It’s a Dog’s Life
Yesterday’s New York Times carried an op-ed piece by Professor Ray D. Madoff of Boston College Law School criticizing the tax policy that provides a charitable deduction, and therefore a government subsidy, for Leona Helmsley’s $8 billion trust for the care of dogs.
Ms. Madoff points out:
" While some choose to contribute to broad public goals, the law does not require it. In recent years, charitable status has been recognized for organizations with purposes as idiosyncratic as promoting excellence in quilting and educating the public about Huey military aircraft."
Leona Helmsley and Trouble
The policy issues are similar to those involved in the discussion of huge endowments, see our prior post on Harvard’s tax exemption for its mega-endowment.
As a tax policy matter, the charitable deduction, for income tax as well as estate and gift tax, is intended to promote giving to charities to relie the burdens of government and to provide a public benefit. As is often the case with tax incentives, taxpayers take the incentive ball and run with it – often to extreme ends. Professor Madoof points out, quite rightly, in my opinion, that it is time to reassess this tax incentive when it results in $ 8 billion in assets being exempted from the estate tax:
"In Mrs. Helmsley’s case, given that her fortune warranted an estate tax rate of 45 percent, her $8 billion donation for dogs is really a gift of $4.4 billion from her and $3.6 billion from you and me.
To put it in perspective, our contribution to Mrs. Helmsley’s cause equals approximately half of what we spend on Head Start, a program that benefits 900,000 children."
Blogging credit goes to Professor Paul Caron Associate Dean of Faculty, Charles Hartsock Professor of Law, University of Cincinnati College of Law. Read his take here. Blogging credit also to Linda L. Beale, Associate Professor at Wayne State University Law School. Click here to read her post.
Eccentricity is Not Incapacity
Capacity to Contract
Eccentricity or lack of prudence is not incapacity. In the words of Diana Romano:
“The lawyer’s task when considering the legal standard of competency is to be able effectively to distinguish foolish, socially deviant, risky, or simply “crazy” choices made competently from comparable choices made incompetently. “
People generally have the freedom to contract. Nevertheless, sometimes the law deems people unable to make decisions in their best interest. Minors, people with a mental disability, those who are in bankruptcy or people who have impaired judgment due to illness, disability, hypnosis, alcohol or drugs do not have capacity to contract.
In order to be bound by a contract, a person must have the legal ability to form a contract in the first place. This legal ability is called the capacity to contract. A person who is unable, due to age or mental impairment, to understand what she is doing when she signs a contract may lack capacity to contract.
If a person has a legal guardian and a court has made a determination that he or she is incapacitated, that person completely lacks the capacity to contract. Any contract signed by a person who has a legally appointed guardian is void. Many courts have held, however, that a person who is under legal guardianship may make a will if the person has testamentary capacity. The legal capacity required to make an enforceable contract is higher than that required to make a will.
A person may have a physical condition or illness which prevents him or her from performing at the levels expected of other persons of comparable age. If such a person cannot care for himself or herself, or acts in ways that are against his or her interests, such a person is entitled to the protection of the state to make sure they are not abused or exploited. Examples of physical conditions that can cause the loss of capacity to make contracts include paralysis, delirium, strokes, Huntington’s disease, Alzheimer’s disease, or dementia. Merely having the condition does not make the person incapacitated. The condition must have sufficiently affected the intellect so that the person cannot comprehend the nature and character of the transaction. If the person cannot comprehend the nature and character of his acts, any contracts or agreements such a person makes are voidable. Any contract may be ratified or disaffirmed by the person when he or she regains full capacity, or it can be ratified or disaffirmed by the person’s agent acting under a power of attorney. If the person’s condition is severe enough, the court may appoint a legal guardian.
Legal capacity is a flexible concept. A diagnosis of Alzheimer’s suggests diminished capacity, but you can not assume that a person is incompetent to contract because of such a diagnosis. Capacity must be viewed in terms of a person’s ability to perform a specific task. A person may be competent for some tasks, but lack capacity for others.
In the Pennsylvania case of Taylor v. Avi, 272 Pa. Super. 291 (1979) 1. 415 A.2d 894plaintiff sought to void a release she had signed after a car accident in which she sustained a head injury which left her with impaired memory, decreased ability to concentrate on such things as reading, and increased irritability. Citing a 1929 will case, Lawrence’s Estate, 286 Pa. 58, 65, 132 A. 786, 789 (1926), the court said that “"[f]ailure of memory does not prove incapacity, unless it is total or so extended as to make incapacity practically certain. A testator may not be able at all times to recollect the names of persons or families of those with whom he has been intimately acquainted . . . and yet his understanding of the ordinary transactions of his life may be sound."
