Tips for Dealing With and Drafting for Clients With Diminished Capacity

Feb 6, 2024 | Family Law, General Estate Planning, Podcasts, T&E Administration

“Tips for Dealing With and Drafting for Clients With Diminished Capacity,” that’s the subject of today’s ACTEC Trust and Estate Talk.

Transcript/Show Notes

This is Toni Ann Kruse, ACTEC Fellow from New York. ACTEC Trust and Estate Talk has shared several podcasts over the past few weeks on attorneys’ professional responsibilities when interacting with clients that have partial or full incapacity and their families. Today, ACTEC Fellows Tara Anne Pleat of Clifton Park, New York and Kim Kamin of Chicago will wrap up this topic and share lessons learned and their top tips. Welcome Tara and Kim.

Understanding the Impact of Diminishing Capacity on Estate Planning

Kim Kamin: Thank you very much, Toni. This is Kim Kamin here. This is such an important topic; all or almost all of us have had to deal with it at some point, and none of us think that this is an easy area to address. And that’s one of the reasons that we are so gratified that ACTEC is focusing on this topic. But let me start with a couple of facts to provide some context that likely will not be surprising.

Some of the basic facts are that over 55 million adults worldwide have dementia, and approximately 6.5 million in the US. We all know that dementia becomes more prevalent with age and almost 40% of adults over the age of 90 have dementia. With longer lifespans, about a third of seniors currently die with Alzheimer’s or another form of dementia. We’ve seen Alzheimer’s deaths increase by almost 150% between 2007 and 2017 and they’re expected to triple between now and 2050.

Only about 0.04% of Americans die with a taxable estate, and yet think about how much time we, as estate planning professionals, spend talking about transfer taxes and how to plan for avoiding them. Meanwhile, as I just said, about a third of Americans are likely to have dementia. And yet so many of us do not spend time as a group thinking about these issues, talking about them, and trying to solve for them.

It’s also important to remember that there are a lot of causes for cognitive impairment, not just dementia. So, it’s important to always be attuned to diminishing or diminished capacity in all of its forms and its various causes that may be temporary or permanent and how we address these aspects in our representation or working with clients, both in planning and administration. Tara?

Tara Anne Pleat: So, in following up on the opening comments here, one of the contentions of major importance is the concept of medical impairment and that we, as lawyers, can maybe see it sometimes, especially if we have had a long-standing working relationship with a client and we recognize that maybe they’re failing or they’re not as quick as they used to be. The point here is that none of us as lawyers, unless we have dual degrees, really have the expertise to diagnose a particular illness obviously or be certain around diminished and diminishing capacity.

One of the main points that I would make here is that it’s really important, when able, to get the opinion of or consult with medical professionals who can properly diagnose or properly identify an illness, injury, or other impairment that is affecting our clients’ abilities to make rational decisions or if that impairment is somehow impacting their decision-making in a way that perhaps isn’t modifying their estate plan per se, but is putting them at risk in one way or another. That will often come up in the context of guardianship proceedings and otherwise. Then, we also have the responsibility to maintain as close to a traditional lawyer-client relationship as possible, even when we are recognizing there’s diminished or diminishing capacity.

Legal and Ethical Considerations in Representing Clients with Diminished Capacity

Professor Mary Radford recently gave a podcast (Professional Responsibility Rules When Dealing With Clients Who Have Diminished Capacity) for ACTEC, focusing on the Model Rules of Professional Conduct, addressing exactly that. How are we ethically obligated to represent individuals with diminished or diminishing capacity?

As estate planners principally and as estate litigators, we’re often looking at how diminished and diminishing capacity is addressed in legal documentation from a planning standpoint, or maybe if there was no planning or that capacity loss was not picked up or adequately addressed in a proactive way.

Kim, thinking about it from that perspective, knowing that as planners, we have to be thinking about the possibility that one-third of our client base is going to suffer from a diminished or diminishing capacity. How do we address that or how would you advise we address that in our estate planning documents?

Planning for Diminished Capacity in Estate Planning Documents

Kim Kamin: Thank you so much. Well, so we all know that the default if we don’t deal with it properly in our documents, is that there is likely to be some version of litigation and/or guardianship proceeding in order to declare those who are suffering from diminished or diminishing capacity and no longer can manage financial affairs, there will need to be a guardian appointed to represent those people. So, the best practice in estate planning is to work with clients in advance who have capacity and anticipate that this could happen in the future.

Drafting Healthcare Powers of Attorney

There are a couple of tools that we want to focus on. We want to focus on drafting powers of attorney for health care and powers of attorney for property that do anticipate future incapacity. The first thing that we need to focus on is making sure that our clients are naming an agent, and this is an individual who can stand in their stead. This is an agent on the powers of attorney for health care for whom HIPAA has been waived so that the agent can have access to their medical records. It is important for the agent to be appointed in a document that is durable and effective immediately rather than having a springing power, in fact, some states don’t allow springing powers anymore. But the last thing in the world our clients need when they are. In fact, incapacitated is for power to say it is only effective after they’ve been declared incapacitated, which means that nobody can step in and act on their behalf in an emergency situation or until such time as they’re declared incapacitated, which could be a long and grueling process depending on whether they have provided for how they can be declared to be incapacitated.

