Capacity to Do What?
”Mental capacity required to end one’s marriage is similar to the mental capacity required to begin the marriage; the threshold is low”. In re Marriage of Greenway (2013) 217 Cal App 4th 628
Mom is not doing well and children are afraid that Step-Dad will take over Mom’s estate. Mom has already made provisions for Step-Dad and the children don’t like it. The children are the successor trustees under the father’s irrevocable trust. The trust says that Mom will be considered disabled if two doctors write an opinion that Mom cannot manage her financial affairs. The trust also says that so long as Mom can remove and appoint trustees and that she has the right to amend the trust regarding her property; but it does not say anything about the mental capacity required to do any of that. The children are talking to two doctors about getting an opinion that Mom cannot manage her financial affairs.
In the real world there are complex matters that require strong capacity and there are simple matters that require less capacity to make the appropriate decisions. One of the major failings of trusts is that they seem to treat all situations with the same standard of capacity, i.e. you either can or cannot manage your financial affairs.
At outset the financial affair standard seems reasonable because after all isn’t a trust about managing and distributing property? Maybe so, until Mom finds out that the children were successful in obtaining the doctors opinion and she no longer controls her property. OR the children find out that one week before Mom passed away she amended her trust to leave her entire estate to her friend (maybe they deserved it).
Here are three gradients of capacity to consider:
- Act as Trustee – if you can’t manage your financial affairs then yes, you shouldn’t be a Trustee because that is what a Trustee does.
- Power to Appoint & Remove Trustees – even if you can’t manage your financial affairs you may still have the capacity to say who can. So why would you have the same standard of capacity for both acting as Trustee and appointing or removing a Trustee? Mom might not be able to serve as Trustee, but even with a lower mental capacity (but not incompetent), she could remove her rebellious children as Trustee and appoint different Trustees thwarting their effort to take over the trust.
- Amending or Revoking a Trust – California law has a capacity sliding scale depending upon the complexity of a trust amendment. Some amendments are extremely complex and others are pretty simple. Simple amendments require only the capacity to execute a will. Other complex amendments require greater capacity. So why would you have the same standard of capacity for signing a simple amendment as acting as Trustee? There may be complex emotions involved but changing trust distributions from say 50/50 to 60/40 is a simple amendment.
I have noticed in two recent cases that the trust became irrevocable when 2 doctors signed a statement that Mom was unable to manage her financial affairs. This standard is a choice not a requirement; and so is allowing amendments after there has been a determination that Mom cannot manage her financial affairs. All of these decisions are subject to the unpredictability of future human affairs.
- Amending or Revoking a Will – In a nutshell the capacity to execute a will requires: 1) that you know who your family is, 2) that you understand generally the nature and extent of your property, and 3) that you understand how the document you are going to sign changes the disposition of your estate, and 4) you are not delusional or hallucinating in a way that significantly impairs the decision to change the will.
Even if it’s impossible to predict every future situation we know one thing. Mom and Dad worked hard, took risks and made sacrifices to build the estate. So doesn’t it make sense that the trust is slanted in favor of Mom and Dad?
IRA Charitable Rollover Legislation is Permanent for 2016 and beyond!
On December 18, 2015, President Obama signed into law the Protecting Americans from Tax Hikes Act of 2015. Known as the IRA charitable rollover, this law has been reinstated for all of 2015 and will remain in effect for 2016 and beyond.
If you are 70 1/2 or older, you are once again eligible to transfer any amount up to $100,000 from your IRA directly to a qualified charity.
Act now to take advantage of this great opportunity. An IRA charitable rollover gift can satisfy all or part of your IRA distribution requirement.
Here’s How it Works:
You must be 70 1/2 or older, on the day the gift is made.
- You must transfer any amount up to $100,000 directly from your IRA to one or more qualified charities. This opportunity only applies to IRAs and not to other types of retirement plans.
- The transfer will not generate taxable income or a tax deduction so you can still benefit, even if you do not itemize your tax deductions.
- No goods or services can be received by the donor in return for the rollover gift to qualify for tax-free treatment.
A Trust is Not Totally Private
How Trust Expenses and Taxes are Paid
How to Stiff Your Kids (Unintentionally)
Jack and Jill were in a second marriage. Each has 2 children from a previous marriage. They don’t have any joint children.
Trusts are not a panacea. They take thought and forward thinking. Joint trusts are typical in community property states such as California. Many joint trusts provide for an equal distribution of assets even when there are children from different marriages. When one spouse dies, many joint trusts divide up into revocable and irrevocable trusts.
Suppose Mary & Joe have a living trust. Joe dies. Mary’s property goes into a revocable trust and she can do whatever she wants. Joe’s property goes into Joe’s irrevocable trust which says that his property will be divided equally among his and Mary’s children.
Then Mary decides that she is going to change her revocable trust to leave it all to her kids. The result is that Mary’s kids will get all of Mary’s property and ½ of Joe’s property; while Joe’s kids get ½ of Joe’s property and none of Mary’s property.