The standard announced by the court in Taylor is that mere weakness of intellect resulting
from sickness or old age is not legal grounds to set aside an executed contract if sufficient intelligence remains to comprehend the nature and character of the transaction, and no evidence of fraud, mutual mistake or undue influence is present.
Some cases are obvious. The family of an Oregon man with Alzheimer’s succeeded in voiding his contracts – he bought 7 cars from the same car dealer in one month.
What about drinking and substance abuse? While a person may consume enough alcohol and/or drugs to reduce or eliminate his or her ability to understand what he or she is doing, such conditions are self-induced. The law does not generally allow the intoxication or drugged state to be raised as an excuse. There are cases where a contract is voidable when an intoxicated party cannot understand the nature and consequences of the transaction and the other party is aware of the intoxication. Compulsive and chronic intoxication and abuse may constitute a mental illness. A sober party who takes advantage of a vulnerable drunk may be guilty of fraud or undue influence.
Pennsylvania Litigation Blog
PA Supreme Court reverses Superior Court AGAIN
Congratulations to Attorney Kendra McGuire on her win in In re: Weidner, 2007 WL 4555334. The PA Supreme Court struck down the Superior Court’s restrictions on agents acting under powers of attorney and limitations on power of attorney documents. See Kendra’s commentary and analysis by clicking here. In her words:
"Attempts to interpret power of attorney documents in such limited ways have been litigated repeatedly with the Superior Court applying very limited interpretations of documents and the Supreme Court confirming time and time again that power of attorney documents must be interpreted broadly. Kudos to the Supreme Court for grasping the implications of this issue, as it effects all of those, and there are many, who act under these power of attorney documents."
The attorney-in-fact in this case changed the beneficiary on the principal’s life insurance policy. The clear holding of the Supreme Court is that the power of attorney document expressly incorporated the Powers of Attorney statute and the general language shows the principal’s intent to empower the agent to do any or all of the things permitted by the statute, which includes engaging in insurance transactions. Said the Court: "[W]e hold the power of attorney at issue was sufficient to empower [the agent] to change the beneficiary of the life insurance policy." The case was remanded for consideration of two other issues:
- Should the trial court have considered only whether the power of attorney
authorized the attorney-in-fact to change beneficiaries under insurance
policies, and declined to consider the principal’s expressed intent regarding
the particular beneficiary designation under the life insurance policy at
issue, or whether a breach of fiduciary duty by the attorney-in-fact would
void the change of beneficiary by the attorney-in-fact, even if the power of
attorney authorized the type of transaction generally? - Do the pleadings establish that the principal intended to authorize the
attorney-in-fact to change the principal’s named beneficiary during the
principal’s lifetime without any notice of the principal?
Do you think an agent can change the principal’s beneficiaries?
Documenting Testamentary Capacity
This excellent article published in The American Journal of Psychiatry (164:722-727, May 2007) gives advice on how to document your client’s capacity. Check it out:
Assessment of Testamentary Capacity and Vulnerability to Undue Influence by Kenneth I. Shulman, M.D., F.R.C.P.C., Carole A. Cohen, M.D., F.R.C.P.C., Felice C. Kirsh, LL.B., Ian M. Hull, B.A., LL.B., and Pamela R. Champine, J.D., LL.M.
The authors state:
"We can expect challenges to testamentary capacity to increase during the coming decades as the number of older adults increases. The increasing complexity of modern families, where asset disposition is sensitive and complicated, may lead to feelings of rejection and injustice and result in more challenges. Finally, the high prevalence of cognitive impairment and dementia in older adults creates a fertile environment for challenges to wills. It therefore behooves psychiatrists and other experts to be aware of the legal, medical, and psychiatric issues that underlie the assessment of testamentary capacity and the role of undue influence—two concepts that are inextricably linked and often combined in legal challenges to wills. "
* * * * *
"The assessment of testamentary capacity and its interrelationship with vulnerability to undue influence bring together the medical and legal domains. The psychiatric and medical experts’ role is primarily to help lawyers and the courts make the best determination of testamentary capacity and to assess the role of undue influence. As the number of older people increases in the coming years, clinicians will likely be involved in these determinations with increasing frequency. Research in this area is needed, and it should involve a collaboration of the medical and legal domains to provide clearer guidelines for the assessment of these complex issues in individual cases (26). Increased awareness within the legal profession of the importance of establishing testamentary capacity at the time of the execution of a will may lead to a greater demand for contemporaneous assessments and possibly avoid a court challenge at the time the will is brought for probate. Proposals to develop "lifetime capacity assessments" for this purpose merit exploration."
