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Unformatted text preview: Planning for Incapacity
Incapacity: Property Management
In most states, conservatorship is the default plan for managing the property of an incapacitated
person who does not provide otherwise. A conservator typically has broad powers to manage the
person’s property similar to those of a trustee, as under UPC § 5-425, and is typically subject to
fiduciary duties of loyalty and care comparable to those of a trustee, as under UPC §§ 5-418, 5423.
In states that use the older guardianship system, the powers of the guardian are more limited and
judicial involvement is more substantial.
Conservatorship
Under UPC § 5-401, a court may appoint a conservator if it finds by clear and convincing
evidence that the person for whose benefit the conservator is sough is unable to manage property
and business affairs because of an impairment in the ability to receive and evaluate information
or make decisions and by a preponderance of the evidence that the person has property that will
be wasted or dissipated unless management is provided or money is needed for the support, care,
education, health, and welfare of the person. Thus, a conservator can be appointed against the
wishes of the person for whom the conservator acts.
Under UPC § 5-413, priority for appointment as conservator is typically given to someone
chosen in advance by the person, an agent under a durable power of attorney, or the person’s
spouse, adult child, or parent, in that order.
Because imposition of a conservatorship is a deprivation of liberty that requires due process,
even moderate conservatorship laws such as UPC § 5-406 provide for an elaborate court
procedure to protect the alleged incompetent. Avoiding a conservatorship by advance estate
planning is in effect a waiver of that process.
Revocable Trust
For example, a funded revocable trust may be used likewise to avoid a conservatorship and to
provide continuity in the event of the settlor’s incapacity. Even if the settlor had been the sole
trustee, upon incapacity a successor trustee can take over without court involvement. The
successor trustee can act with respect to trust property immediately and without judicial
involvement.
For a revocable trust to function as a substitute for a conservatorship, it needs a clause setting out
a standard for when the settler has become incapacitated, especially if the settlor has also been
acting as trustee, indicating when the settlor can be replaced with a successor trustee, (often the
solution is to designate the settlor’s physician and one other named person to evaluate capacity),
and directing use of the trust property during incapacity. One issue with using a revocable trust as a substitute for a conservatorship is who can enforce
the terms of the trust during the settler’s incapacity. The trending rule is that the duties of the
trustee are owed exclusively to the settlor while the trust is revocable. The thrust of the note on
p. 501 in the casebook is that Prof. Sitkoff thinks this is wrong, as it might require the
appointment of a conservator to look out for the settlor’s interests, unless the settlor has an agent
with durable power of attorney.
Durable Power of Attorney
A power of attorney creates an agency relationship in which an agent is given a written
authorization to act on behalf of a principal. An agent under a power of attorney, traditionally
called an attorney-in-fact, can be granted the power to do almost anything for a principal. A
written instrument setting forth the terms of the agent’s authority provides evidence of that
authority, which encourages third parties to deal with the agent as a representative of the
principal. Because at common law an agent’s authority terminates on the principal’s incapacity,
an ordinary power of attorney is of limited use in incapacity planning.
A durable power of attorney, on the other hand, remains effective during the incapacity of the
principal and until the principal dies. Providing a simple way to avoid guardianship or
conservatorship by allowing an agent to manage a principal’s assets when necessity or incapacity
requires its, a durable power of attorney can be drafted to be effective immediately upon signing
or only upon the principal’s incapacity, as under UPC § 5B-109.
In the absence of a statute, a power of attorney is governed by the common law of agency, which
imposes fiduciary duties of loyalty and care on an agent and supplies default terms for the
agency relationship. Every state has enacted a statute specifically authorizing a durable power of
attorney and governing certain elements of the agency relationship.
The scope of the agency relationship can be made to include all property owned by the principal,
including property acquired after execution of the power, allowing a person “to retain full legal
and equitable ownership of his assets while delegating to the agent a defined scope of authority
to act in the principal’s stead.” In this respect, a durable power of attorney is more flexible than a
trust that applies only to property placed in the trust. However, this flexibility also creates risk
because the potential for abuse of that power is very real, with the principal incompetent and
unable to sue.
