Posts Categorized: Massachusetts Law

How to Approach Questions of a Client’s Mental Capacity in Estate Planning

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Authors: Erin K. Higgins and Conor Slattery of Conn Kavanaugh

Clients of all ages may at one point or another become mentally incapacitated and unable to make important legal decisions. Questions of mental capacity arise most often with elderly clients, which leaves estate planning attorneys making mental capacity determinations more frequently than their colleagues practicing in other legal fields.

The basic presumption is that a person is legally competent to make decisions and execute legal documents.  Determining whether a client has the requisite capacity to make decisions involves assessing whether the client is able to effectively communicate and understand his or her decisions, and the consequences associated with these decisions.  The ABA Commission on Law and Aging has issued a handbook in collaboration with the American Psychological Association in order to aid attorneys in assessing whether or not their elderly clients are of a diminished capacity.  Some common warning signs of diminished capacity that estate planning attorneys should look out for when meeting with their clients are:

  • Repetitive phone calls or conversations where a client does not remember the previous conversations;
  • Reliance on a care-giver;
  • Completely forgetting a recent event; and
  • The client’s failure to recall his or her assets or previous decisions.

Once the client’s mental capacity comes into question, the estate planning attorney should attempt to review the client’s assets, personal information, and other basic information to see if the client is able to effectively communicate and recall such information. It may be prudent to ask another attorney to attend a meeting with a client as a witness to events and to assist in determining the client’s mental capacity. An attorney should remember that such a conversation may not only be awkward and difficult for himself or herself, but may be equally (if not more) embarrassing or intimidating for the client. In order to put the client at ease, the attorney should employ a conversational approach, rather than running through a checklist of questions akin to an interrogation, when evaluating a client’s capacity. For example, the attorney may begin the conversation by inquiring as to whether the client’s family is still planning a vacation, whether a grandchild is still playing a particular sport, how the client’s hobby is going, or simply discuss current events with the client as the attorney would if catching up with a friend over coffee.

If you reasonably believe that your client’s capacity is diminished, you may need to take action to protect the client’s interests and assets pursuant to Rule of Professional Conduct 1.14. Confidential client information is protected under Rule of Professional Conduct 1.6, and attorneys for the most part cannot disseminate such confidential client information without the client’s consent. However, an exception exists to Rule 1.6 when representing a client with a diminished capacity. An attorney is impliedly authorized to reveal confidential information when taking protective action on behalf of a client with diminished capacity, but only to the extent reasonably necessary to protect the client’s interests. See Rule 1.14(c). The estate planning attorney must take care to determine exactly what confidential client information, if any, must be disclosed to protect the client’s interests and assets, and limit any such disclosure to this identified information only.

Estate planning attorneys who fail to safeguard the assets and interests of their clients with diminished capacity may be subject to disciplinary action. In Matter of Reynolds, 15 Mass. Att’y Disc. R. 497 (1999), an attorney received a public reprimand for altering an elderly client’s estate plan to benefit the client’s live-in caregiver without inquiring about the parties’ relationship, where the attorney knew that this was a fundamental change to the estate plan to the detriment of the client’s family. The attorney in this situation should have conducted a diminished capacity review before making such a fundamental change to the client’s estate plan.

Questioning and determining a client’s mental capacity is never easy, and an estate planning attorney may face the difficult choice of whether he or she is ethically able to execute a client’s request. In these situations, estate planning attorneys may wish to consult with outside counsel on the appropriate course of action.

Ferri v. Powell-Ferri: MA Supreme Judicial Court Decision Regarding Trust Decanting

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Author:  Allison M. Whitmore, Morgan, Lewis & Bockius LLP

In the case of Ferri v. Powell-Ferri, the Massachusetts Supreme Judicial Court (SJC) responded to certified questions from the Connecticut Supreme Court concerning trustees’ authority to distribute (or decant) substantially all of the assets of an irrevocable trust into a new trust.  In connection with a Connecticut divorce proceeding, the Connecticut Supreme Court certified questions to the SJC about the construction of a Massachusetts trust created by the father of the trust’s beneficiary for the sole benefit of his son.

The terms of a 1983 trust authorized the Trustees to pay to or segregate irrevocably trust assets for the beneficiary. In addition, the beneficiary, at certain ages, had the right to request withdrawals up to fixed percentages of the trust assets.  At the time of the decanting, the beneficiary had the right to request a withdrawal of up to 75% of the trust property.  Without informing the beneficiary, the Trustees decanted the 1983 trust property to a new trust, under which the beneficiary could no longer exercise a withdrawal right.

