Source, Purpose, History
While many of the actions an adult would take and the documents an adult would sign to effectuate testamentary dispositions and inter-vivos wealth transfer transactions require only testamentary capacity, many others require contractual capacity, which is missing in both minors and adjudicated disabled adults in guardianship. Therefore, traditionally, minors and  adults under guardianship could not take advantage of either lifetime wealth transfer and tax planning, or post-death testamentary dispositions. That changed in the 1990’s with the enactment of statutory provisions that were designed to allow disabled persons to do virtually everything with their property that abled people could do, and allow certain estate-type transactions for minors, on a much more limited basis.  These statutes were both crafted and lobbied for by the disability rights community, which felt it was unfair and unreasonable to deny adjudicated disabled persons the ability to do with their property the sorts of estate planning and tax planning that abled persons could do. 

Some states allow certain limited guardianship estate planning at common law. When states have common law provisions, they are typically a product of substituted judgment, which effectively limits the scope of guardianship estate planning to following through on patterns of gifting established by the disabled person at times when there was no disability.

What Do The States Allow?
A detailed summary of the law in all fifty states’ is beyond the scope of this article. However, there are some general trends. While most states allow such planning and do so by statute, not all states allow planning to the same extent, and some only allow gifting. Only seven states (California, Colorado, Illinois, Massachusetts, Minnesota, Montana, and South Dakota) permit the guardian or conservator of a disabled adult to execute a will for the disabled adult.  Few states allow for guardianship estate planning for minors. Eleven states expressly prohibit such planning or don’t clearly sanction it (Alaska, Arkansas, Iowa, Louisiana, Maryland, Mississippi, Ohio, Oklahoma, Pennsylvania, Tennessee and Vermont). All others allow Court-Appointed Guardians for disabled adults to do at least some traditional estate planning, typically on petition to the court and by court order.

Case Law Restrictions On Use Of Guardianship Estate Plan
While implementation of guardianship estate planning is generally accomplished by state statute, the courts, when asked to interpret the statutes, have often imposed restrictions not apparent on the face of the law. These restrictions generally address concerns that the process will be used to obliterate court supervision over guardianship budgets and investments, or that it will obliterate longstanding estate plans.

• Restricting Deviation From Existing Estate Plan
An example of a case concerned with deviation form an existing plan is In In re Guardianship of E.N., 877 N.E.2d 795 (Ind. 2007), where the disabled person’s brothers objected, and the Appellate Court ruled that the statute could not be used to purposefully write out of a disabled person’s estate plan provisions that were likely to generate litigation post-death. See id. at 799. The Indiana court compared Indiana’s statute to the Illinois statute (755 ILCS 5/11a-18(a-5)(11)) and noted that the Indiana statute did not include the “broad power” to modify the protected person’s will or trust as the ward’s children had claimed.

• Eliminating Court Supervision
One common theme in case law restriction of guardianship estate planning has been a reluctance of the courts to allow guardianship estate planning to be used to purposefully and completely eliminate court supervision of the guardianship property, typically over budgeted expenditures on behalf of the disabled person and investments. This was the reason such a proposed plan was denied implementation in the Ahmed case, 322 Ill. App. 3d 741 (1st Dist. 2001), where the court simply exercised its discretion to deny the petition to implement the plan over concerns on unrestricted investing and expenditure.  In re Estate of Ahmed, 322 Ill. App. 3d 741, 747 (1st Dist. 2001).

One way to address a court’s concern with loss of supervision is to draft a trust document where expenditures are limited to the ongoing guardianship budget set by the court, and investments are limited to those allowed only in guardianship estates pursuant to the applicable guardianship statute.

Types Of Documents And Acts Allowed
While the list of estate planning tools or actions available to a guardian differs state to state, acts available to a guardian often include the guardian, on behalf of the disabled person:
(1) making gifts of income or principal, or both, of the estate, either outright or in trust;

(2) conveying, releasing, or disclaiming his or her contingent and expectant interests in property, including marital property rights and any right of survivorship incident to joint tenancy or tenancy by the entirety;

(3) releasing or disclaiming his or her powers as trustee, personal representative, custodian for minors, or guardian;

(4) exercising, releasing, or disclaiming his or her powers as donee of a power of appointment;

(5) entering into contracts;

(6) creating for the benefit of the ward or others, revocable or irrevocable trusts of his or her property that may extend beyond his or her disability or life;

(7) exercising options of the ward to purchase or exchange securities or other property;

(8) exercising the rights of the ward to elect benefit or payment options, to terminate, to change beneficiaries or ownership, to assign rights, to borrow, or to receive cash value in return for a surrender of rights under any one or more of the following:
• life insurance policies, plans, or benefits,
• annuity policies, plans, or benefits,
• mutual fund and other dividend investment plans,
• retirement, profit sharing, and employee welfare plans and benefits;

(9) exercising his or her right to claim or disclaim an elective share in the estate of his or her deceased spouse and to renounce any interest by testate or intestate succession or by inter-vivos transfer;

(10) changing the ward's residence or domicile; or

(11) modifying by means of codicil or trust amendment the terms of the ward's will or any revocable trust created by the ward, as the court may consider advisable in light of changes in applicable tax laws.

