Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

Sunday, April 28, 2013

Article on Estate Planning Tools That Protect People With Declining Capacity

Jalayne AriasJalayne J. Arias (JD, MA, Fellow, Cleveland Fellowship in Advance Bioethics, Cleveland Clinic) recently published an article entitled, A Time To Step In Legal Mechanism For Protecting Those With Declining Capacity, 39 Am. J.L. & Med. 134 (2013). Provided below is the introduction to their article:

Ms. Jones, a seventy-five-year-old widow, lives independently in a home located in a retirement community. Her neighbors watch over her by stopping in from time to time, often bringing groceries and cooking meals. A neurologist diagnosed Ms. Jones with amnestic mild cognitive impairment three years ago, shortly after her husband passed away. Her physicians believe her impairment is of the Alzheimer’s type and she will likely progress to dementia. She has two daughters and a son. Her daughters live out-of-state and visit regularly around the holidays and for special events. Her son lives thirty-five minutes away and comes to see her once a week. Recently, Ms. Jones began demonstrating apathy towards previously enjoyed hobbies and regularly complains of forgetting parts of books she has read or movies she has seen. During a recent visit, her son inquired about bank notices on the kitchen table. Ms. Jones calmly explained that her account was overdrawn and that it was a “silly mistake.” Her son is concerned that she may no longer have the capacity to manage her own finances. Yet, only Ms. Jones has access to her bank accounts, opened when her husband was alive. This prevents her son from reviewing bank records without her approval, which she refuses to provide. He struggles to determine whether to pursue legal actions. Because she has been able to get by thus far, he is reluctant to take away her freedom through a guardianship before it is necessary.

 An aging society in the United States will place an increased burden on families, probate courts, and others to manage societal and personal challenges. Current estimates approximate that the population over sixty-five years of age will increase from 40 million in 2010 to 72.1 million by 2030. As society ages, the number of elderly with cognitive deficits will also increase. While cognitive decline is commonly associated with normal aging, an additional subset of the population experiences an increased burden of cognitive and functional deficits resulting from neurodegenerative conditions. Age-associated neurodegenerative diseases include Alzheimer’s disease, Parkinson’s disease, and multiple classes of dementia. While similar cognitive decline may be associated with ““normal aging,” those that suffer from neurodegenerative conditions will experience significant impairments that heighten the types and frequency of challenges experienced by the individual and family. Attributes of neurodegenerative conditions, like Alzheimer’s, challenge caregivers and family members to address concerns relevant to the patient’s day-to-day living needs. Ms. Jones may be experiencing a decline in her executive functions and memory. These declines may cause her to forget that she made a specific purchase or cause challenges with balancing a budget. These progressive deficits will challenge her son, as well as her daughters, to address how to effectively help her manage finances and other daily tasks without prematurely restricting her autonomy. Individuals with cognitive deficits are at an increased risk of lacking capacity in one or more contexts (e.g., medical consent, financial management, and living independently). Family members who are unable to assist loved ones with these tasks through informal interventions often look to clinicians and the legal system for guidance.

The guardianship and probate system provides legal protections for those incapable of managing their own person or affairs. A legal determination of incompetency is a prerequisite to a judicial order appointing a guardianship or other protective mechanism. The significance of incompetency determinations challenges probate courts to balance an individual’s autonomy with necessary protective measures. Autonomy, an individual’s right to control her decisions and actions, requires that others respect her decisions or actions. For example, a healthcare provider must respect an individual’s request to refuse treatment. A legal determination of incompetence removes an individual’s legal authority to manage her own affairs and has broad implications for her daily interactions and activities. The right extends to those decisions that are objectively risky or dangerous. Nevertheless, when an individual lacks capacity or a court declares her incompetent, her decision-making authority may be restricted.

The dynamic relationship between competency and capacity are at the cornerstone of a state’s parens patriae right to limit autonomy. Though often used interchangeably, capacity and competency reside in two different contexts. A judicial body, usually a probate court, determines whether a person is legally incompetent. In contrast, clinicians--physicians, psychiatrists, or other experts--determine whether an individual has decision-making capacity. Yet, determinations of incapacity and incompetence result in similar restrictions of an individual’s autonomous decision-making authority. Standards for capacity and competency determinations are interrelated. Judicial decisions and statutory language inform clinical capacity criteria and assessments. Similarly, judicial and legal standards are derived from clinical capacity criteria and clinically based research. Despite the interrelated attributes of competency and capacity, these concepts adhere to different structures. Capacity is a continuum and is context-specific. Conversely, most state laws define competence without providing for an intermediate determination that allows for gradation. Instead, competency is determined largely through a global structure. Under this structure, an individual is declared either competent or incompetent. The complicated dynamic between competence and capacity leaves judges to determine where along the capacity continuum an individual becomes incompetent.