Relying on Morse v. Kraft, the SJC looked to the terms of the trust instrument and other relevant evidence of the settlor’s intent when deciding whether the Trustees were authorized to decant.  The SJC found that the Trustees were granted broad discretion when making distributions to or for the benefit of the beneficiary.  The SJC also found that the beneficiary’s right to request a withdrawal of a certain percentage of the trust assets was not inconsistent with the authority to decant.  The two distribution mechanisms provided under the trust instrument were not mutually exclusive, the Trustees maintained full legal title to the trust property and they did not lose their ability to exercise their fiduciary duties over “withdrawable” trust assets.  Therefore, unless and until all of the trust assets were distributed in response to the beneficiary’s request for a withdrawal, the Trustees could exercise their powers and obligations under the trust, including the duty to decant if they deemed decanting to be in the beneficiary’s best interest.

 

 

A Win for Trusts & Asset Protection in Massachusetts

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Author:  Annette K. Eaton, Nixon Peabody LLP

After a year of living with the uncertainty caused by the Massachusetts Appeals Court’s decision in Pfannenstiehl v. Pfannenstiehl, on August 4, 2016 the Massachusetts Supreme Judicial Court reversed the decision, representing a major win for the asset protection features of trusts in Massachusetts.

In August 2015, the Massachusetts Appeals Court issued the unprecedented decision in Pfannenstiehl allowing a husband’s beneficial interest in a discretionary spendthrift trust with an ascertainable standard to be included in his marital estate and divisible in a divorce proceeding.   

The 2015 decision sent shockwaves through the Massachusetts estate planning community, casting uncertainty upon all discretionary spendthrift trusts, especially those that employed an ascertainable standard for distributions, i.e. “comfortable support, health, maintenance, welfare and education,” such as the trust at issue in Pfannenstiehl.  Although, many estate planners in recent years have had reservations about employing ascertainable standards for this very reason, there had been no prior case in Massachusetts which specifically included a discretionary trust with an ascertainable standard in a beneficiary’s marital estate in the event of divorce until Pfannenstiehl.  Historically, a spouse’s interest in a discretionary spendthrift trust has been excluded from the marital estate because the interest is considered to be too remote and speculative to be deemed an asset.  This is because distributions to beneficiaries are generally within the trustee’s discretion even if subject to an ascertainable standard. 

However, on August 4, 2016, the Massachusetts Supreme Judicial Court reversed the Appeals Court’s decision, holding that the beneficiary’s right to receive distributions from the trust was “speculative” and did not render his right to future distributions from the trust to be “sufficiently certain such that it may be included in the marital estate.”  As a result, discretionary spendthrift trusts with ascertainable standards are once again safe, for now, from being included in a marital estate in the event of divorce.

Bank of America v. Commissioner of Revenue

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Author: Kerry Reilly, Esq., K. Reilly Law LLC

Bank of America v. Commissioner of Revenue

SJC – 11995 (July 11, 2016)

On July 11, 2016, the Massachusetts Supreme Judicial Court (“SJC”) upheld the decision of the Appellate Tax Board (the “board”) that Bank of America N.A. (“B of A”), in its capacity as corporate trustee, qualified as an inhabitant of the Commonwealth of Massachusetts (“MA”) and was subject to the state’s fiduciary income tax for the trusts in question.

G.L. c.62 §10 (a) provides that income received by trustees is subject to MA taxes if “the persons to whom the same is payable, or for whose benefit it is accumulated, are inhabitants of the commonwealth…”  Under G.L. 62 §1(f), inhabitant” means – “(1) any natural person domiciled in the commonwealth, or (2) any natural person who…maintains a permanent place of abode in the commonwealth and spends in the aggregate more than 183 days of the taxable year in the commonwealth.” Section 14 subjects corporate trustees to the same tax regime as “natural” trustees.

The SJC affirmed that B of A was an inhabitant of the Commonwealth based on its extensive branch structure, its conducting of business related specifically to the trusts at issue – “maintaining relationships with the beneficiaries, making decisions about distributions to those beneficiaries, administering trust assets, and retaining certain records” – as well as conducting similar business for other trusts, and was thus subject to taxes pursuant to G.L. c.62 §10.

Governor Baker’s Proposed MassHealth Estate Recovery Expansion NOT Included in House Committee on Ways & Means FY 2017 Budget Recommendations

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By: Sarah Roscioli (BCLS 3L)

Overview of Governor’s Proposed Changes to MassHealth Estate Recovery. The Governor’s proposed FY 2017 budget would have, among other things, expanded MassHealth estate recovery to include non-probate property for those becoming eligible for Medicaid (nursing facility benefits) on or after July 1, 2016.

