Webb v. Anderson Children Trust

December 22, 2020Capacity, Case Summary, IRA, Trusts off
Photo by JOSHUA COLEMAN on Unsplash.

Abstract

Case Name: Webb v. Anderson Children Trust, 1st Dist., Hamilton Nos. C-190600, 2020-Ohio-4975.
Jurisdiction: Ohio Court of Appeals for the First District.
Plaintiffs-Appellant: Kimberly A. Webb, individually and as beneficiary of the Betty S. Anderson Children Trust.
Defendant-Appellees: The Betty S. Anderson Children Trust and Michael R. Webb, individually and as Trustee.
Concepts: Standard to prove lack of capacity to enter into an IRA Agreement and to designate a beneficiary; test for mental capacity to enter into contract.
Nature of Case: Whether mental capacity required to enter into an IRA Agreement is the capacity to contract, or testamentary capacity?
Lower Ct. Decision: Kimberly failed to prove by clear and convincing evidence that the principal had lacked the requisite-testamentary-capacity to enter into an IRA agreement and to designate a beneficiary on her IRA.
Appellate Decision: Affirmed.

Introduction

Betty S. Anderson (“Betty”) was the mother of Kimberly and Michael.1 Michael was the financial power of attorney and Successor Trustee of the Betty S. Anderson Children Trust and the Betty S. Anderson Grandson Trust.2 After Betty’s death, the primary beneficiaries of the Children Trust were Kimberly and Michael.3 Under Betty’s will, her net estate was to be distributed in equal one-third shares to Michael, to the Betty S. Anderson Children Trust (the “Children Trust”), and to the Betty S. Anderson Grandson Trust (the “Grandson Trust”).4 Betty had executed the will, created the trusts, and appointed Michael as her attorney-in-fact under a durable power of attorney on June 25, 2003.5

Betty also owned an IRA, and originally designated Kimberly and Michael as equal beneficiaries.6 On June 4, 2003, Betty changed the beneficiary designation to name Michael as the IRA’s sole beneficiary.7 On June 26, 2003, the day after she executed her will and created her trusts, she again changed the beneficiary designation to Michael, the Children Trust, and the Grandson Trust, each to receive an equal 1/3 share.8

In 2009, Betty learned that the institution holding her IRA was suffering financial difficulties, whereupon Michael suggested to her that she move her IRA to UBS and use Michael’s friend Stephen Lee as her financial advisor.9 On February 25, 2009, Betty executed several documents to open an account at UBS and transfer her IRA there.10 She signed a UBS power-of-attorney form designating Michael as her agent with respect to the UBS account, which Kimberly also signed as witness.11 Betty also signed a UBS signature page acknowledging that she had read, understood, and agreed to the terms and conditions of the UBS “Client Relationship Agreement,” a single-spaced seven-page document, in addition to the terms of her “New Account Booklet,” which incorporated more than 60 pages of account documents pertaining to account information, terms, conditions, and disclosures.12 The “Client Relationship Agreement” contained a transfer-on-death designation naming Michael as sole beneficiary.13 In June, 2010, at Michael’s request, the probate court declared Betty incompetent due to dementia and appointed Michael her guardian.14 In May, 2012, two months after Betty’s death, Betty’s UBS account was closed and the funds transferred to Michael.15

Kimberly filed a complaint in June, 2017, for declaratory judgment, trust accounting, money damages, and removal of Michael as trustee of the Children Trust.16 She alleged that Michael knew Betty suffered from dementia at the time she opened the UBS IRA, and that he allowed himself to be designated as the account’s sole beneficiary in contravention of Betty’s will and overall estate plan.17 Kimberly also alleged that Michael had converted her share of the IRA and breached his duty as financial power of attorney by designating himself as sole beneficiary; and that he breached his fiduciary duty when he acted in his own self-interest, failed to disclose his conflict of interest, exerted undue influence on Betty, and/or caused her to execute documents under a mistake of fact; and that Michael intentionally interfered with her expected inheritance from the account.18 At trial, the magistrate entered judgment for Michael because there was no evidence that dementia actually affected Betty’s ability to make the designation.19 Kimberly objected to the magistrate’s decision, arguing to no avail that she had presented sufficient evidence for the court to declare the 2009 beneficiary designation void.20  Kimberly brought a single assignment of error arguing that the trial court erred in finding that she failed to present clear and convincing evidence of Betty’s lack of mental capacity to contract, that the court applied the wrong test for mental capacity to contract and that the court’s decision was against the manifest weight of the evidence.21

This case is of interest to attorneys who plan and litigate Ohio estates because it clarifies the level of mental capacity required to execute such beneficiary designations as are designated contractual in nature by statute but also have testamentary effect, and emphasizes the substance of expert witness testimony requisite to show or overturn a finding of capacity.

