An aging population, coupled with ever-changing estate tax provisions, such as those we confront at the end of 2012, may require attorneys to consider estate planning for clients who have become mentally impaired. This article explores the limited options under New Jersey law for such planning.
The Low Standard for Testamentary Capacity
Our courts describe testamentary capacity as the lowest standard for capacity known in the law. Gellert v. Livingston, 5 N.J. 65(1950). When confronted with a need for estate planning for tax or other reasons, the attorney should first explore whether his client possesses capacity to make a will. In that context, the attorney would be called upon to consider his ethical obligations under RPC 1.14, including the preservation of the putative testator’s intentions (if the attorney is satisfied the client in fact possesses capacity), while declining to engage in such planning if the client is incapacitated. See American College of Trust and Estate Counsel Commentaries on the Model Rules of Professional Conduct, Comment on RPC 1.14. Of course, where there is potential incapacity, a will executed under such circumstances would be subject to challenge.
A Person Adjudicated Incapacitated May Not Make a Will
Where the putative testator is incapacitated, a guardianship may be required. A court may enter a judgment of incapacity and appoint a general guardian when the testator lacks capacity to “govern himself or manage his affairs.” N.J.S.A. 3B:12-24.1(a).
A person adjudicated incapacitated may not make a will. Where an incapacitated person “dies intestate or without any will except one which was executed after commencement of proceedings which ultimately resulted in adjudicating a person incapacitated… the person’s property shall descend and be distributed as in the case of intestacy.” N.J.S.A 3B:12-27. (While the statute references intestacy, presumably it also means the estate would devolve pursuant to a valid will made before the guardianship proceeding commenced.) Moreover, N.J.S.A. 3B:12-49 grants the guardianship court extensive powers except the “power to make a will.”
N.J.S.A. 3B:12-27 preserves the possibility, however, that a court might enter judgment restoring a person to capacity. See N.J.S.A. 3B:12-28. That section permitted a young man, previously declared incapacitated, to be restored to capacity so he could make a will. Matter of Frisch, 250 N.J. Super. 438 (Law. Div. 1991). The Frisch court considered the distinctions between incapacity for a guardianship as opposed to testamentary capacity, but did not resolve that issue because it found that the medical evidence before it permitted it to restore the ward to capacity so he could make a will.
Does a Limited Guardianship Preclude Estate Planning?
In 2005, our Legislature adopted the “limited guardianship” concept. N.J.S.A 3B:12-24.1(b). That concept authorizes the court to appoint a “limited guardian” if the court finds that “an individual is incapacitated and lacks the capacity to do some, but not all of the tasks necessary to care for himself.” That section does not use the same “capacity to govern himself and manage his affairs” language as N.J.S.A. 3B:12-24.1. Does that language difference permit a court, in a limited guardianship, to preserve the ward’s ability to make a will?
The history of the limited guardianship concept in New Jersey indicates that the Legislature expressly considered that possibility. In Assembly Bill 1922 as originally proposed, N.J.S.A. 3B:12-24.1 and 12-27 would have been expressly amended to indicate that the ward’s power to execute a will could be expressly preserved. That language was deleted in the legislative process. Thus, the legislative history does not support the notion that the court could preserve the right to engage in estate planning. See also N.J.S.A. 3B:12-49.
Some suggest that estate planning rights could be preserved because they believe a limited guardianship involves a lesser degree of impairment than that required for a general guardianship. An unreported Appellate Division decision rejects that theory. In re Keeter, 2011 WL 2304204 (App. Div. 2011) compared the two applicable sections. It held that both require a finding of incapacity:
The consideration of the type of guardianship to be imposed is taken only after a determination that the person is incapacitated. N.J.S.A. 3B:12-24.1(a) (“[i]f the court finds that an individual is incapacitated … the court may appoint a general guardian … “)(emphasis added); N.J.S.A. 3B:12-24.1(b)(“[i]f the court finds that an individual is incapacitated … the court may appoint a limited guardian …”)(emphasis added).
These authorities confirm that the limited guardianship statute requires a finding of incapacity that precludes the ward from making a will under N.J.S.A 3B:12-27.
Estate Planning by a General Guardian
Our legislature and courts have determined that, in certain circumstances, a court may authorize a guardian to proceed with estate planning on behalf of the ward. While N.J.S.A. 3B:12-49 expressly precludes the court from exercising the “power to make a will,” it authorizes the court to engage in other forms of estate planning. For example, it allows the court to create “revocable or irrevocable trusts of the property of the estate which may extend beyond the ward’s disability or life….” It also authorizes the court to exercise or release various powers, including the ward’s rights as donee of a power of appointment. See also 3B:12-50. N.J.S.A. 3B:12-58 authorizes a court to permit gifts to “charity and other objects the ward might have been expected to make.”