Typically, there must be a petition by the guardian of the estate, listing the nature and extent of the property, and the reasons for invoking the statute. In most states, there must be notice to all persons interested as the court directs. Usually, the court will require notice to any interested person, whether or not they are of record in the proceeding, whose property rights may be affected by the action taken. 

Another frequent requirement is that the court will require an evidentiary hearing where the basic elements of the petition are proved up.

Distinguish Statutory Guardianship Estate Plan From Competency Determinations
Most states maintain a different competency threshold for adjudication of disability versus ability to execute testamentary documents. Guardianship of the estate is generally available when a person, due to a developmental disability or mental illness, cannot manage his or her estate. Testamentary capacity, alternatively, is a lower standard, and only requires that a person be able to understand the testamentary nature of the transaction, have the ability to recognize and understand the natural objects of their bounty and the extent of their estate. Therefore, a guardianship appointment is not conclusive on the issue of whether a disabled person possesses the requisite mental capacity for certain acts of estate planning. 

If guardianship estate planning will involve only the need to execute a testamentary document, an alternative is to have the disabled person evaluated, either by a psychiatrist or, if elderly, by geriatric psychiatrist, for testamentary capacity.  In certain limited guardianship situations, there may also be an available evaluation for actual contractual capacity, which is higher than required for inter-vivos transfers, non-testamentary beneficiary designations and related contract actions. 

It is important to note that documents executed pursuant to this process could be subject to all the usual testamentary challenges over capacity and undue influence, as they are signed by an adjudicated disabled person who, by definition, has some kind of altered or diminished capacity. Therefore, while this process may be less complicated from a court procedure standpoint, it should be used carefully, since an adjudicated disabled person is much more likely to draw a challenge at death than an otherwise competent individual.

IRS Acceptance And Other Tax Issues
• IRS Acknowledgment
The IRS will generally honor the tax impact of documents generated through guardianship estate planning in the same manner as a document executed by a competent adult. This is similar to the IRS’s earlier position on limited cases involving both estate planning action by power of attorney as well as earlier substituted judgment common law estate planning cases for disabled persons. See, e.g., I.R.S. PLR 9015017 (April 30, 1990) (ruling that disclaimers executed by attorneys-in-fact are effective disclaimers under local law that meet the requirements for a qualified disclaimer under section 2518(b)(4) of the Internal Revenue Code); I.R.S. Tech. Adv. Mem. 9413002 (Apr. 1, 1994) (ruling that the distributions of property from the decedent’s revocable trust made by the decedent’s guardian within three years of the decedent’s death and pursuant to specific authority granted by the court are not includible in the decedent’s gross estate under § 2035 or 2038).

•Settlement Standard Applies
Parties to guardianship estate planning should be careful to note that the IRS has, in the past, refused to recognize litigated settlements that have tax impact unless the settlement is a resolution of a bona fide dispute, the amounts passing to parties, particularly spouses and charities, do not exceed amounts which could have been recovered if there had been litigation successfully completed, and the quality of the property issues awarded parties is consistent with what they could have received in litigation. See Estate of Hubert v. Commissioner, 101 T.C. 314 (1993) (requiring bona fide adversarial proceeding among parties with significant interests to protect in litigation, aff’d on other grounds, 63 F.3d 1083 (11th Cir. 1995), aff’d 117 520 U.S. 93 (1997); Tech.Adv.Mem. 8945004 (Nov. 9, 1989).  Since guardianship estate planning has the potential of changing materially the marital deduction and charitable deduction attributes for transfer tax purposes of an estate or trust post-death, care should be taken to adhere to the litigation settlement standards for IRS acceptance, since they would likely be equally applied to a change brought about by guardianship estate planning, which is in the nature of litigation, achieved after a court proceeding by court order. 

Minors Estates
Several years after the guardianship estate planning statutes were broadly adopted for adjudicated disabled adults, some minor guardianship statutes were also modified to create limited estate planning opportunities for minors who have guardianship estates.

Several important limitations typically apply in such cases, which are relatively rare and usually limited to overriding the intestacy statutes by leaving property in trust, albeit following state intestate shares.

David Baker is the chair of the Estate, Trust and Guardianship Controversy Practice Group at McDermott, Will & Emery