Capacity assessments could become the new normal for beneficiary designations

Capacity issues coming before the court will increase steadily as the baby boomer population ages. We’ve visited the issue of capacity and making a beneficiary designation before in the Fawson case. For advisors, it’s a challenge to deal with a client whose beneficiary designations seem to be contrary to their estate plan, and it might even call into question a client’s mental capacity.

The Alberta decision in Wasylynuk v. Bouma, 2018 AQB 159 gives insight into what types of evidence a court may review to determine whether a person is mentally capable. The case also reviews the principles of joint ownership and the resulting trust that forms part of an estate plan.

Tette Bouma signed many documents relating to the disposition of his property:

Four separate beneficiary designations in the mid to late 1990s for four separate insurance policies in his name;

A will dated April 17, 1998;

A deed of gift to his son, Bernie, dated February 21, 2001

A subsequent will dated July 20, 2001.

Tette had issues with alcohol abuse and was identified as a binge drinker. Over the years he received medical treatment and was given addiction counselling and rehabilitation services. He was also diagnosed with dementia but ultimately died of cancer.

Tette left a significant estate with a large portion of it comprising insurance proceeds. He had received legal and financial advice when he put his estate plan into place – an estate plan that excluded his daughter, Betty Ann.

Disgruntled, Betty Ann started legal action arguing that Tette did not have the mental capacity when making the 2001 will, the deed of gift, or the beneficiary designations. She argued the 1998 will, which had included her as a beneficiary, should be in effect. The resulting litigation spanned several years.

The extensive medical evidence given in this case is fascinating, as is the impact Tette’s alcohol abuse and dementia had on determining whether he had the ability to create his estate plan. Several doctors, two lawyers, his accountant, an addiction counsellor, and Tette’s insurance advisor gave evidence at trial.

The deed of gift and the 2001 will – medical and legal evidence

Tette’s lawyer, Mr. Ackroyd, provided Tette with legal services for years and knew about and was sensitive to Tette’s alcohol problem.

Tette was concerned about Betty Ann and that there would be litigation over his estate. Because he trusted Bernie to be fair, Tette wanted his son to receive his assets and eventually distribute them to his other siblings.

Mr. Ackroyd said that Tette was not intoxicated at the time of giving the instruction for the deed of gift nor did he feel there was undue influence from Bernie. Mr. Ackroyd suggested to Tette that it would be beneficial to for him to get a Certificate of Capacity from a doctor and independent legal advice from another lawyer about the deed of gift. Tette followed through with these suggestions.

After administering a mental test, the doctor found that Tette was competent. The doctor’s certificate confirming Tette’s capacity was given to the second lawyer, Mr. Van Winssen, who was satisfied that Tette understood what he was doing by executing the deed of gift.

With both the doctor and another lawyer satisfied with Tette’s capacity, Mr. Ackroyd felt Tette understood what he was doing and the consequences of what he was signing. Mr. Ackroyd drafted the 2001 will which made Bernie the beneficiary of Tette’s four life insurance policies. The previous designation on three of the policies had been Tette’s estate and the fourth had named his children equally.

The court examined the Supreme Court of Canada (SCC) case of Pecore, which dealt with the intention of a parent who made a gift to an adult child. The SCC said the parent must have sufficient capacity to make such a gift. From that premise, the court indicated that it is not sufficient to show that the testator lacked capacity; the incapacity must be tied to a relevant date. A testator may only have temporary periods of rational and lucid behaviour and, in those moments, may competently dispose of his or her estate. Tette willingly attended the medical capacity test and sought the independent legal advice. These actions were paramount to the court in concluding that Tette was capable in executing his estate plan and provided good facts.

The beneficiary designations

In this case the court indicated it must consider all evidence relating to capacity to determine whether the person was lucid enough to make the designation. The court cited the principal found in a decision that had been appealed to the Supreme Court of Canada (see Turner Estate v. Bezanson (1995) 6 ETR (2d) 282, 139 NSR (2d) aff’d on this point (1995), 8 ETR (2d) 169, 143 NSR (2d) 123). The capacity test for a beneficiary is the same as that required for a testamentary disposition.

There was no evidence that Tette was incapacitated at the time of changing the designations or that any suspicious circumstances existed. The court relied on Tette’s insurance advisor’s evidence and the medical and legal evidence before the court. The court also noted that the changes to the beneficiary designations from the estate to Bernie were consistent with other steps Tette took to ensure that Bernie had control over all his assets before and upon Tette’s death.

Conclusion

Tette took all the steps he needed to put his plan in place. He took his lawyer’s advice and had a capacity assessment done. The steps Tette took provided the necessary evidence the court needed to determine his estate plan. This case is a good benchmark for advisors of what is now required when dealing with capacity issues. There is a positive duty on the part of a person taking instructions from a client – whether that’s an advisor or a lawyer – to try and establish their client’s capacity. The new normal appears to be having the client get a capacity assessment and proper legal advice.