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