Background

The test for mental capacity to enter a contract is whether the person understood the nature of the transaction and the effects of her own actions, and is similar to the test used to determine testamentary capacity.22

The test for testamentary capacity is whether the person has “sufficient mind and memory: First, to understand the nature of the business in which he is engaged; Second, to comprehend generally the nature and extent of his property; Third , to hold in his mind the names and identity of those who have natural claims upon his county; [and] Fourth, to be able to appreciate his relation to the members of his family.”23

The Ohio Uniform Transfer-on-Death Security Registration Act governs certain beneficiary designations, including the transfer of IRA proceeds.24 Under the Act, a transfer-on-death occurs as a result of contract and is not testamentary in nature.25 The Act, in effect, removes such transfers from  the decedent’s testamentary estate, from Ohio’s Statute of Wills, and from the formalities that apply to such testamentary dispositions.26

Even though such a transfer is contractual and not testamentary, Ohio courts have held that “the test of testamentary capacity can also be used as a standard for mental capacity to execute a beneficiary designation.”27

A party seeking to establish that a contract or beneficiary designation is voidable on the ground that a party lacked mental capacity to enter into it must establish the lack of mental capacity by clear and convincing evidence.28

Case Description

At trial, evidence was presented from Stephen Lee’s deposition that he met with Betty alone in his office at least once prior to February 25, 2009.29 Betty had expressed her reasoning for changes in her estate plan, and Lee believed Betty understood her goals, the means to accomplish them, and that she was a capable person.30 Lee testified that if he had believed Betty was not capable of understanding what she was doing, he would have referred the matter to his firm’s legal department.31 Lee testified that he did not discuss Betty’s beneficiary designations with Michael, and that Betty made her decisions alone.32 Michael testified that both he and Kimberly were present when Betty executed the UBS documents on February 25, 2009; that to his knowledge Betty was not suffering from dementia and had not been diagnosed with dementia at the time she signed the documents, and that he had no discussions with either Betty or Lee regarding making himself the sole beneficiary of the UBS IRA.33 Kimberly testified that at the time Betty signed the documents, she was fully aware of who Kimberly, Michael, and Kyle were.34 Kimberly also testified regarding the 2010 probate court hearing resulting in Betty’s guardianship, stating that she had testified that Betty did not need a guardian because Betty was capable of handling her own affairs.35

Expert testimony from Barbara Brewer, Ph.D., who had conducted a Mini Mental Status Exam on Betty on April 2, 2009, indicated that Betty had been “on the edge of the mild” range of cognitive impairment at that time, but that “severe cognitive impairment” was indicated by further testing on March 11, 2010.36 While Dr. Brewer testified that Betty had been mentally impaired by dementia on February 25, 2009, and that it was extremely unlikely that Betty had been able to read or comprehend the Client Relationship Agreement she signed on February 25, 2009, Dr. Brewer did not affirmatively state that Betty’s dementia actually affected her ability to make the beneficiary designation.37

After trial, the magistrate found for Michael on the basis that no evidence had shown that he had either manipulated Betty into making the beneficiary designation or unduly influenced her, and that Dr. Brewer’s opinion as to Betty having dementia at the time she made the beneficiary designation was not itself sufficient to determine whether dementia actually affected Betty’s ability to make the designation.38 The magistrate found no evidence that Michael had actually manipulated Betty into making the beneficiary designation.39 Although Kimberly object to the magistrate’s decision and challenged the conclusion that Kimberly had not presented sufficient evidence for the court to consider the 2009 beneficiary designation void,40 the trial court overruled the objection and adopted the magistrate’s decision as the judgment of the court, finding that Kimberly failed to prove that Anderson lacked the mental capacity to execute the 2009 beneficiary designation.41

On appeal, Kimberly argued that the trial court erred in finding that she had failed to present clear and convincing evidence of  lack of capacity to contract.42 Kimberly argued that the court applied the wrong test for mental capacity to contract and that the court’s decision was against the manifest weight of the evidence.43 She also contended that the Ohio Uniform Transfer-on-Death Security Registration Act governed Betty’s beneficiary designation, so the transfer on Betty’s death was not testamentary, and so the test of testamentary capacity did not apply to a determination of Betty’s ability to enter the contract; instead, the general test of capacity to enter a contract should govern.44 Kimberly also argued that the court improperly limited its review of Betty’s mental capacity to her designation of a beneficiary and not the seven-page “Client Relationship Agreement” as a whole, which incorporated the 60-page “New Account Booklet.” Kimberly’s Complaint, however, sought a declaration striking only the beneficiary designation, not the entire contract, as void.45

