What Happens When a Settlor Loses Capacity?

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As our population ages, trustees of revocable trusts will be faced with an increasingly common predicament: what happens after my settlor loses capacity?[1]  This question gives rise to many other questions – Is the trust now “irrevocable”? What duties do I owe and to whom? What if the loss of capacity is only temporary?

Before considering these questions, it’s important to first understand a trustee’s duties under a revocable trust before the loss of capacity.  When a settlor has capacity, the “rights of the beneficiaries are subject to the control of, and the duties of the trustee are owed exclusively to, the settlor.”  Colo. Rev. Stat. § 15-5-603(2).  This small sentence has big consequences.

While the settlor has capacity, the trustee may follow a settlor’s directions even if contrary to the terms of a trust; the trustee of revocable trust need only report to the settlor (not other beneficiaries); and only the settlor may bring claims against the trustee for breach of fiduciary duty.  Upon the loss of capacity, do these obligations change? Not really.

A settlor’s loss of capacity does not render a trust “irrevocable.”  That is, the settlor’s power to revoke is “not terminated by the settlor’s incapacity” and may instead be exercised by an agent under a power of attorney, a conservator, or a guardian.  UTC § 602, cmt.; see also Colo. Rev. Stat. § 15-5-602.  Further, a settlor may revoke the trust if he or she regains capacity.

Because the trust remains “revocable” (but subject to any contrary terms of the trust), the trustee does not need to notify the beneficiaries of the trust’s existence, does not need to inform or report to the beneficiaries, and may only be sued by the settlor’s agents.  This result will not be the same for every trust and will differ depending upon what state’s law governs the trust.  However, in Colorado, the law intends to honor revocable trusts’ role as “will substitutes” and ensures that devisees under a revocable trust “have no right to know of the dispositions made in their favor until the testator’s death, whether or not the testator is incapacitated.”  UTC § 603, cmt.

[1] Note this post does not address irrevocable trusts.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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