The current legal-medical model for competency determinations fails to accurately reflect the complexities of declining capacity in an aging population. A global structure for competency determinations leaves a critical gap between competent and incompetent. This not only raises concerns about how to classify those that fall between the two, but also highlights the lack of legal protections for those within the gap. Ultimately, it limits protections available to individuals who do not yet meet the threshold for incompetency. This leaves family members and caregivers with more questions than answers: When do I intervene? Who will serve as a guardian if my siblings live out of state? Where will my mother live? Who will manage her finances? Who will make medical decisions? Ultimately, family members, like Ms. Jones’s son, are left with the burden of protecting their loved one from potential risks related to cognitive and functional impairments.

A revised model is needed to provide protections to individuals who do not yet meet the threshold for incompetence but require additional protections for their personal or financial welfare. The cyclical relationship between law and medicine demands convergent approaches to evaluating an individual’s abilities to engage in financial, medical, and other critical decision-making processes. A revised legal model will include additional legal mechanisms that provide protective measures tailored towards individuals’ deficits. This Article provides an unprecedented examination of the legal model for determining competence through a comparison of the medical model for evaluating capacity. While a number of legal scholars have examined the appointment and oversight of guardians, few have critically examined the process by which individuals are declared incompetent. This Article presents a comprehensive overview of competency and clinical capacity determination procedures, legal mechanisms available to protect individuals with declining capacity, and policy recommendations for improving legal protections in light of inefficiencies related to legal competency determinations.

Part II provides an overview of the medical model for determining capacity, providing a basis for assessing the effectiveness of the legal model for competency determinations. Part III critically examines the current legal approach for competency determinations and protective mechanism orders. Through an overview of the current structure, flaws in the current approach are illustrated. Specifically, the current judicial process of declaring incompetency fails to provide a balance between autonomy and needed protections. Finally, Part IV discusses two recommendations to address faults in the current system: (1) judicial determinations of incompetence should adopt a gradient structure that reflects the realities of capacity; and (2) legal protections should be implemented and improved that apply to those who fall in the gap between incompetent and competent, such as limited guardianships. These recommendations seek to create a more effective system that provides needed protections, prevents overly restrictive measures, and provides families and caregivers mechanisms to intervene when necessary.

April 28, 2013 in Articles, Disability Planning - Health Care, Disability Planning - Property Management | Permalink | Comments (0) | TrackBack (0)

Foreign Asset Protection Trust Case is a Hollow Victory

Asset protectionGenerally, the goal of asset protection is to shield assets from creditors while ensuring that the owner can make use of those assets legally. The Foreign Asset Protection Trust (FAPT) may not be the best way to reach that goal. Recently, the Arline Grant case shed some light on this form of asset protection. Arline Grant's husband, Raymond Grant, created two FAPT's before his death. One of those trust's was created to benefit Arline under Raymond's management. Arline had very little to do with the trusts. Raymond's poor management of the couples taxes, led to a $36 million dollar judgment for the United States.The U.S. employed different techniques including trying to hold Arline in contempt to pay the judgment using the trusts located offshore. This attempt was unsuccessful. The court reasoned that the evidence indicated Arline sufficiently showed that she could not send back the funds.

Then in  2011, the U.S. noticed Arline's children had received $221,000 dollars from the trust account. In 2012, the U.S. filed a motion claiming Arline violated the Repatriation order. The judge agreed and ruled in favor of the U.S. Additionally, the U.S. was also granted a permanent injunction against Arline and her children from being paid any funds from the trusts. Moreover, if they did receive funds they would be compelled to turn them over to the U.S. As a result, the offshore assets are protected, but Arline cannot lawfully access them, which is the general goal of asset protection.

See Jay AdkissonThe One Foreign Asset Protection Trust 'Win' Turns Out To Be A Dud, Forbes, Apr. 25, 2013.

