Any trusts and estates attorney who has been in practice for more than a few years is likely to have dealt with an incapacitated trustee. A common problem is that of a superannuated trustee who is no longer capable of either administering a trust of which he is the sole trustee, or meaningfully participating with his co-trustees in administering a trust of which he is one of several trustees. Similarly, a trustee may be incapacitated by alcoholism or drug addiction, or may suffer from a mental disease such as Alzheimer's.
When such situations arise, it is important to know your local law and any remedies that may be available. But in the final analysis, case law shows us that there is no substitute for skillful drafting of trusts in anticipation of a trustee's possible incapacity, whatever the cause may be.
When fixing the standard by which a trustee is to be judged as incapacitated, it's important to say what you mean, and, to mean what you say. In the Michigan case of Card v. Card,1 a married couple, Frank and Cora Card, created a joint revocable trust, naming themselves as the trustees. Under Section 2.3 of the trust agreement, if one of the trustees died or became “legally incapacitated,” the other could act alone and exercise all trust powers freely. Conversely, under Section 4.1, a successor trustee could act alone if a physician provided a certificate stating that the other trustee lacked mental acuity.
Cora executed a document purporting to revoke the trust on the grounds that Frank was incapacitated. She also filed for a protective order for Frank, in effect seeking a legal declaration of Frank's incapacity. However, both Frank and Cora died before the probate court could rule on the petition. Cora's personal representative then filed a petition seeking a determination of whether Cora had successfully revoked the trust. The probate court dismissed the petition, holding that a judicial determination of a trustee's incapacity was required before the other trustee could revoke the trust. The court reasoned that if a physician's certificate was required before a successor trustee could act alone, a higher standard (a judicial determination of incapacity) was required before an original trustee could act alone to revoke the trust.
The appellate court affirmed, reasoning that “legally incapacitated person” is defined by statute in Michigan to mean an individual lacking sufficient understanding or capacity to make or communicate informed decisions concerning himself on account of mental illness, mental deficiency, drug addiction or the like. Because the appointment of a guardian for such a person requires a judicial determination of incapacity, the appellate court concluded that only a court of competent jurisdiction could have declared Frank incapacitated, triggering Cora's right to act alone and revoke the trust. Cora's declaration of incapacity was a nullity. A term defined by statute to require judicial intervention could not be effectuated by any other means.
The lesson Card teaches us is that a carefully drafted trust agreement will seek to avoid recourse to the courts when removing a trustee. Choose language carefully, lest unnecessary time and money be lost to unwanted legal proceedings. Requiring a physician's certificate, as the Cards' trust did in its provision regarding successor trustees, is a typical and practical solution. Whether the standard is one of lacking “mental acuity,” as in Card, or the inability to conduct trust affairs or to handle one's own financial affairs, a simple physician's certificate is far more efficient than court proceedings.
An interesting twist is whether an incapacitated trustee may at some later date resume his role as trustee and exercise the attendant powers. In Round v. Commissioner,2 decedent John Round had in 1934 and 1935 created three trusts for the benefit of his children. In each, he named himself as trustee with a corporate co-trustee, reserving the right in the trustees to withhold or distribute income and principal to his children in accordance with varying standards set forth in the trust instruments. The trusts also provided that upon his death, resignation or incapacity, the corporate trustee would act as sole trustee of the trusts.
In 1956, Round applied to the probate court of Middlesex, Mass., for the appointment of Boston Safe Deposit and Trust Company as conservator of his property on the grounds that he was incapacitated by reason of advanced age. The court granted Round's request and appointed the trust company as his conservator. When Round died on April 4, 1958, he had not tendered his resignation as trustee as he was authorized to do by the terms of the various trust instruments. Round's executors did not include the trust assets on his estate tax return. The IRS concluded that the trust assets ought to be included in Round's gross estate under Internal Revenue Code Sections 2036(a)3 and 2038(a)(2)4 because of the decedent's shared power with the corporate trustee to withhold or to distribute trust income and principal. The IRS determined that the decedent's estate owed more than $160,000.
The executors argued that Round's incapacity, as evidenced by the appointment of a conservator, rendered the corporate trustee the sole trustee of each trust. Consequently, the decedent no longer possessed his former powers, acting with the corporate co-trustee, to distribute trust income or principal. The Tax Court disagreed, holding that the trust principal and income was includible in the decedent's gross estate. The court reasoned that the decedent had never been declared mentally incompetent, did not resign, and had not been removed as trustee. His shared powers over the trust property existed, although he may not have had the present capacity to exercise them.
