How a Settlor’s Capacity Affects the Rights of Beneficiaries.

           An elderly person’s mental capacity to make
decisions affecting the management, investment and disposition at death of his
trust estate is often disputed in lawsuits over alleged wrongs done to the
elderly person and/or his family.  Such
lawsuits can involve the elderly person’s trustee, surviving spouse, surviving
children and romantic relations, as relevant in the situation.  Let us consider two 2011 court of appeals
cases where an elderly person’s capacity to make decisions became important.

          First,
consider a trustee of an elderly person who follows the elderly settlor’s
instructions to buy stock in a single company even though the investment is unreasonably
risky and involves a company where the trustee is both an officer and major
share owner.  What duty does the trustee
owe to the settlor?    What duty does that trustee owe to the
settlor’s surviving beneficiaries?

          In Estate of Giraldin, California’s 4^th
District Court of Appeals held that the trustee had no duty to investigate the
mental capacity of the elderly settlor as he was not adjudicated to be unable
to manage his property interests (such as is done in conservatorship or
capacity proceedings).  The Court of
Appeal was not disturbed by the conflict of interest involving the trustee
investing in his own company, nor by the riskiness of the investment.   The Court said that the settlor of a
revocable trust could do whatever he wanted with his own assets.  

The decision also said
that the Trustee had no duty to the death beneficiaries so long as the settlor
had the power to revoke the trust (till he died) and had capacity.  Now the issue of capacity is the heart of
this case.  The possibility of incapacity
prior to adjudication of incapacity was side-stepped by the Court of Appeal.   The court did not want to impose a duty on the
trustee to “second guess” the settlor’s capacity to make decisions regarding
his own assets. 

          Next,
consider an elderly person who is forgetful and decides to leave most of his
assets to his long time romantic partner to the detriment of his own children,
with whom he has strained relations.  He
amends his trust to leave sixty percent (60%) to his romantic partner; he opens
a joint bank account with her; and he changes the designation of death
beneficiaries for his retirement to include her.  What level of understanding is required here?

          In Andersen v. Hunt, California’s 2^nd
District Court of Appeals held that the level of understanding (capacity) required
depends on each situation.  That is, the
nature of the activity controls what capacity is required.  Regarding the specific trust amendment, the
court saw that all it did was change who received what percentages, it is like a
will.  According the Court of Appeal applied
the standard associated with executing one’s will. 

Testamentary capacity
to execute a will requires the lowest degree of capacity.  That is, to comprehend the nature of the
testamentary act; to know the type, character and situation of one’s property;
and to recall one’s immediate living family relations (i.e., spouse, children
and parents, as relevant).  Thus, the simple
amendment was within the elderly settlor’s testamentary capacity.  However, opening the joint bank account and
changing the designated beneficiaries were more complicated activities.  These were evaluated using the higher
standard of review required of contractual matters.  These were found to have been beyond this
person’s capacity and so invalid.

          The
foregoing discussion illustrates the thorny issues involved in these capacity
cases.  The court of appeals decisions
are not controlling state wide.  Anyone
grappling with such matters should obtain qualified legal counsel for guidance
with their particular situation.