The Court of Appeal affirmed the lower court decision for Defendants because it had not been proved by clear and convincing evidence that Betty had lacked the mental capacity to enter into the IRA Agreement and to designate a beneficiary for her IRA. Dr. Brewer’s testimony did not address the elements of testamentary capacity and whether Betty’s dementia actually affected her ability to make beneficiary designations.46 Rather, there was ample evidence that Betty was capable of knowingly and competently designating Michael as the beneficiary.47 While Kimberly also contended that the lower court weighed the evidence improperly by valuing Lee’s testimony more highly than Dr. Brewer’s, the expert testimony was not in contradiction with the conclusion that Betty had had the requisite capacity at the time she signed the beneficiary designation.48

Conclusion

Despite the Ohio Uniform Transfer on Death of Securities Act, the Webb court concluded that the mental capacity required to designate an IRA beneficiary was only testamentary capacity rather than the greater capacity required to contract.49 To prove lack of mental capacity, a litigant must show by clear and convincing evidence that an impaired mental state actually did affect a principal’s beneficiary designation.50

  1. Webb v. Anderson Children Trust, 2020-Ohio-4975, ¶ 1.
  2. Id. at ¶¶ 4, 5.
  3. Id. at ¶ 5. The Grandson Trust was intended to provide for Kyle M. Webb, Betty’s grandson, with the balance of the estate to be distributed to Kyle upon his reaching the age of 25.
  4. Webb at ¶ 4.
  5. Id.
  6. Webb at ¶ 7.
  7. Id.
  8. Id.
  9. Webb at ¶ 8.
  10. Id. at ¶ 10.
  11. Id.
  12. Webb at ¶ 11.
  13. Id.
  14. Webb at ¶ 12.
  15. Id. at ¶ 13.
  16. Id. at ¶ 14.
  17. Id. at ¶ 15.
  18. Id.
  19. Webb at ¶ 28.
  20. Id. at ¶ 29.
  21. Id. at ¶ 31.
  22. Webb at ¶ 34, citing Giurbino v. Giurbino, 89 Ohio App. 3d 646, 658 (8th Dist. 1993).
  23. Id. at ¶ 35, quoting Flowers at ¶ 84, quoting Niemes v. Niemes, 97 Ohio St. 145 (1917).
  24. Ohio Rev. Code 1709, et seq.
  25. Ohio Rev. Code 1709.09(A).
  26. Webb at ¶ 33, citing Bielat v. Bielat, 87 Ohio St. 3d 350, 351 (2000).
  27. Webb at ¶ 34, quoting Stanek v. Stanek, 2d Dist. Greene No. 2018-CA-39, 2019-Ohio-2841, ¶ 38, quoting In re Estate of Flowers, 2017-Ohio-1310, ¶ 84 (6th Dist.).
  28. Webb at ¶ 36, citing Flowers at ¶ 84, Giurbino at 658; Davis v. Marshall, 10th Dist. Franklin No. 94APE02-158; Schiavoni v. Roy, 9th Dist. Medina No. 11CA108-M, 2012-Ohio-4435, ¶ 17.
  29. Webb at ¶ 16.
  30. Id. at ¶¶ 16, 17.
  31. Id. at ¶ 18.
  32. Id. at ¶ 19.
  33. Webb at ¶ 20.
  34. Id. Kimberly testified, consistent with Michael’s testimony, that she had been present when Betty signed the UBS documents, and acknowledged her signature on the UBS power-of-attorney form. Kimberly further testified that she had not read the form before she signed it, and that Betty had not been present when Kimberly signed.
  35. Webb at  ¶¶ 22, 23.
  36. Id. at ¶¶ 24, 25.
  37. Id. at ¶¶ 27, 28.
  38. Id. at ¶ 28.
  39. Id.
  40. Webb at ¶ 29.
  41. Id. at ¶ 30.
  42. Id. at ¶ 31.
  43. Id.
  44. Webb at ¶ 32.
  45. Id. at ¶ 37.
  46. Id. at ¶ 38.
  47. Id. at ¶ 39. In fact, even applying the test for competency to contract generally, the Court of Appeal reached the same result.
  48. Webb at ¶¶ 41- 43.
  49. Id. at ¶ 39.
  50. Id. at ¶ 44.