UPC § 5B-116 and statutes in some states give standing to sue an agent to a principal’s spouse,
parent, descendant, presumptive death beneficiary, or other person interested in the principal’s
welfare.
In re Estate of Kurrelmeyer
In 1996, Louis Kurrelmeyer executed two powers of attorney naming his wife, Martina, and
daughter, Nancy, as attorneys in fact. Four years later, he became incompetent. In 2000, Martina
executed an inter vivos trust, the Louis H. Kurrelmeyer Living Trust, on his behalf, naming herself and Nancy as co-trustees. Martina then transferred certain real estate, the Clearwater
property, to the trust. Louis died testate the following year. Under a 1980 will, Martina would
have gotten a life estate in the Clearwater property with remainder to Louis’s surviving children.
As a life tenant, Martina would have been responsible for taxes and upkeep. However, under the
2000 trust, Martina is granted the right to occupy the property with the trust paying expenses.
She was also authorized to direct the trustees to sell the property and either add the proceeds to
the trust principal or put them toward the purchase of a different home for her use and
enjoyment. Martina was also entitled to all income from the trust and to so much of the principal
as the trustees deemed necessary and proper for her support. On her death, the principal would
be held in further trust for Louis’s surviving children, or descendants of any predeceasing
children, until age 25. The 2000 trust also required that, as long as Martina was co-trustee, there
had to be another trustee and they could only act by mutual agreement.
Louis’s children objected to the exclusion of the Clearwater property from the probate inventory
prepared by Martina as executor under the 1980 will. They argue it should have passed under
the will. The children’s argued that (1) the power of attorney did not and (2) could not authorize
Martina to change Louis’s estate plan by creating an inter vivos revocable trust, and (3) that
Martina’s exercise of that power constituted self-dealing and a breach of the duty of loyalty.
The lower court ruled in favor of the children on the first argument, but on appeal, the Vermont
Supreme Court reversed. Three issues on appeal followed from the children’s arguments: (1)
Did the terms of the power of attorney instrument give Martina the power to create a trust? (2) If
so, is the power to create a trust legally delegable to an agent? and (3) If so, under the
circumstances here, did Martina’s exercise of the power to make a trust breach her duty of
loyalty?
The powers of a trustee are separate from the duties of a trustee—a trustee might still violate a
duty while exercising a power that the trustee does have.
Issue #1: Did the terms of the instrument give Martina the power to create and fund a trust
for Louis?
Older cases strictly construed powers of attorney in order to protect the principal—that is,
requiring that the principal clearly delegate the power. This approach supports the contention
that a principal can’t be harmed by abuse of power if the agent doesn’t have a power—but that
means that the principal also can’t benefit from the agent’s exercise of the power. Here, the court
applies a more modern mode of analysis, examines the terms and context of the instrument, and
finds that “the express language of the power of attorney authorized the attorney-in-fact to create
a trust.”
The court concluded that the instrument gave the agent power to “do and perform all and every
act and thing whatsoever necessary to be done in the premises, as fully to all intents and purposes
as I might or could do if personally present, with full power of substitution and revocation,
hereby ratifying and confirming all that my said attorney may do pursuant to this power.” And to “execute and deliver any assignments, stock powers, deeds or trust instruments,” and that
the agent may “add all of my assets deemed appropriate by my said attorney to any trust of
which I am the Donor.”
(But is it really established that Louis contemplated that combining these powers would allow
Martina to, in effect, pull property out of his probate estate and change his estate plan? Note
that the gift-giving clause specifically excludes the agent.)
Ultimately, the powers given are broad and it probably makes sense to defer to fiduciary duties to
protect Louis from the actions of a bad actor.
Issue #2: Was Martina’s exercise of this power consistent with her fiduciary duties of loyalty
and care? Is there a public policy limitation on the scope of permissible delegation of this
power?