Legislative Update.  On April 13, 2016, the House Committee on Ways and Means made its recommendations for the FY 2017 budget, which do not include the Governor’s proposed expanded definition of “estate” for purposes of recovery against the assets of a deceased MassHealth long-term care benefits recipient.

Broadening Definition of “Estate.”  Currently, M.G.L. Ch. 118E, Section 31(c) defines “estate” as all real and personal property and other assets included in decedent’s probate estate.  The Governor’s proposed language would have redefined the term “estate” to include: (1) joint property, including joint tenancy and tenancy by the entirety; (2) life estates; (3) funded revocable trusts; and (4) other property passing by beneficiary designation.  The Governor’s proposed language specifically excluded annuities and life insurance, with the exception of payments otherwise includable in the decedent’s probate estate.

Recovery Deferred for Surviving Spouse.  It is important to note that the Governor’s proposed budget would not have hastened the Division’s recovery when the decedent is survived by a spouse, i.e., under Chapter 118E, Section 31(b), recovery may not commence until after the death of the surviving spouse.

Overview of Budget Approval Process. On January 27, 2016, Governor Baker and Lieutenant Governor Polito filed their budget proposal for the Fiscal Year 2017 (FY17).  In mid-April, the House Ways & Means Committee reported its budget to the full House for debate and vote.  Then, in mid-May, the Senate Ways & Means Committee will report its budget to the full Senate for debate and vote.  The House and Senate budgets will then be reconciled into a single budget which will return to each chamber for a vote.  Once the House and Senate pass the reconciled budget, it will go to the Governor to be signed.  Following any legislative overrides, the final budget would go into effect for the fiscal year beginning July 1, 2016.

The full text of the Governor’s budget proposal can be found here.  The full text of the House Committee’s recommendations can be found here.

Court Rejects Income-Only Trust Created by MassHealth Applicant

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In a poorly-reasoned and somewhat murky decision, a Superior Court judge in Daley v. Sudders (Civil Action No. 15–CV–0188–D.Dec. 24, 2015) extends the Doherty decision to reject the MassHealth application of a man who, with his wife, placed his Worcester condominium into an irrevocable trust for long-term care planning purposes. To learn more about this case and its implications for life estate trusts, click HERE.

Brissette v. Ryan

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Author: Angie Guarracino, Esq., Nixon Peabody LLP

In Brissette v. Ryan, 2013 Mass. LEXIS 994 (November 29, 2013), the Appeals Court reversed a jury award to the plaintiff for $100,000 for a malpractice claim where the defendant attorney advised the plaintiff and her husband to transfer their home to their children without retaining a life estate in order to avoid healthcare liens, stating that the life estate would subject the property to healthcare liens. The defendant attorney was unaware that the law had changed a few years earlier to permit transferors to retain a life estate without subjecting the property to healthcare liens. When the plaintiff discovered the mistake she hired an attorney to reform the deed in the probate court, although the plaintiff’s son opposed the probate court proceeding and that proceeding was ultimately dismissed, leading the plaintiff to file a malpractice claim against the defendant.

After the jury verdict, the defendant filed a Motion for Judgment Notwithstanding the Verdict and a Motion for New Trial. The defendant challenged the verdict as being against the weight of the evidence and argued that the jury award was improperly grounded in sympathy and speculative damages. The Court agreed finding that the plaintiff did not incur any actual damages.

Despite the plaintiff’s claim that due to the defendant’s advice, she now owns nothing when she could have owned a life estate, the Court held that the loss of rights alone is not sufficient without proof of actual damages. The plaintiff did not testify that she had any plans to mortgage or rent the house and the plaintiff’s children never tried or threatened to evict her.

The Court felt that the jury likely felt sympathy for the plaintiff in awarding her $100,000 because the amount was speculative and there was no basis for that amount in the evidence. The plaintiff had not even presented any evidence for out-of-pocket expenses, such as attorney fees. The Court held that the plaintiff’s unease that her children might someday evict her, despite their testimony that they would never do that, and the fact that she did not show any actual damages, did not amount to an exceptional circumstance to warrant emotional distress damages.

The Court held that there were no set of circumstances which it may be reasonably inferred that the plaintiff suffered or will likely suffer damages due to the defendant’s legal representation.

Torres v. Torres

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Author:  Sandy Christopher, JD, CTFA
Senior Trust & Fiduciary Specialist, Wells Fargo Private Bank

In Torres v. Torres (84 Mass. App. Ct. 1117; 995 N.E.2d 1152; 2013 Mass. App. Unpub. LEXIS 1029) the plaintiff, Jesse E. Torres, III (“Jesse”), appealed the ruling of the Superior Court concluding that Massachusetts law prohibits a claim for anticipatory breach of a contract to make a will.  The Appeals Court vacated the judgment of the lower court and allowed the suit to go forward, but solely as an action in quantum meruit.