April 28, 2013 in Current Events, New Cases, Trusts | Permalink | Comments (0) | TrackBack (0)

Saturday, April 27, 2013

Obama’s Budget Proposal Likely to Have Negative Effect on Charities


As I have previously discussed, President Obama’s budget proposal could have a huge impact on charitable donations.

For every donation to a nonprofit organization, taxpayers in the highest tax bracket currently receive a 39.6 percent tax deduction.  Obama proposes to cap the tax deduction for donations at 28 percent for all tax brackets.  Along with increased income taxes, capital gains taxes, and Medicare surcharges, this cap on tax deductions could provide an additional disincentive to donate.  Charities also worry about another budget proposal known as the Buffett Rule that would require those with an annual income over $1 million to pay a minimum tax of 30 percent.

This proposal comes during a period of stagnant revenue for the charitable sector.  One study shows “that the top 2.2 percent of taxpayers were responsible for 27 percent of all charitable giving.”  Providing disincentives for the top tax brackets to donate may have a devastating effect on the charitable sector and the needy who benefit from it. 

See Colleen O’Dea, Charities Fear Obama Budget Will Hurt Donations, Private Wealth, Apr. 19, 2013

April 27, 2013 in Current Events, Gift Tax, Income Tax | Permalink | Comments (0) | TrackBack (0)

State Gift and Estate Taxes Are Alive and Well

Gift Tax

Even with the large federal unified credit, a taxpayer might still have to pay state estate taxes following their death. There are still 21 states with a state estate tax. The District of Columbia also imposes a state estate tax. The problem is that most of these do not have a large unified credit like at the federal level that excludes a good amount of income from taxation. For example, in New Jersey the exclusion limit is $675,000, in Rhode Island the limit is $910,725, and in New York the limit is $1 million. In each of these states, the top rate on income exceeding the exclusion is 16%.

remember, all of a person's assets are included in this amount. This could also include life insurance depending on who receives the policy and how the policy is owned. Furthermore, several states impose an inheritance tax, which is different from the estate tax. An inheritance tax is imposed on the beneficiaries after the distribution of property, with the exception of spouses is most states and children and relatives in some. The two states that impose an inheritance tax on Maryland and New Jersey. There are ways to reduce the amount that a person will pay in estate taxes. For example, a person could give deathbed gifts which are exactly what they sound. A person could technically give away enough money to decrease their estate to below the threshold amount, but that is not always the best. A better strategy might be to discuss things with an estate planning attorney in the person's state to figure out the best possible strategies. 

See Sandra Block, Retirement: State Estate Taxes Are Alive and Well, The Chicago Tribune, Apr. 16, 2013.

April 27, 2013 in Current Affairs, Estate Tax, Gift Tax | Permalink | Comments (0) | TrackBack (0)

Article on Common-Law Tests of Capacity

WillsThe British Columbia Law Institute (British Columbia, Canada) recently published an article entitled, Consultation Paper on Common-Law Tests of Capacity, (Feb. 22, 2013). Provided below is the abstract from SSRN:

Judge-made tests of mental capacity that determine whether a person meets the cognitive threshold to make a legally valid decision, enter into a transaction, or form a relationship hold sway over some important areas of the law. This consultation paper examines nine common-law tests of capacity, spanning tests that operate in wills-and-estates law, contract law, and family law. The consultation paper contains 31 tentative recommendations for reform. These tentative recommendations include proposals for maintaining the current common-law tests of capacity to make a will and to marry, clarifying the test of capacity to make an inter vivos gift, fine-tuning certain contractual rules that relate to mental capacity, and creating a new procedure allowing an application to court to make, alter, or revoke a will for a person who does not have testamentary capacity.

April 27, 2013 in Articles, Estate Planning - Generally | Permalink | Comments (0) | TrackBack (0)

Friday, April 26, 2013

New Case: Bjork v. O'Meara

Unknown-2Statute of limitations for tortious interference with inheritance rights is the period applicable to claims to recover personal property.  The Illinois Supreme Court had held in Bjork v. O’Meara, that plaintiff’s action for tortious interference with an expectancy was governed not by the six-month statute applicable to will contests but rather the longer period applicable to claims to recover personal property.  The plaintiff was improperly denied discovery by the trial court and the action has nothing to do with the decedent’s will but rather with the alleged interference with a lifetime gift.

See Bjork v. O’Meara, No. 114044, 2013 WL 285679 (Ill. 2013).