On appeal, the U.S. Court of Appeals for the First Circuit affirmed the Tax Court.5 Citing Massachusetts law, the appeals court concluded that the decedent could have recovered and resumed his position as co-trustee. Quoting the Supreme Judicial Court of Massachusetts, the federal appeals court said, “A conservatorship ‘raises … no (conclusive) presumption of continued incapacity.’”6 Thus, the decedent had not effectively shed his powers for purposes of the estate tax. Despite its decision in Round, the appeals court noted that its decision in Hurd v. Comm'r7 suggested that a judicial declaration of mental incapacity might be adequate to sever a trustee's powers for purposes of the estate tax laws. The court also noted, though, that the Tax Court had held such a judicial declaration insufficient to terminate a trustee's powers for estate tax purposes.8
Although the jurisprudence surrounding the transfer tax laws has developed considerably since the decisions in Round, cases continue to stand for the proposition that a trustee's capacity in the eyes of the law may not be a fixed state of affairs. This could be extremely problematic if, for example, one of two trustees, required under a trust instrument or local law to act jointly, may or may not be considered competent at any given time to participate in the administration of the trust.
The lesson from Round: it's better to provide a mechanism for the removal of an incapacitated trustee and to adhere to the trust terms in that regard than to rely on language that is susceptible of varying interpretations. Alternatively, an incapacitated trustee may be given the opportunity upon recovering to resume his role as trustee, but then the mechanism for his removal and reappointment, as well as the consequences for a provisional successor trustee, if any, should be carefully spelled out in the trust instrument.
USE WHAT YOU'VE GOT
It sometimes happens that a trust is skillfully drafted to address the prospect of an incapacitated trustee, but the competent trustee or perhaps a settlor or beneficiary of the trust neglects to implement the trust mechanisms for dealing with an incapacitated trustee. Boggess v. Albert9 is such a case. In Boggess, husband John Nosic and his wife, Thelma, established the John and Thelma Nosic Family Trust on Oct. 23, 1996, appointing themselves as trustees. The remainder beneficiaries of the trust were Judith and Danny Boggess, who'd acted as caregivers for John and Thelma from October 1996 through June 2000. Judith was initially named as the sole successor trustee, although Danny was later named as her co-successor trustee.
The trust agreement provided in Article IV that the trust could be amended or revoked by either settlor by means of a signed writing delivered to the trustees. However, upon the incompetency of either settlor, his or her power to alter the trust terminated. The competent spouse, on the other hand, retained the power to amend or revoke the trust. Pursuant to Article V of the trust agreement, either settlor had the power to declare his or her spouse incompetent on account of illness, age or other cause after consulting the settlors' primary care physician, another physician and the settlors' family.
On July 7, 2000, John Nosic, acting alone, amended the trust agreement to name Diana Albert in lieu of the Boggesses as remainder beneficiary and successor trustee. Following the deaths of John and Thelma, the Boggesses sued Diana Albert for a declaratory judgment that the attempted amendment of the trust was ineffectual.
Several weeks before July 7, 2000, Thelma Nosic had been hospitalized and then transferred to two nursing facilities. She returned home for only a few days on July 5, then was hospitalized again for a month. It was apparent from the trial testimony that Thelma was incompetent during the critical period that included July 7. A nurse's aide who cared for Thelma during her short stay at home testified that Thelma was unable to communicate, and that it was difficult to tell whether she understood when others attempted to communicate with her. Thelma's attending physician testified that his hospital discharge diagnosis on July 5, 2000, concluded that Thelma suffered from dementia. Diana Albert testified that Thelma had become incoherent. She also testified that after returning from the lawyers with the amended trust document on July 7, John Nosic presented it to his wife and tried as best he could to explain its significance to her. She testified further that Thelma “started to grab” the document, after which time John placed the amended trust agreement in a cabinet in the Nosics' home.
The trial court concluded that the trust amendment was valid and that it was unnecessary to deliver the amended document to Thelma, stating that the law will not require the commission of a vain act. The Boggesses appealed.
