observations of particular value to attorneys whose practice tends to focus on older clients, but the Handbook for Psychologists may be especially interesting since it covers this field from a perspective not often seen by practicing attorneys: the medical perspective, including descriptions of common medical problems that affect determinations of capacity, and that profession’s struggle to fit medical practice into legal constructs and categories.
In the medical world, the term most frequently used to determine a patient’s ability to make medical decisions is competence, not capacity, and it most frequently refers to the ability to understand and make medical decisions. Clinicians often draw a distinction between “global capacity” to engage in a wide range of functions, versus “specific capacities” or the ability to perform specific functions and potential methods for enhancing these abilities. The current trend is toward focusing on specific capacities rather than the more general approach.
By contrast, the legal perspective historically has been global as well as black and white: is your client competent or incompetent? Is there a finding of incapacity or not? Lawyers and other advisors increasingly see clients who present themselves in ways that raise questions, but not obvious answers.
Legal Standards of Capacity
The first question an attorney should ask when presented with a client with marginal capacity is whether that client is able to engage the lawyer’s services. This is a contractual standard of capacity and involves the client’s ability to understand the legal business to be transacted, as well as the ability to cooperate in achieving that result. Because the complexity or level of difficulty of legal transactions vary, as do each client’s individual strengths and weaknesses, there is no one size fits all. The common law presumes that each individual over the age of eighteen years has capacity to act and make binding legal decisions on his or her behalf. Only if evidence is presented that in fact, this particular person lacks capacity in this particular area or overall does the presumption of capacity change.
- Testamentary capacity is one of the lowest standards of capacity, requiring in most states an understanding of the nature of one’s assets, the natural objects of one’s bounty and the ability to rationally create a plan to dispose of those assets. To further complicate matters, the law in most states recognizes the concept of “lucid moment” or “lucid interval”. This concept may not be agreed on by medical practitioners, who evaluate a patient’s level of impairments based on a more comprehensive medical diagnosis and evaluation of capacities, not on lucid moments.
- Contractual capacity concerns the client’s capacity to understand the nature and effect of the business being transacted. This could be quite simple such as the purchase of items in a grocery store. Or it could be as complex as the creation of a generation skipping transfer tax plan; the decision to place assets in an LLC and determine the managers and operating structure of the entity to obtain tax savings; or to engage in sales to a defective grantor trust.
- Capacity for health care decisions. The Uniform Health Care Decisions Act (which has been enacted in seven states) provides that capacity to make health care decisions, from a legal standpoint, means “…an individual’s ability to understand the significant benefits, risks and alternatives to proposed health care and to make and communicate a health care decision”. While doctors spend more time on this issue than attorneys, it is important to consider if our clients are able to understand and execute advanced directives or other health care documents.
- Donative capacity is the capacity to make a gift. It is similar to but more demanding than testamentary capacity. In addition to knowledge of one’s assets and the natural objects of one’s bounty, it also involves the greater complexity of understanding and calculating the effect of the gift on the donor’s current finances. In the case of annual exclusion gifts for wealthy individuals, the standard may not be hard to reach. But for more substantial gifts, especially in complex transactions such as conveying a significant portion of one’s assets to a family limited partnership or simple gifts for people of more modest means, courts may be more skeptical and practitioners should be as well.
If there are substantial concerns about capacity, the attorney should consider professional medical or psychological consultation, and if the attorney believes there is no capacity, the ABA’s Handbook for Lawyers mentioned above advises the attorney to not proceed. If the conclusion is equivocal, the attorney may proceed but should carefully document the process and safeguard evidence. Best practice dictates giving the client the benefit of the doubt and providing an opportunity to plan, but also dictates careful preservation of the evidence if needed for any future judicial proceedings.
Article Published by ThinkAdvisor April 10 2017
Written by Johnathan E. Gopman & Michael Sneeringer