The majority view is that the power to make a revocable trust may be delegated (But isn’t this a
will substitute? We wouldn’t delegate the power to make a will! Comment to the Restatement
Third of Trusts on this point explains that durable powers of attorney are meant to preserve for
the incompetent the flexibility of financial management that a surrogate can offer—and estate
planning is an important piece of financial management.) On this basis, the court in Kurrelmeyer
distinguished between a power to make a will and a power to make and fund a revocable trust. In
this way, the court seeks to preserve the amount of good that an agent can do with this power and
at the same time rely on the fiduciary duty to protect the principal from an agent’s abuse of that
power.
Issue #3: Did Martina breach her fiduciary duty by self-dealing?
Martina did, in fact, self-deal, thereby triggering a review of her duty of loyalty. She argued that
the trust was supported by prudent tax and estate planning objectives. However, the record
before the court on appeal is not complete because the trial court decided on the first issue—so
there isn’t enough evidence to answer this question on appeal. The court remanded the case to
the superior court to “consider whether there was a breach of fiduciary duty on the part of
Martina as agent in light of all the relevant circumstances at the time the trust was executed.”
The question for the lower court to decide is whether she acted in good faith to advance Louis’s
best interests consistent with his expectations so far as they can be known. On remand, it turns
out that Louis, while still competent, had hired a lawyer, and in consultation with that lawyer,
drew up an estate plan that called for the Clearwater property to be put in a trust for Martina’s
benefit, with trustees having power to sell it and replace it, just like the trust created by Martina
in 2000. Louis lost competence just before he managed to execute the paperwork. So, on those
facts, Martina was merely completing the estate planning he had begun and therefore the court
felt that she was acting in a manner consistent with his expectations and in his best interest.
This case illustrates how Vermont worked through this issue in 2006, but, as laid out in note 2 on
p. 510, the majority view, including the approach taken in both UTC § 602 and UPC § 5B201(a)(1), is that an agent can create, modify, or revoke a trust only if the power to do so is specifically granted by the power-of-attorney instrument, a requirement that would not have been
met by the instrument in Kurrelmeyer.
In some states and under UPC § 5-411(a), a court-appointed guardian or conservator has the
power not only to make, amend, or revoke a trust for the protected person, but also to make,
amend, or revoke the person’s will. If the guardian or conservator’s action is challenged, under
UPC § 5-411(c), the court will review the action under a substituted judgment standard that, in
accordance with the principle of freedom of disposition, considers whether the protected person
would likely have undertaken the same action.
Whether an agent may make gifts from the principal’s property raises similar difficulties. In most
states an agent cannot make a substantial gift without specific authorization. In many states and
under UPC § 5B-217, the grant of such a power is subject to enhanced formality requirements.
For example, the statutory form provided in UPC § 5B-301 requires the principal to write her
initials next to the provision giving an agent the power to make gifts.
Health Care Decisions
Competent adults have a Constitutional right to make health care decisions for themselves. This
right may be exercised via an “advance directive” document. In case of incompetent patients on
life support, state law may require clear and convincing evidence” of their wishes prior to
losing competency.
When there is no “living will,” health care decisions for an incompetent patient fall to a patient’s
spouse or next of kin, subject to a “substituted judgment” standard.
The case cited for the constitutional right to make health care decisions for ourselves, Cruzan v.
Dir. Of Missouri Dept. of Health (1990), was actually a “right to die” case, the first to reach the
U.S. Supreme Court, brought by the parents of a young woman who had been rendered comatose
in a car accident. Because there was no hope for her return to cognitive functioning, they fought
for the right to have her feeding tube removed, but Missouri had a law requiring clear and
convincing evidence of the patient’s wishes for removal of life support. The Cruzan case found
the law to be constitutional, so Ms. Cruzan’s parents could not ask for the removal of the tube
without first showing clear and convincing evidence that this is what their daughter would have
wanted. Eventually they were able to do this, but the practical effect of the ruling was to
emphasize the value and importance of documents known as “living wills” or “health care
directives” that can establish the wishes of a person while they are still competent to express
those wishes.
