The Law – Naming Beneficiaries in Your Estate Plan
California-based elder-law attorney, Cynthia Cox, recently explained the issues around CAPACITY vs COMPETENCE. She has been practicing elder law for almost 30 years and agreed to an interview with The Caregiver’s Voice. At the end of the interview, she offers insights on the oft-mistaken belief that choosing “payable on death” to name a beneficiary as a viable option.
Years ago, I went to see an attorney with my widowed father. It was increasingly apparent he could no longer live alone, safely. He agreed to visit me in California. While he was not yet formally diagnosed by a doctor, the medical and caregiving professionals assisting him observed symptoms of dementia. I needed a Power of Attorney to ensure my sister and brother would not accuse me of kidnapping. They had been relatively uninvolved in his care.
The attorney asked my father questions to determine his competence. My father answered enthusiastically. The attorney deemed him sufficiently aware of what he was agreeing to – he was competent. While the burden was lifted off his shoulders, it would weigh heavily on mine. Weeks later, after he settled in California, the California attorney asked him the same questions. Confused, he did not know where he was, what time it was, and more. He was deemed incompetent.
Capacity and Competency
Years later, in an issue of Generations, the American Society on Aging’s quarterly, a representative of the National Association of Elder Law Attorneys (NAELA), addressed a more nuanced distinction between competence and capacity.
Had my father met with the California attorney at a different time, he would have answered the questions. However, that morning, he was grumpy and uncooperative; thus, sealing his fate.
Cox says that while NAELA and the nation as a whole may make this distinction, the State of California representing 12% of our nation’s population does not. Cox explains that competence is a legal term while capacity remains a medical determination. California attorneys use both terms interchangeably and the law does not distinguish between the two. She adds that attorneys are tasked with determining capacity – a difficult process since she believes attorneys are pressured to make a medical decision.
An Attorney’s View of Capacity
Despite this, Cox says, ethically and morally, attorneys must ensure there is no undue influence by a family member or caregiver. When it happens, it’s usually an urgent request to change an estate plan or make gifts. “My mother wants to change her estate plan and I need to bring her in right away.”
- Cox considers the person who makes the call, who brings in the care recipient, and the care recipient’s personality.
- Does the family member/caregiver dominate – talk over the elder in the waiting room?
- Is the person pushy or bossy?
Cox also considers the elder or person receiving care.
- Is s/he independent or dependent on the caregiver?
- What is the care recipient’s mental state?
- Is s/he depressed?
- Are there any observable memory issues?
- What is his/her orientation to time and place?
Capacity and Undue Influence
Cox distinguishes between these two: One can have capacity and still be subject to undue influence. A son who threatens his mother with, “I’m not going to continue taking you to your monthly lunches unless you make me a beneficiary of your trust.” Undue influence is using pressure to subvert the will of another, which causes an unwanted result and harm.
Without the caregiver present, Cox tries to get the care recipient to respond to questions.
- Does your son, daughter, caregiver know why you are here, today?
- Did s/he encourage you to do what you will do, today?
- Did anyone go over what you should say, today?
- What would happen if you did not make this change?
She asks the last question as a more subtle way to explore potential fear.
She looks at the family dynamic. A care recipient getting disoriented about a date may be minor compared to who made the appointment and whether that person has greater self-interest versus seeking an equitable distribution.
This brings us back to the distinction between competency and capacity. I ask her, “Why is California different?”
She takes a deep breath, sighs, and replies, “That’s a good question… a very good question… I’m not sure I know the answer… most of the differentiation appears to come out of the medical field. California uses both terms interchangeably.”
Payable on Death vs. Naming a Trust
Recently, more financial institutions have been giving people the option to name a beneficiary “Payable on Death” (POD) or “Transfer on Death” (TOD). Those who take this shortcut may be overlooking a more likely outcome – incapacity. Many attorneys advise avoiding naming a POD due to this possibility.
Cox explains that if a person loses capacity and is unable to manage his/her affairs, naming a POD or TOD, will still likely avoid probate, but will cause headaches and delays.
Since people infrequently update their estate plans and beneficiary information, she’s seen cases where the POD beneficiary died without the donor – now incapacitated – knowing. Instead, she and many California attorneys recommend setting up a trust if your estate is valued at $166,250 or more.
When the trust owns the asset, the successor trustee will step in immediately to ensure your wishes are upheld when you lose capacity or die. While, a smaller estate will avoid probate, the asset value varies state by state. For example, in Alabama, the minimum is a mere $3,000. Years ago, $600,000 was touted as the magic dividing line. Cox says this figure may have been mentioned on national radio and requoted until it went viral. Per the Legal Match site’s law library addressing issues of probate nationwide, Idaho, Illinois, Hawaii, Utah, Washington, and West Virginia set the limit at $100,000; whereas Wyoming is $200,000 and New Mexico sets taxable value of property at $500,000.
Create a trust to avoid the expensive and time-consuming (in California, 12 to 18 months) cumbersome court process. Trusts have longevity built in to handle whatever comes your way.