Several decisions address guardianship estate planning. In re Trott, 118 N.J. Super. 436 (Ch. Div. 1972); In re Labis, 314 N.J. Super. 140 (App. Div. 1998); and In re Cohen, 335 N.J. Super. 13 (App. Div. 2000), certif. denied, 167 N.J. 632 (2001). Each of those decisions focused on estate planning by a guardian, with approval of the court, on behalf of the ward. The first two involved lifetime gifts: Trott approved estate planning annual exclusion gifts for tax reduction purposes; Labis approved a gift of a home to a spouse for Medicaid planning purposes. Only Cohen involved post-mortem dispositions — it declined approval of a family settlement agreement that would have altered the ward’s preguardianship testamentary plan.
The substituted judgment concept of estate planning recognized in those three decisions was ratified by the Supreme Court in In re Keri, 181 N.J. 50 (2004), where the court expressly recognized a court could authorize gifts to qualify the ward for Medicaid. Keri expressly ratified the Trott formula that requires the guardian to establish five criteria to obtain approval for gift planning:
(1) the mental and physical condition of the incompetent are such that the possibility of her restoration to competency is virtually nonexistent; (2) the assets of the estate of the incompetent remaining after the consummation of the proposed gifts are such that, in the light of her life expectancy and her present condition of health, they are more than adequate to meet all of her needs in the style and comfort in which she now is (and since the onset of her incompetency has been) maintained, giving due consideration to all normal contingencies; (3) the donees constitute the natural objects of the bounty of the incompetent by any standard; (4) the transfer will benefit and advantage the estate of the incompetent by a reduction of death taxes; (5) there is no substantial evidence that the incompetent, as a reasonably prudent person, would, if competent, not make the gifts proposed in order to effectuate a saving of death taxes.
181 N.J. at 59.
The Keri substituted-judgment mechanism focuses on what the ward intended — or perhaps what he would have intended. The third and fifth prongs of the Trott analysis focus on whether the beneficiaries of such estate planning are “natural objects” of the ward’s bounty and whether the ward “would, if competent, not make the proposed gifts.” Resolution of those questions may involve difficult questions of an incapacitated person’s intent in a state where “intent of the testator” has greater import than most other jurisdictions. For example, our probable intent doctrine requires a court to determine, potentially by reference to extrinsic evidence, what the testator would have done if he “envisioned the present inquiry.” In re Estate of Payne, 186 N.J. 324 (2006); see In re Estate of Ehrlich, 427 N.J. Super. 64 (App. Div. 2012) (appeal pending). These cases confirm that our courts often confront difficult questions of intention, but it is not clear that the analysis in either of those cases has any bearing on guardianship estate planning.
The third prong of the Trott analysis focuses on the “natural objects” of the ward’s bounty; N.J.S.A. 3B:12-58 incorporates the same concept with respect to gifts. Cohen confirmed that where the ward implemented an estate plan prior to her incapacity, that instrument necessarily defined her “natural objects” such that the court could not make changes that were contrary to the ward’s “clear testamentary intent.” 335 N.J. Super. at 32.
If the ward would otherwise die intestate, the “natural objects” in guardianship estate planning would be those who take by intestate disposition. Doing otherwise could defeat the basic premise of the intestacy statute — that it governs all estates where the decedent did not develop his own estate plan. Trott supports that notion by confirming that the natural objects of the ward’s bounty — those who would take under the ward’s will if she had died at the time of the gifting decision — would receive the annual gifts (even if they might ultimately predecease the ward such that the balance of the estate would devolve to contingent beneficiaries). Trott, 118 N.J. Super at 443 n. 1. Labis and Keri involved similar considerations, as court approved gifts to those who would eventually receive the ward’s estate. The same principles that permitted approval of gifts in those cases caused the Cohen court to decline to approve an arrangement that would defeat the ward’s preguardianship estate planning arrangements.
Where the ward does not have an existing estate plan, these same concepts apparently preclude estate planning in favor of those who would not take by intestacy. Perhaps one could argue that compelling evidence of the ward’s intention, in the form of unequivocal writings or actions, could overcome designation of the intestate takers as the default “natural objects” of the ward’s bounty under the Trott analysis. That argument, however, does not appear to be supported by existing case law or the intestacy statute.
In most cases involving guardianship estate planning (Trott, Labis and Keri), the parties did not dispute the proposed gifting arrangements. In fact, in situations driven by tax considerations, all interested parties might agree gifts or other estate planning should be approved to achieve desired tax savings such as the use of annual exclusion gifting, charitable or marital deduction planning, and full use of estate or gift tax exemptions. In any event, these options have become particularly important tools to consider in this era of ever-changing estate tax laws such as the changes slated to take effect in 2013. •