On appeal, the Boggesses argued that the trial court had erred in concluding that it was unnecessary to deliver the amended trust agreement to Thelma. According to the Boggesses, delivery was ineffective because Thelma was not competent to receive delivery. The appellate court disagreed and affirmed the trial court. The court was unable to find that the trial court had in fact concluded that delivery was unnecessary. However, the appellate court reached that very conclusion in considering the language of the trust. Moreover, the court determined that John Nosic's presenting the trust amendment to his wife constituted adequate delivery to her, there being no requirement in the trust agreement that she be competent to understand what was presented. Finally, the court emphasized the incompetency provisions of the trust. The trust, the court noted, did not require a judicial determination of incompetency, but rather permitted a settlor to make that determination after consultation with the “primary physician” and the Nosics' family. (The requirement that a settlor also consult with a second physician seems conveniently to have disappeared in the appellate court's formulation of the trust's requirements.) In any case, the court concluded that there was ample evidence in the record to find that Thelma was incompetent. Thus, no delivery of the amended trust agreement was required.
In Boggess, the courts ultimately vindicated John Nosic's choice of who should receive the trust assets after his and his wife's deaths. But at what cost? The trial and appellate courts relied upon the mechanism set forth in the trust agreement for disqualifying an incapacitated trustee, concluding that the requirements described there had been fulfilled. In fact, however, the terms of the trust agreement had not been satisfied, for John had never declared Thelma incapacitated as the trust required him to do. Surprisingly, the amended trust actually renamed Thelma as co-trustee with John. Had John merely followed the terms of the trust, consulted with two doctors and his family and declared Thelma incompetent, his chosen beneficiary might well have been spared the expense and delay of litigation before receiving the trust assets.
Compare Boggess with Carl H. Christensen Family Trust v. Christensen.10 In this case, Carl H. and Lenna Christensen placed most of their community property into a revocable trust in May 1993, naming themselves as trustees. During their lifetimes, the trust income was payable to them jointly or alone to the survivor of them. After the death of the first settlor to die, the trustee was to administer the trust for the surviving spouse's lifetime. Upon the death of the second settlor, the trust assets were to be distributed in trust or outright to the settlors' descendants. The couple named two of their children, Carl V. Christensen and Danita Wilcox, as successor trustees, authorizing them to act as trustees when both of the trust settlors resigned or ceased to act as trustees.
In 1995, when Carl the father was apparently suffering from Alzheimer's, the settlors' other son, Forrest, approached Lenna about buying the family farm at a considerable discount from its fair market value. As Lenna understood the transaction, the family's dentist was going to provide Forrest with financing. Most of the farm would be deeded to Forrest, the dentist would receive a parcel that he had long sought to purchase for a cabin site, and Carl and Lenna would retain a life estate in the family residence and an adjoining parcel of land. Lenna was pleased that the property would remain in family hands.
By April 1996, the father was gravely afflicted with Alzheimer's. The trust agreement included a nonjudicial mechanism for removing an incapacitated trustee, but this tool was not used. The sale of the farm went forward with the father and Lenna as the selling trustees. Only at the closing did Lenna realize that the family dentist was to acquire a 50 percent interest in the entire farm, save the family residence and adjoining parcel, and that the sale included certain farm equipment as well as land. Despite her reservations, Lenna signed the closing documents, as did her husband. Lenna later testified that she thought that her husband did not fully understand what was happening at the closing.
Only after the closing did Lenna learn from Forrest that she and her husband were responsible for the payment of insurance, maintenance and taxes on the life estate. Weighing her many grievances about the deal that she had reluctantly accepted, Lenna and several of her other children filed suit against Forrest and the family dentist seeking to rescind the conveyance of the family farm. The alleged grounds for the rescission were that the husband had been incapacitated and incapable of consenting to the transaction.
The trial court concluded that the trust instrument contained a latent ambiguity, there being no provision for one settlor to act in the event that the other settlor became incapacitated. Consequently, the court applied the default rule of Idaho Code Section 109-68(b), which provides that: “(b) If [two] [(2)] or more trustees are appointed to perform a trust, and if any of them is unable or refuses to accept the appointment, or, having accepted, ceases to be a trustee, the surviving or remaining trustees shall perform the trust and succeed to all the powers, duties, and discretionary authority given to the trustees jointly.” Applying the statute, the court determined on summary judgment that, even if Carl were incapacitated, Lenna had the power to bind the trust acting alone. Consequently, the conveyance of the farm was valid.