You can download a pdf copy of the article for free. Click here.
Capacity to Make Will
Growing Old and Issues of Diminished Capacity
The law assumes that adult individuals have mental capacity, that is, they are capable of making rational decisions on their own behalf. Note we say they are “capable” of making rational decisions. The law doesn’t expect or require that they actually make rational decisions. Competent individuals of all ages, old and young, have the right to make foolish, eccentric or idiosyncratic decisions. For better or worse, all of us are free to make bad decisions.
People Vary
A persons’s capacity may change from day to day (or even during the day), depending on the course of the illness, fatigue and the effects of medication. Some folks have good days and bad days. Some are more alert in the morning; some have their best time in the afternoon. Legal competency is not something that a person either has or doesn’t have –it can be quite variable.
Standards Vary
Whether or not a person is legally competent depends on the purpose for which the capacity is being determined. The law provides a different standard of competency for 1) making contracts, 2) making wills, 3) having a guardian appointed, 4) and giving informed consent to medical treatment.
Whether or not a person is competent is a legal determination, not a medical one. Medical testimony is important, and is always sought by a court in making the determination of capacity. Since the law has many different defined standards depending on the action being taken, the determination of whether or not a person is competent to do a certain thing is always a legal decision.
Lowest Standard
What surprises most people is that the capacity to make a will, called testamentary capacity, is the lowest level of capacity in the law. All that is required is that the person making the will (1) understand in a general away, the nature of his property, (2) knows who are the “natural objects of his bounty,” that is, the persons who would normally be his heirs, and (3) must be able to comprehend that he or she is making a will.
A person who has had a stroke, or is diagnosed with Alzheimer’s disease, may still have sufficient capacity to make a will even though there is some impairment of speech, some impairment of thought processes, and/or some physical impairment. The fact that a client does not know the year or the name of the President does not necessarily mean that she can not make a will. Since signing a will does not require a great deal of capacity, the fact that the next day the person does not remember the signing of a will does not invalidate the will if he had the minimum required capacity the day before when he signed it.
Is it time to take away the car keys?
Growing Old and Issues of Diminished Capacity
“Aging seems to be the only available way to live a long life.”
– Daniel Francois Esprit Auber
Maggie Kuhn started the Gray Panthers in 1970 as a response to her forced retirement at age 65. The mission of the Gray Panthers was to speak out against age discrimination, the Viet Nam war, and other political oppressions. There is no doubt that stereotyping due to age exists in contemporary society. The Gray Panthers call this kind of discrimination “ageism.” To be told "you’re too old" is as disheartening as to be told "you’re too young"; both statements make you a stereotype when in fact you are an individual.
No bright line test
Obviously, mere chronological age does not give an answer to the question of whether or not a person is mentally or physically impaired. Nor does a medical diagnosis give the complete answer on the issue of the ability to be in control of one’s own life. When and to what extent a persons capacity to make decisions is diminished is a very difficult topic for lawyers, care-givers, and families.
The right to make bad decisions
How many of us know an older adult insisting on living alone at home when friends, family, and advisors think it’s a bad idea? Is the person incapable of making decisions? Or is it simply a decision that others do not agree with. Concern in a situation like this stems from the fear that the person will be hurt – they will leave the stove on and burn the house down, they will fall down and not be able to get up or summon help, they won’t eat properly and can’t get around to doctor’s appointments and the grocery store. Is a person who chooses to live this way incompetent? Or merely independent?
There is a long-standing American tradition of individualism – of each person being free to make his or her own choices and decisions and choosing his or her way of life. While fostering independence and self esteem, individualism also tends to promote self-centeredness at the expense of family and community. Individualism can mean being free to make bad choices.
Different competency standards
The issues surrounding diminished capacity run from whether or not an older adult should contihnue to drive, to whether he or she can live alone at home, wheter he or she can make a will, make gifts, and otherwise control finances, to whether or not a court-appointed guardian must be appointed. Often, a family’s first encounter with this question is whether or not the older adult should continue driving a car.
Help! I need research.
Winning your estate planning malpractice case depends not only on your skills as a litigator but also on a thorough understanding of the substantive law of the case. You need to know what is at the "top of mind" of lawyers who practice in the area. Combine that with the explosion of information available on the Internet and you have a daunting prospect.
Jason Haven’s award-winning site has a wealth of information and resources for legal research on estate planning topics.
Check it out: Jason E. Havens’ Legal Research for Estate Planners (LREP)