Special thanks to William LaPiana (Professor of Law, New York Law School) for bringing this case to my attention.

April 26, 2013 in Estate Planning - Generally, New Cases | Permalink | Comments (0) | TrackBack (0)

Thandi Maqubela Cross-Examined During Her Murder Trial


On April 18th, the cross-examination of Thandi Maqubela ended in the Western Cape Town High Court in South Africa.

Thandi Maqubela has pleaded not guilty to the alleged murder of her husband, acting judge Patrick Maqubela.  She and business associate Vela Mabena allegedly suffocated the judge with plastic cling-wrap in June 2009.

Thandi is also charged with fraud for allegedly forging her husband’s signature on a will naming her the main beneficiary.  She told the court she found the will in a carton months after her husband’s death, but the prosecutor claims the judge died intestate.  The estate is worth around 20 million South African Rands.

See Maqubela’s Cross-examination Ends, Times Live, Apr. 18, 2013.

April 26, 2013 in Current Events, Wills | Permalink | Comments (0) | TrackBack (0)

Qualified Replacement Property


QRP (Qualified Replacement Property) is a way for stockholders to avoid capital gains taxes.  Stockholders who sell their shares to an Employee Stock Ownership Plan (ESOP) can avoid capital gains taxes if they use the proceeds of the sale to buy QRP.  This tax deferral is found in Internal Revenue Code § 1042.

Please click here to see an example of how to avoid the capital gains tax on the sale of QRP.  

See Renaissance, Case Strategy: Avoiding Capital Gain Tax on Sale of QRP, CharitableTrust.com, Apr. 18, 2013.

April 26, 2013 in Estate Planning - Generally | Permalink | Comments (0) | TrackBack (0)

Caramadre Explains His Own Despair In Fraud Case

Estate DisputeAs I have previously discussed, Joseph Caramadre, a Cranston, Rhode Island attorney, has chosen to withdraw his guilty plea in his multi-million-dollar investment scheme fraud case, claiming that the only reason that he pleaded guilty was because his wife was depressed and was under pressure from other attorneys. Caramadre further explained of his own despair in facing his multi-million-dollar investment fraud case. He explained that his attorneys failed to adequately cross-examine witnesses. He also accussed his attorneys of failing to show how the witnesses against Caramadre only changed their perception of him after the FBI approached them with information about his scheme. He claimed that the information that was provided to them was misleading.

See Katie Mulvaney, Cranston Estate Planner Caramadre Tells of Despair Before Guilty Plea In Fraud Case, The Providence Journal, Apr. 24, 2013.

Special thanks to Brian Cohan (Attorney at Law, Law Offices of Brian J. Cohan, P.C.) for bringing this article to my attention.

April 26, 2013 in Current Events, Estate Planning - Generally | Permalink | Comments (0) | TrackBack (0)

Update on CLE on Skills Training for Estate Planners

CLE ImageThe American Bar Association Section of Real Property, Trust and Estate Law and New York Law School will sponsor a CLE entitled, 2013 Skills Training for Estate Planners, from July 17-19, 2013. The deadline to register is June 28, 2013. Provided below is a description of the event:

For over 15 years, the Skills Training for Estate Planners CLE program has provided lawyers with a strong educational experience focused on the fundamentals of estate planning. This year the program has added a NEW Advanced Topics course of study, focused on current topics of interest and importance to experienced estate planning lawyers.

This intensive three-day course is an excellent opportunity for experienced lawyers to further expand their knowledge and skills in estate planning. The outstanding faculty includes experts in all aspects of estate planning, and the topics they will cover include:

Business Planning

  • Family business planning
  • Chapter 14 implications
  • Valuation theory and practice
  • QSSTs versus ESBTs
  • Use and drafting of buy sell agreements
  • Income tax exit strategies

Trust Considerations

  • Use and drafting of split interest trusts
  • Generation skipping transfer tax planning
  • Impact of Section 2036 on drafting and planning
  • Estate freezes, GRATs and sales to intentionally defective grantor trusts
  • Life insurance trust planning
  • The numbers of estate planning

Important Considerations

  • Retirement planning and deferred compensation
  • Planning for residences/vacation homes
  • Planning for the multinational client
  • Income tax considerations for taxable estates
  • Ethical considerations

April 26, 2013 in Conferences & CLE, Estate Planning - Generally | Permalink | Comments (1) | TrackBack (0)