Capacity and Estate Planning: What You Need to Know

As our loved ones get older, we want to ensure that they have planned for their future. This often means having an estate plan in place to handle the distributions of their assets upon their passing or to plan for their incapacity. However, what happens if our loved one already shows signs of memory loss or incapacity? Is it too late to have these crucial documents prepared?

To properly execute any legal document, the person signing must have the “capacity” to understand the significance of the document they are signing. In estate planning, the required capacity for each document can vary. This article will discuss the different capacity requirements in Massachusetts for executing the most common estate planning documents.

Wills

Wills are an essential part of estate planning. Wills allow individuals to put a plan in place to prepare for the distribution of their assets upon their death.

To execute a Will under Massachusetts law, the individual needs to have “testamentary capacity.” The statute requires that they are at least eighteen (18) years of age and “of sound mind.” (MGL c.190B, s. 2-501). The courts construe the soundness of mind requirement to mean that a person has the sufficient mental capacity to execute a Will if they can understand:

  1. The nature and extent of their property,
  2. The people who are “the natural objects of their bounty.”
  3. The disposition they are making of their property.

This capacity requirement means that a person who wants to execute a Will needs to understand what property they have, who they want to give it to, and how they want to give it to them after they have passed away. They must also have a general understanding of the significance of the document they are signing.

Revocable Trusts

Revocable trusts are helpful estate planning tools to minimize estate taxes, protect assets from creditors and help family members avoid probate. A revocable trust can be created if the individual who is creating the trust (the “Settlor”) is over eighteen (18) years of age, has the capacity to dispose of their property, and intends to create a trust. (MGL c.203E, s.402)

This capacity requirement is very similar to the “testamentary capacity” discussed above. The Settlor must understand what property they have, who they want to give their property to, and how they want to distribute it upon their death. The most notable difference from testamentary capacity is that the Settlor must also intend to create a trust.

The “intention to create a trust” requirement can be met in various ways. The Settlor can manifest their intent with written or spoken words or even conduct. The most important factor in satisfying this requirement is that the Settlor must demonstrate in some way that they want their property to be held by one person (the Trustee) for the benefit of someone else (the beneficiaries).

Irrevocable Trusts

Irrevocable trusts give individuals with even more protection against creditors and estate tax minimization. The capacity required under Massachusetts law to validly execute an irrevocable trust is the same standard required for executing a revocable trust.

Much like the standard for revocable trusts, the Settlor must understand what property they have, how the property is passing to their family, and who their family members are. However, unlike revocable trusts, this standard also requires that the Settlor understands that the trust is, in fact, irrevocable, meaning that it cannot be amended or changed once executed. The Settlor must also understand the effects the disposition may have on their financial security and those dependent on them.

Durable Powers of Attorney and Health Care Proxies

Durable Powers of Attorney and Health Care Proxies can be ideal tools in planning for incapacity. These documents ensure that an individual (the “Principal”) designates a person to make financial and medical decisions on their behalf if they are ever unable to make them for themselves.

The principal must be over eighteen (18) years of age and understand the duties and powers they are delegating to their agent. This means they must understand that their agent will be able to access their financial and medical information and “step into their shoes” if they were incapacitated. Due to the vast number of powers that are delegated to the agent, the Principal should choose someone they trust with this responsibility. (For more information on choosing the proper agent, see this article Choosing the Proper Fiduciaries for Your Estate Plan – Beyond the Will)

Real Estate Documents

When preparing an estate plan, it may be necessary to execute certain real estate documents – like deeds – to ensure that assets are titled correctly. Massachusetts requires the contractual capacity to execute a deed, a more demanding standard than testamentary capacity.

Contractual capacity requires understanding “the nature and quality of the transaction, together with an understanding of its significance and consequences.” This is a higher level of understanding than is required to execute a Will or a Trust because the person executing it must be able to comprehend the contract they are signing and its effects on their property.

Determining Mental Capacity

To determine whether a loved one meets the capacity requirements discussed above, their mental capacity should be evaluated before they execute their desired documents. The good news is that mental capacity is relatively easy to establish in most cases. Most of the documents mentioned above require either a notary or witnesses (or, for some documents, both) in order to be valid under Massachusetts law. Therefore, while working with an attorney to prepare the estate plan, the attorney will evaluate their capacity before preparing the documents. Then, at the time of signing, the witnesses and notary will also be able to evaluate their capacity.

However, suppose there is a serious question about a person’s mental capacity. In that case, it is best to have a medical professional perform neurological and cognitive function tests to measure their ability to make decisions and understand more complicated situations.

Is it too late?

Although the abovementioned standards may seem clear on paper, applying them to your loved ones can be more difficult, depending on the situation. Even though your loved one may have memory loss or have been diagnosed with a mental disease like Alzheimer’s or Dementia, they may still have the required mental capacity. For these individuals, their mental capacity can also vary daily, and they may have periods of lucid moments. If the memory loss is minor, but they can still make rational and competent decisions for themselves, it may not be too late.

Determining capacity is essential to establishing a valid estate plan, and the best practice is to establish an estate plan before there are any questions regarding mental capacity. However, hiring a professional to prepare an estate plan is key, as they can give a neutral evaluation and ensure that the requisite capacity standards are met.

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