When there is no living will, typical state statutes define a hierarchy of people to make the
decision on behalf of the incompetent patient, starting with the spouse or next of kin, subject to a
“substituted judgement” standard, in which the agent is intended to ascertain what the patient has
chosen or would have chosen under the circumstances. All states now also have statutes providing for the use of living wills or documents providing
advance directives for health care—you need to check the applicable jurisdiction because some
states require particular forms or formalities such as witnesses.
Advanced Directives
Instructional Directives – Specifies treatment in end-of-life situation or in the event of
incompetence.
Proxy Directives – Designates an agent to make health care decisions for the patient.
Hybrid or Combined Directives – Incorporates both of the first two approaches by directing
treatment preferences and designating an agent to make substituted decisions.
In the absence of an advance directive, responsibility for an incompetent patient’s health care
decision usually falls to the patient’s spouse or next of kin. The Uniform Health-Care Decisions
Act provides that, in the absence of advance directive, decisions are to be made by surrogates in
the following order: (1) spouse, unless legally separated; (2) adult child: (3) parent; (4) adult
sibling (if there is more than one person in a class, the majority controls).
When making health care decisions for an incompetent patient, an agent is held to a substituted
judgment standard of what the patient has chosen or would have chosen in that situation. Protection of the Surviving Spouse and Children
In all but one of the separate property states, a surviving spouse is entitled to an elective or
forced share, typically one-third, of the decedent spouse’s estate. In the community property
states, each spouse owns all earnings during marriage in equal, undivided shares. There is no
elective share because the surviving spouse already owns half of the couple’s community
property. Both separate property and community property states protect a pretermitted surviving
spouse from accidental disinheritance by way of a premarital will that the decedent spouse
neglected to update after the marriage.
Elective (or “forced”) share: typically, a surviving spouse may elect to take one-third of a
decedent spouse’s estate in separate property states.
Protection for Pretermitted Spouses – protected from being accidentally disinherited by a
premarital will that leaves out the later spouse and which decedent never got around to changing
before death.
Protection for Pretermitted Children – protection from being accidentally disinherited by a
will executed before their birth that leaves the children out unintentionally
In contrast to a surviving spouse, in the American legal tradition a surviving child has no rights
to a mandatory share of a decedent parent’s estate. A property owner may disinherit her blood
relatives, including her children, if that is her desire.
However, as with a pretermitted spouse, American law does protect a child who is accidentally
omitted from a will—such as a child born after the execution of a will that does not contemplate
subsequent children—but this is a default rule that may be overcome by express language in the
will.
Marital Property Systems
Separate Property: (1) No automatic sharing of earnings; whatever one spouse earns or acquires
is hers or her own property. (2) Protection against disinheritance provided through an elective
share, typically one-third of a spouse’s estate.
Community Property: (1) Property earned or acquired during marriage is community property.
(2) No elective share, because each spouse owns all earnings during marriage in equal, undivided
shares.
Community Property and Separate Property States 2012 Most states are separate property states and in all but one of those states, a surviving spouse is
entitled to an elective share (the exception is Georgia). South Dakota now offers a community
property option as well.
Community Property and Separate Property States 2016 Marital Property Systems Partnership Theory – (1) Elective share justified because surviving spouse contributed to the
decedent’s wealth. (2) Surviving spouse should be entitled to a one-half share of decedent’s
property acquired during marriage.
Support Obligation: (1) Older view that marriage entails a support obligation. (2) Support
theory implies a smaller percentage applied to all of the decedent’s property, a minimum amount,
and accounting for other resources available for support of survivor.
Variation Across States
What happens if the survivor rejects a devise of a life estate?
Majority: Not charged against the survivor’s elective share.
Minority: Survivor’s share charged for ½ value of the property.
What if the survivor dies before exercising his right?
Majority: Right must be exercised during the survivor’s life
What if the survivor is incompetent?
Majority: Representative may elect share, ...
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