Where Capacity and Contract collide in Estate Planning.
Often portrayed in movies by families fighting over a large inheritance left by the rich benefactor who may, or may not, have lost their marbles (insert plot twist), capacity can be a major issue when it comes to individuals making last minute changes to their estate plan or making changes after being diagnosed with some type of mental illness such as dementia or Alzheimer’s. If a person lacks the proper mental capacity and creates a document, it will be invalidated under California Law. The key to determining whether or not the estate plan is valid lies in a determination as to whether or not the testator (the rich benefactor) had the capacity to make the changes when they were made. In California, the rules which determine whether or not an individual has capacity can be confusing. Hopefully the following will help clear that up.
First and foremost, it is important to note that there are more than one set of rules for determining capacity in California. There is “Contractual Capacity” and there is “Testamentary Capacity”. Generally, under California law, there is a presumption that all persons have capacity and are capable of contracting, except minors, who cannot contract until they reach the age of majority. It is also important to note that a person who has a mental disorder can still have capacity. A diagnosis does not automatically presume incapacity.
Testamentary Capacity is what a person must have in order to create a valid Will. Testamentary Capacity is a lower form of mental capacity and a person may be deemed to have Testamentary Capacity while lacking Contractual Capacity. An individual has Testamentary Capacity if that person is able to:
understand that he or she is creating a Will,
understand the what property they own, and
understand their relation to those people affected by the Will (typically their children or heirs).
Contractual Capacity is required in order to create a valid Trust. Contractual Capacity is a much more difficult standard to reach, requiring a person to understand and appreciate the consequences of their decisions, unlike Testamentary Capacity which may allow for a valid will without a complete understanding and appreciation for the consequences.
A person has Contractual Capacity, and therefore is of sound mind, if they understand the risks, benefits, and possible consequences of their decision. California Probate code sets the standards for determining whether or not a person has Contractual Capacity by listing various areas where an incapacitated individual shows evidence of a deficit, and a correlation between that deficit and the decision or act in question. Some of the more common deficits listed are:
altertness and attention,
ability to process information and remember,
ability to understand and communicate with others,
ability to understand and appreciate quantities,
ability to reason using abstract concepts,
ability to plan, organize, and carry out actions in one’s own rational self-interest
ability to reason logically
It is important to keep these two levels of capacity in mind when creating an estate plan and know that when it comes to individuals who may be showing early signs of memory loss or dementia, time is of the essence to get their estate plan in place. When an individual showing signs of incapacity wishes to create their estate plan, best practice is to have a physician make a determination as to whether or not they have Testamentary or Contractual Capacity. If a physician were to make a determination that an individual has the Capacity to create their Will and Trust, that evidence can go a long way in overcoming an argument from anyone contesting the terms of their Will or Trust after the creator’s death.
If you or a loved one need to create or update their estate plan and capacity may be an issue, we encourage you to reach out to an estate planning attorney as soon as possible. The legal team at Naimish & Lewis are here to assist with your estate planning needs.