On appeal, the Idaho Supreme Court reversed. The Supreme Court agreed with the trial court that the trust agreement contained a latent ambiguity concerning the power of one trustee to act if the second trustee were incapacitated. The court noted that Article II, Section 2(A) of the agreement contained a non-judicial mechanism for designating a trustee as incapacitated. It also cited Section 2(B) of the same article, which governed the administration of the trust in the event of a trustee's incapacity. The court quoted the following provisions of Section 2(B): “During the period of incapacity, (1) any attempt by [Settlors] to exercise any of the powers reserved by him, her, or them under this agreement shall be without force and effect; … (3) the Successor Trustees shall have power and authority on [Settlors'] behalf to exercise or perform any act … whatsoever that [Settlors] may have… ; (4) if at the time of such determination [Settlors] are acting as a Trustee hereunder, he, she, or they shall be deemed to have resigned … and any provision herein designating a successor trustee shall take effect.”
The court pointed out that, in apparent contradiction to the quoted Section 2(B), the article that dealt with the designation of successor trustees provided for them to serve only if both of the settlors resigned or ceased to act as a trustee. The court determined that there was no provision permitting a competent spouse to act alone if the other spouse were incapacitated. The court also questioned whether a trustee could be considered incapacitated unless the provisions of Article II, Section 2(A) were satisfied.
The Supreme Court concluded that the meaning of the ambiguously worded agreement was a question of fact that turned on the parties' intent. The trial court erred by resolving a factual issue on summary judgment. The Supreme Court remanded the case to the trial court for proceedings consistent with its opinion.
Once more, proper drafting and adherence to the express terms of the trust could have saved the parties untold thousands of dollars in attorneys' fees.
In Boggess, the trust instrument provided all of the tools that the parties needed to deal with the incapacity of a trustee, but the tools were not put to proper use. In Christensen, by contrast, the drafter failed to provide clearly for the all-too-likely possibility that at least one of the aging trustees would become incapacitated. Every drafting project makes demands on the attorney to provide clearly for any number of contingencies. The incapacitated trustee is a contingency that may not loom large in the mind of the client or the drafter, but it is one not to be overlooked.
- Card. v. Card, 2001 WL 1335957 (Mich. App. 2001) (unreported decision).
- Round v. Commissioner, 40 T.C. 970 (1963).
- IRC Section 2036(a)(2) brings into the gross estate property previously transferred by a decedent over which the decedent retained the power, not ending prior to his death, exercisable alone or in conjunction with any person, “to designate the persons who shall possess or enjoy the property or the income therefrom.”
- IRC Section 2038(a)(2), applicable to transfers on or before June 22, 1936, brings into the gross estate property transferred by the decedent “where the enjoyment thereof was subject at the date of his death to any change through the exercise of a power, either by the decedent alone or in conjunction with any person, to alter, amend, or revoke.” IRC Section 2038(a)(1) provides a similar rule for transfers occurring after June 22, 1936.
- Round v. Comm'r, 332 F.2d 590 (1964). On appeal, the issue was limited to whether the accumulated trust income was includible in the decedent's gross estate.
- Quoting from Chase v. Chase, 216 Mass. 394, 396 (1914).
- Hurd v. Comm'r, 160 F.2d 610 (1947), aff'g Estate of Edward L. Hurd, 6 T.C. 819 (1946).
- Citing Estate of Charles S. Inman, 18 T.C. 522, 526 (1952), rev'd on other grounds, 203 F.2d 679 (2d Cir. 1953). This notwithstanding the suggestion of the Tax Court's decision in Round that a judicial declaration of incompetency might have altered the result in that case.
- Boggess v. Albert, 2003 WL 549894 (Ohio App. Dist. 5) (unreported decision).
- Carl H. Christensen Family Trust v. Christensen, 133 Idaho 866 (1999).
American Masters: Modernist artist Marsden Hartley's oil “Red Flowers and Sailboat,” a still life painted in 1935-36, sold for $1.2 million at Christie's “Important American Paintings, Drawings & Sculpture Sale” in New York on Dec. 1, 2005.
American Masters: American Stuart Davis painted ”Still Life with Flowers” in 1930. The painting, an example of Davis's transformation from a Realist to Modernist painter, sold for $3.2 million at Christie's “Important American Paintings, Drawings & Sculpture Sale” in New York on Dec. 1, 2005.