Jesse alleged that he and his mother, Sophie Torres (“Sophie”), had, in 2009, reached an agreement requiring Sophie to leave Jesse certain parcels of real property in her will.  The purported contract permitted Sophie to sell or finance the various pieces of property during her life for her own benefit and required any proceeds not used by Sophie to become Jesse’s property upon Sophie’s death.  As consideration for this, Jesse relinquished any claim he might have against Sophie or her estate for services rendered, or funds loaned to her, as long as the terms of the ostensible contract were respected. If the terms of the supposed contract were violated, “any monies and interest will become fully due and payable.” In 2011, subsequent to the execution of the alleged contract, Sophie executed a new will, which Jesse claimed was a breach of her contractual obligation to him under the 2009 agreement.

The Court noted that Jesse’s action “purports to raise several questions of first impression, namely whether we recognize contracts not to revoke a will, and whether an action for beach of such a contract is premature until the death of the testator, as in an action to make a will.” However, the Court, in an act of “judicial prudence” declined to address these questions, as it concluded that they were unnecessary to decide in this case, as Jesse had available to him a viable action in quantum meruit.   The quantum meruit action was available  to Jesse because “the contract specifies that Jesse’s damages will be the very monies and interest he loaned to his parents, whether the litigation is denominated a contract action or an action in quantum meruit, the merits and, if Jesse is successful, the relief, will be identical.”

Doherty v. Director of Medicaid

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Author:
Matthew Conroy, J.D., CFP®
Argent Wealth Management, LLC

This recent Essex Superior Court decision is the latest chapter of litigation between the Doherty family and the Commonwealth, dealing with issues of trust construction, trust reformation, and eligibility for Medicaid benefits under the MassHealth program.  Ultimately, the instant case was dismissed due to a lack of standing on the part of the plaintiffs, who were challenging an earlier ruling denying their deceased aunt benefits from Medicaid.

In 2006, the decedent Muriel S. Doherty moved to a nursing home in North Andover.  She applied for Medicaid benefits through the MassHealth program, and was subsequently denied by the Executive Office of Health and Human Services (“EOHHS”).  The denial of benefits was based upon the fact that Muriel was the beneficiary of an irrevocable trust with a value of $630,000, which EOHHS argued was a countable asset well in excess of the maximum allowed for Medicaid eligibility.  The Superior Court and Appeals Court upheld the EOHHS determination, reasoning that the trust instrument granted Muriel access to principal distributions, thereby triggering the inclusion of those assets for Medicaid eligibility purposes.  As a result of this denial of benefits, almost $400,000 was paid to the nursing home until Mrs. Doherty’s death in 2010.

In 2012, Mrs. Doherty’s heirs obtained a judgment from the probate court, reforming the trust retroactive to April 12, 2000.  Provisions allowing for principal distributions to Muriel were removed, as it was stipulated that Muriel never intended for trustees to have discretionary authority to make such distributions.  With this reformed trust in hand, the heirs demanded that EOHHS reconsider the 2006 denial of benefits, and reimburse them the full amount paid by Mrs. Doherty to the nursing home.  The EOHHS refused to reopen their 2006 determination, and Mrs. Doherty’s heirs filed suit in Superior Court.

The Superior Court ruled that the plaintiffs had no standing to sue the EOHHS.  The Court reasoned that the plaintiffs could not allege an injury within the area of concern of the Medicaid statute, which is to provide benefits “for those eligible for financial assistance.”  Admittedly, none of the heirs were indigent or in need of such benefits. In addition, the Court found no provisions in the statute allowing heirs of an estate to apply for them.  Moreover, as a matter of public policy, the Court considered the adverse effects of allowing standing in this case.  Permitting heirs to seek Medicaid benefits through the use of reformed trusts could bring “disastrous results” to the Medicaid program, “putting large amounts of public money into the hands of those who need it least.”

Because neither MassHealth nor the Courts will be sympathetic to heirs who challenge eligibility determinations of a deceased applicant, estate planners need to raise Medicaid eligibility at the planning stage.  As clients with assets of $630,000 might become or want to become eligible for Medicaid benefits, the estate attorney – with elder care knowledge or in consultation with an elder law specialist – should discuss with clients the pros and cons of various planning and drafting strategies.  What clients ultimately need to know is that creating new facts will not replace good planning.