What Does “Lack of Capacity” Mean in Estate Planning?
It’s time for another Tuesday Tidbit from The Billable Bean. This week, BB is spilling the legal beans on “lack of capacity,” including what it means, how it can affect someone’s ability to make important decisions, and why planning ahead can help ensure the right people are in place to step in when needed.
The term “lack of capacity” comes up frequently in estate planning, trust administration, conservatorships, and probate matters. But what does it actually mean?
In everyday conversation, we might think of capacity as simply whether someone is capable of making decisions for themselves. Legally, however, the concept is more nuanced.
A person’s capacity can affect whether they are able to create or change certain estate planning documents, enter into transactions, manage their financial affairs, or make healthcare decisions. And importantly, capacity is not always an all-or-nothing determination.
Understanding what capacity means and planning before it becomes an issue can help individuals and families prepare for situations in which someone may eventually need assistance managing their affairs.
What Does “Capacity” Mean?
Generally speaking, capacity refers to a person’s ability to understand and make a particular decision.
One of the most important things to understand is that there is not necessarily one universal standard of capacity that applies to every situation.
The level of understanding required can depend on the decision being made or the legal document involved. Someone may have sufficient capacity to make one type of decision while lacking the capacity required for another.
Capacity can also change over time. Aging, illness, injury, cognitive decline, medication, or other circumstances may affect a person’s ability to understand and make decisions.
For that reason, simply having a medical diagnosis or experiencing some cognitive decline does not automatically answer the legal question of whether someone has capacity for a particular act.
What Does It Mean to “Lack Capacity”?
When someone lacks the legally required capacity for a particular decision, it generally means that they are unable to sufficiently understand, evaluate, or communicate the information necessary to make that decision.
In the estate planning context, questions about capacity can arise when someone wants to create or amend a will or trust, sign a power of attorney, make significant financial decisions, or take other actions affecting their estate.
The specific legal standard matters.
That distinction can become particularly important when families disagree about whether a loved one understood what they were signing or whether changes to an estate plan truly reflected that person’s wishes.
Why Does Capacity Matter for Estate Planning?
Estate planning documents are designed to establish what should happen both during your lifetime and after your death.
But those documents generally need to be created while you have the legal capacity required to make them.
Waiting until someone is experiencing significant cognitive decline or is no longer able to understand the decisions involved can dramatically limit the options available.
That is why estate planning isn’t something that should necessarily be postponed until later in life. Creating a plan while you are able to clearly communicate your wishes allows you to decide who you trust, how you want your affairs handled, and what should happen if you are eventually unable to manage certain matters yourself.
What Happens If Someone Loses Capacity?
This is where thoughtful planning can make an enormous difference.
An estate plan can include documents that establish who has authority to step in and assist when you can no longer make certain decisions yourself.
For example, depending on the circumstances, a successor trustee may be able to assume responsibility for managing assets held in a trust. An agent designated under a durable power of attorney may have authority to handle certain financial matters. An agent under an Advance Healthcare Directive may be authorized to make healthcare decisions when the appropriate conditions are met.
Exactly when and how those powers become effective depends on the documents themselves and applicable law.
Without adequate planning, however, a family may have fewer options. In some circumstances, court involvement, such as a conservatorship proceeding, may be necessary to establish who has authority to act.
Capacity Can Also Become a Source of Disputes
Questions about capacity don’t always arise while someone is alive.
After a person passes away, beneficiaries or family members may challenge changes made to an estate plan by arguing that the individual lacked the necessary capacity when a document was signed.
For example, questions may arise when an estate plan was substantially changed late in someone’s life, particularly if the changes significantly altered who would inherit or who would be placed in control.
These disputes can be complicated because determining capacity may require looking at the individual’s condition at the time the particular decision or document was made, rather than simply their overall health before or after that date.
Medical records, witness testimony, communications, attorney records, and other evidence may all become relevant depending on the circumstances.
Planning Ahead Can Provide Clarity
No one likes to imagine a time when they may be unable to manage their own affairs. But incapacity planning is an important part of a comprehensive estate plan.
It gives you an opportunity to make important choices while they are yours to make.
Who should manage your finances if you cannot? Who do you trust to make healthcare decisions? Who should step in as trustee? What guidance do you want those individuals to have?
Addressing these questions in advance can provide clearer direction for the people you trust and may help reduce uncertainty and conflict later.
Estate planning isn’t only about deciding what happens to your assets after you’re gone. It’s also about planning for what happens if you’re still here but need someone else to step in.
If you have questions about incapacity planning, updating an existing estate plan, or a capacity issue involving a trust or estate, the attorneys at Law Stein Anderson, LLP can help you understand the legal considerations and available options. Schedule a complimentary consultation today by visiting here.