It's important to have a plan in place just in case a trustee is unable to serve while on an extended vacation or because of a short-term incapacity
Not every trustee's incapacity is expected to be of long duration. An accident may render a trustee unable to attend to a trust's affairs for several weeks or months. Similarly, a trustee may simply be incommunicado, on an extended vacation to the Himalayas. It's as important to plan for these contingencies as it is for a trustee's extended or permanent incapacity.
Depending on the circumstances and the settlor's preferences, it may be appropriate to draft a provision whereby a trustee may be removed but permitted later to reclaim his position as trustee. This provision would be best suited to a case in which a trustee is incapacitated for an indefinite period of time that is expected to be of short duration but could prove to be extended (in the case of an accident, for example). The trust agreement might provide that the trustees with full capacity be entitled to file a document, contingent upon a physician's certificate of incapacity, declaring the trustee incapacitated and removing the trustee during such period. Such a provision might entail the appointment of a successor trustee to replace the removed trustee during the period of incapacity. Upon the removing trustees' receipt of a physician's certificate declaring the trustee competent to resume his role as trustee, he would be reinstated.
However, particularly if a successor trustee has been appointed to fill the shoes of the incapacitated trustee, there will necessarily be at least some minimal disruption in the administration of the trust when the incapacitated trustee is once again appointed trustee and the successor removed from office. Thus, whether the incapacitated trustee is entitled to resume his service as trustee might also turn on the length of his incapacity, such that he is not entitled to be reappointed trustee if the period of his incapacity has exceeded, say, one year. Of course, the trustee's right to resume his role as trustee might also depend on the identity of the particular trustee. If the incapacitated trustee is the settlor herself or a close and trusted family member, such a trustee might be permitted to resume her role as trustee notwithstanding the duration of her incapacity.
In the case of an extended but delimited period of absence, the trust agreement might provide that the trustee file a document with his co-trustees setting forth the period of absence and stating that he releases his powers as trustee during such period. Presumably, it would be unnecessary to appoint a successor trustee during a mere period of absence, and the absent trustee would take up his powers on the date stated in the document filed with his co-trustees.
Consider the application of these principles to Estate of Sheri Rosengarten.1 Sheri Rosengarten had executed a living trust to which she transferred her assets. The trust instrument named Sheri and her brother, David Cohen, as co-trustees. The trust also provided that if Sheri became incapacitated, her father, Stanley Cohen, would serve as trustee in her stead. On Oct. 23, 2001, David commenced a guardianship proceeding for Sheri, alleging that she had become totally incapacitated. Following a hearing in which it was established that Sheri suffered from bipolar disorder and delusions and that she had ceased to take her medication, Sheri was adjudicated incapacitated. The attorney who had been appointed by the Orphans' Court to represent Sheri during the hearing was appointed as her guardian.
David resigned as a co-trustee of the trust, leaving Stanley Cohen as sole trustee. Sheri's guardian approached Stanley, stating that she wished to sell Sheri's home. Stanley indicated that he wished to retain the home in the hopes that Sheri would one day be able to return there. As a result of this difference of opinion, the guardian petitioned the Orphans' Court for Stanley's removal as trustee.
Attorney Robert Ruehl filed an answer on Sheri's behalf objecting to Stanley's removal and to the sale of Sheri's residence and asking the court to conduct a review hearing on Sheri's continued incapacity. The court refused to remove Stanley as trustee, but it also refused to grant Sheri the hearing she sought and directed the sale of Sheri's residence. The Superior Court reversed, holding, inter alia, that pursuant to Pennsylvania statute the Orphans' Court was obligated to act on Sheri's request for a hearing on her capacity unless the court issued a finding that the request was frivolous.2
Had the trust so provided, an adjudication of competence (or a physician's certificate) could have triggered Sheri's reappointment as trustee, even as sole trustee, thereby facilitating the implementation of her wishes respecting her residence and other matters. This is a close case, however, and given Sheri's seemingly tenuous mental health, she might have been better served by omitting any provision for her reappointment as trustee, as was apparently the case.
— Maureen S. Bateman and Mark W. Smith
Estate of Sheri Rosengarten, 871 A.2d 1249 (Pa. Super. 2005).
Ibid, citing Pa.C.S. Section 5521.2(a).