Sunrise, Sunset: What to Do About a Trustee With Diminishing Capacity

• Publication year: 2014
• Author: By John A. Hartog, Esq.*

SUNRISE, SUNSET: WHAT TO DO ABOUT A TRUSTEE WITH DIMINISHING CAPACITY

By John A. Hartog, Esq.¹*

I. INTRODUCTION

America is aging. In 2011, about one in eight Americans was over age sixty-five.² As the Baby Boom generation ages, the percentage of elders will increase. Over the next fifteen years, more than a thousand Californians will turn sixty-five every day.³ This segment of California's population is expected to grow by more than 20% over the next five years. Some commentators assert that the oncoming decades will witness a transfer of about $12 trillion in wealth from those born in the 1920s and 1930s to the Baby Boomers, and that the Boomers are expected to transfer some $30 trillion in assets to their beneficiaries over the next thirty to forty years in the U.S.⁴

The aging population brings new challenges, including planning for, and dealing with, gradual decline in physical and mental abilities. Many individuals wish to serve as trustee of their assets for as long as possible, even when they begin to lose their faculties. The inability or refusal to recognize and respond to these impairments can create thorny legal and practical issues for the individual and concerned family. These issues are heightened when the individual is serving as the trustee of a trust with fiduciary obligations. The challenges in representing the "fading trustee" can be acute for all advisors, especially that trustee's attorney.

As Justice Cardozo observed more than eighty years ago, "[n]ot honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior" for a trustee.⁵ A fading trustee is often reluctant to surrender control or unable to recognize his or her loss of ability. This inability can have the awkward consequence of adversely affecting the trust administration, thereby exposing a less than competent person (as well as the trust beneficiaries) to economic injury. Encouraging a trustee with diminished capacity to resign can also place the attorney in the unenviable position of infuriating the client to the point of discharge.

In a Panglossian⁶ world the well-drafted instrument would contain the necessary procedures for addressing the fading capacity of a trustee. Even Voltaire's eternal optimist, however, could not resolve the practical problems of human beings confronting unpleasant truths about themselves or their loved ones. The plain fact is that most documents practitioners draft or administer do not contain sophisticated mechanisms for dealing with incapacity. In consequence, the practical problems in handling recalcitrant or reluctant individuals are aggravated by gaps in the applicable language. The result can be unacceptable: either a continued disregard of the awkward circumstance, merely aggravating the problem, or a resort to the judicial process, with its attendant stress, expense, delay, and uncertainty.

These problems are compounded for the attorney representing the fading trustee. The lawyer's duty to the client may prevent that lawyer from undertaking the actions necessary to protect the (unwilling or incapable) client from liability and damages. Attorneys—who are not generally skilled in evaluating mental capacity—may be reluctant and feel unqualified to determine that a client is, or is about to become, unable to perform his or her fiduciary duties.

In the forty-six states that have adopted the ABA Model Rules of Professional Conduct (California is not an ABA Model Rules state), the attorney may have a duty to the trust beneficiaries as well as the trustee.⁷ That duty may require that the attorney disclose facts and communications adverse to the fiduciary continuing to serve.⁸ The attorney may even have a duty to take action to prevent potential loss to the trust beneficiaries, including petitioning the court to remove a trustee-client.⁹

An attorney in these jurisdictions may face the unpleasant situation of trying to understand a client's capacity and disclose personal information under a belief that such disclosure is required, only to discover the client is not only fully functional but incensed. That attorney also has to decide what to disclose and to whom to disclose it. Unhappy beneficiaries may use disclosed information (even when erroneous) to complicate trust administration or force a resignation as a result.

The California Rules of Professional Conduct forbid the attorney from disclosing such information.¹⁰ The attorney representing a fiduciary is considered to have a duty only to the fiduciary, and disclosure would expose the attorney to claims by the fiduciary and possible disciplinary action.