Another thing to keep in mind with these agencies is not to name co-agents, which can be very messy if our client is incapacitated and needs someone to act for them. But it is fine if the client wanted their agent to be consulting with others to recommend that, for example, if one child is acting, that child please consult with the other children and keep them reasonably informed of their actions.

Revocable Living Trust

The second important document is the revocable living trust. The existence of a revocable living trust is often touted as an option to help avoid the need for guardianship because a fully funded revocable living trust can avoid guardianship if all of the assets are in the trust. The successor trustee can step in for our client, and similarly, to avoid probate at death.

With the revocable living trust then, we also want to make sure that is a document that anticipates exactly what is the process for declaring the settlor, the principal, and the client to be incapacitated. And far too often, I see documents that say, oh, a doctor can declare them to be incapacitated. But from a practical perspective, that doesn’t just spontaneously happen, where doctors just declare their patients to be incapacitated for legal purposes.

A best practice would be instead to empower those whom your client trusts, for example, their spouse and a majority of their adult children, or their spouse and their two siblings, but to name a committee of individuals whom they trust who by committee can determine them to be incapacitated and then waive HIPAA so that they can also have a doctor consent to the declaration of incapacity. So that the doctor is involved and can weigh in to make sure that there is, in fact, something medical that’s going on.

That’s a much more practical approach than just naming a doctor and expecting that that’s going to solve the problem. Or God forbid two doctors, I’ve seen that sometimes too, that you know I can be declared disabled by my primary care physician and a physician who has who’s a neuro-psych specialist or who has some specialization in the primary incapacitating condition. And yet, what if the client at that point then refuses to go sit through the tests and have the brain scans and have that specialist declare them incapacitated, which is very, very common that the clients who know that they’re starting to slip do not want to sit through that grueling exam.

Anticipating Capacity in Irrevocable Trust

The next thing is to be anticipating capacity in irrevocable trusts. Drafting there can be done in a couple of ways, which also can be adopted, by the way, in the Revocable Living Trust. One is to limit the ages of trustees. I’ve seen some documents that actually require a trustee to resign upon reaching a certain age unless a doctor certifies that they, in fact, still do have full capacity to manage financial affairs.

Another can be to encourage our clients ahead of time to always anticipate having a co-trustee once they reach a certain age. Oftentimes, that age is 80, occasionally 82 or 85. But that can be a very gentle way to avoid needing to declare them incapacitated at all because the co-trustee can just help them with whatever needs to be done.

Another alternative is to allow a beneficiary to challenge the capacity of the fiduciary. And then that fiduciary needs to comply with a neuro-psych test or have some type of medical confirmation that, in fact, they do still have full capacity to thoughtfully attend to the financial matters and other administrative matters of the trust. Or that if they fail to do so within a certain timeframe, they are automatically removed, and the successor trustee would step in.

And then finally, anticipating in these trusts, building in that if a beneficiary becomes incapacitated, the trust can convert to a Special Needs Trust, by a trust protector or somebody else, and that the trustee in their discretion can also take steps to protect a beneficiary that they believe is incapacitated, such as paying expenses directly rather than giving cash to that beneficiary.

So those would be the top tips for drafting in anticipation of incapacity, both of the client who is the settlor of the trust, the various fiduciaries of the various trusts, as well as the beneficiaries of the trusts. Tara, want to bring us home as we wrap up here?

Considerations for Special or Supplemental Needs Trusts in Estate Planning

Tara Anne Pleat: Yeah, I think the last comment I would make is following up on Kim’s final point relative to special or supplemental needs trusts, as there really is an art in drafting those documents and often they are an afterthought. And it’s really important to contemplate that there will be that need. In doing so, you’re careful in drafting those provisions just as you would be careful in drafting an estate tax minimization provision or other provision in your document. As I say, those provisions are often written in as an afterthought and often in a way that makes it very difficult for the fiduciary who takes on the role of trustee to accomplish their job.

Again, on that point specifically, ACTEC has done a podcast, which I participated in along with a colleague (Interacting With Clients and Beneficiaries When Determining Incapacity), talking about exactly that, about how we draft for beneficiaries we know are incapacitated and how we draft in a way that permits a complete and proper administration of those trusts. So rather than spend more time here talking about it, I would commend that podcast and the others focused on diminished and diminishing capacity to folks who are listening to this one. Thanks so much, Kim and thanks for listening.

Toni Ann Kruse: Thank you, Tara and Kim, for this excellent discussion and for wrapping up this series on diminished capacity.

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