Viewing the problem from an even more dark perspective, one can anticipate the circumstance when the injured beneficiaries (or successor fiduciary) seek restitution from the trustee's attorney for failing to have prevented the underlying harm.¹¹ The attorney then finds himself or herself in the dilemma of having to comply with clear ethical duties to the client while risking civil liability to third parties.

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Another challenge confronting planners is the absence of legal guidance in this area. Neither the statutes nor the case law has yet been required to confront this problem directly. As a result, practitioners are compelled to pull threads from other areas to answer these new questions. Inevitably, stresses will arise from the application of principles developed from other policy considerations and fact patterns. This tension will remain until the law catches up to the facts.

Developing the law affecting fading trustees may encourage implementing a different standard of capacity. The law already acknowledges a sliding scale for marital capacity, testamentary capacity and contractual capacity. The future may bring a higher standard for fiduciary capacity.

Many of the challenges highlighted by this article can be managed by including anticipatory procedures in the applicable instrument. Attentive drafting of incapacity provisions can facilitate transfer of the trusteeship when the trustee suffers from diminishing capacity.

II. GENERAL CAPACITY ISSUES

The Probate Code generally presumes that adults possess the capacity to undertake any legal task unless they have been adjudicated as incapacitated in a protective proceeding.¹² A party challenging an individual's capacity must present sufficient evidence of incapacity to meet the requisite burden of proof.¹³ The definition of "diminished capacity" in everyday legal practice depends largely on the type of transaction or decision under consideration.¹⁴ Depending on the specific transaction or decision at issue, as well as the jurisdiction in which one is located, legal capacity may have multiple definitions.¹⁵ Examples of common transaction-specific legal standards include testamentary capacity, donative capacity, contractual capacity, capacity to convey real property, capacity to execute a Durable Power of Attorney, decisional capacity in health care, capacity to litigate, mediate and settle, and the capacities to drive, to marry, to stand trial, or to vote. The capacity to serve as a fiduciary is rarely articulated as independent of other capacities. This oversight contributes to the current lack of guidance in this area. As the law develops, the author hopes that this oversight will be addressed.

The basic starting point for any mental capacity determination in California is the Due Process in Competence Determinations Act ("DPCDA").¹⁶ The literature contains little material directly on point that describes the facts and circumstances in which a person will be deemed incapacitated pursuant to DPCDA. Marc B. Hankin, one of the drafters of DPCDA, summarized the legislative history and operative terms of the statute by stating that it "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."¹⁷

DPCDA codifies standards for a court to use in determining whether a person has the capacity to perform particular acts in a variety of contexts. The statutory presumption continues common law that an individual is "competent" until proven otherwise. Probate Code sections 810 through 813 contain special rules governing the evidence that must be adduced whenever one seeks to prove that a person lacks the capacity to make a decision or do a particular act.

DPCDA does not authorize a mere diagnosis of a physical or mental disorder as the sole basis to establish lack of capacity. A judicial determination of incapacity must be based on evidence "of a deficit in one or more of the person's mental functions."¹⁸ The code requires a finding of significant impairment with respect to "the type of act or decision in question,"¹⁹ and the court may take into consideration "the frequency, severity, and duration of periods of impairment."²⁰

Those rules provide, inter alia, that a "judicial determination that a person is totally without understanding, or of unsound mind, or suffers from one or more mental deficits so substantial that, under the circumstances, the person should be deemed to lack the legal capacity to perform a specific act, should be based on evidence of a deficit in one or more of the person's mental functions rather than on a diagnosis of a mental or physical disorder."²¹

Probate Code section 812 provides that a person lacks the capacity to make a decision unless the person has the ability to communicate the decision (verbally or by any other means) and to understand and appreciate, to the extent relevant, all of the following:

1. The rights and responsibilities created by or affected by the decision;
2. The probable consequences for the decision-maker and, when appropriate, the persons affected by the decision; and
3. The significant risks, benefits, and reasonable alternatives involved in the decision.

The requirements specified in Probate Code section 812...