Legal knowledge is worth its weight in gold, and rarely free. Legal Opinions has compiled a host of attorneys, experts in their field, to provide information and resources on a variety of topics. Nevada Business Magazine has been publishing this feature since 2014. Articles in the 2024 edition of Legal Opinions offer advice to business owners and executives on issues directly affecting their workforce, bottom line and future efforts.
If Cannabis Is Rescheduled . . . Then What?
By Alicia R. Ashcraft, managing partner and Jeffrey F. Barr, managing partner, Aschraft & Barr
In case you didn’t catch it, the Department of Justice published a notice of proposed rulemaking on May 20, 2024, to reschedule cannabis from Schedule I of the Controlled Substances Act (CSA) to Schedule III. This move is profound for state-licensed cannabis businesses, though not in the way that people might expect.
As a reminder, substances listed on Schedule I are held to have no currently accepted medical use, a high potential for abuse and a potential high physical or psychological dependence. A move to Schedule III reflects a recognition of the medical uses of cannabis and an acknowledgement that cannabis has less potential for abuse than other substances.
This is consistent with the scientific review supporting the Department of Health and Human Services (HHS) recommendation for rescheduling earlier this year. While the change will not legalize cannabis, it marks a significant move toward reducing federal prohibitions and recognizing cannabis’s therapeutic and medical benefits. The Drug Enforcement Administration (DEA) will conduct a hearing later this year to consider rescheduling.
If the DEA makes the move to Schedule III, the manufacture, distribution, dispensing and possession of cannabis would not be decriminalized. Additionally, any drugs containing marijuana would remain subject to certain prohibitions under the Federal Food and Drug Administration (FDA). The DEA indicated that a drug containing marijuana would need FDA approval to be lawfully introduced into interstate commerce. In short, cannabis would still remain a controlled substance subject to federal law, and those who traffic in cannabis without proper authorization could still face federal prosecution.
So, if cannabis remains under the CSA, what’s the benefit to state operators? The principal benefit would be that rescheduling would eliminate the burden of Internal Revenue Code 280E (IRC 280E), which prohibits businesses that are “trafficking in controlled substances” from taking tax deductions for ordinary and necessary business expenses. Rescheduling would remove this prohibition and allow state-licensed cannabis businesses to take deductions for various expenses like other businesses.
Similarly, rescheduling has the potential to ease banking issues for the cannabis industry, primarily by lessening the regulatory and legal risks that have impeded the availability of financial services. As a Schedule III substance, cannabis businesses would be viewed and treated as those working with highly-regulated substances, which would reduce the risk for the financial institutions and provide greater access to loans and other traditional financing mechanisms. Other clarifying legislation, such as the Secure and Fair Enforcement Regulation Banking Act (SAFER Banking Act), which has been proposed in some form for over 10 years, may follow, providing protections and less risk for financial institutions.
A further benefit of rescheduling would be a relaxation of the restrictions on cannabis research. The current placement on Schedule I means that the CSA imposes strict controls on research involving marijuana, including very stringent licensing and compliance, involving both the DEA and FDA, for growers and producers, as well as for those conducting the research. Rescheduling could allow easier access to funding and grants for cannabis studies which were previously unavailable.
Moreover, rescheduling would mean that cannabis businesses could potentially take advantage of other federal laws, such as intellectual property and bankruptcy, from which they were previously excluded. Intellectual property protection can give a company in an emerging industry a competitive edge to be able to own exclusive rights to unique strains, extraction methods or product formulations and attract investors. Likewise, these companies that have faced a large tax burden and limited access to banking and finance, may then be able to reorganize under federal bankruptcy, which allows distressed businesses some breathing room from creditors and to restructure debts.
While the rescheduling of cannabis does not constitute “legalization” for recreational use, and the same criminal prohibitions would exist restricting unauthorized manufacturing, distributing, and possession, the meaningful benefits for cannabis-related businesses in the availability of tax deductions, banking, and research are profound in the next stage of the evolution for this industry.
The When, Who, How and What of Internal Investigations
By Greg Brower, shareholder and Jamie Leavitt, associate, Brownstein Hyatt Farber Schreck
Organizations of all types can face situations when an internal investigation is helpful, or needed, to establish facts and identify potential risks. These may include allegations of sexual harassment, a violation of company policy, or even criminal conduct. When confronted with such a situation, the organization’s leadership must carefully consider whether a formal investigation is warranted and, if so, how it should be conducted and with what end goal. Here are four questions to review.
When is an internal investigation required?
Not every workplace complaint warrants a formal investigation. For example, complaints relating to personality conflicts or other common workplace disagreements are usually best handled by a supervisor with some guidance from the human resources (“HR”) department. However, allegations of misconduct that go beyond the ordinary and potentially implicate legal or policy issues that can create risk for the organization, such as a report of sexual misconduct, discrimination, regulatory deficiency or criminal conduct should always be investigated. These types of situations can create potential risk for the organization in the form of civil litigation, regulatory enforcement proceedings, or even criminal prosecution. The determination of whether an allegation requires an investigation should be made by someone entirely unbiased and competent to evaluate the situation.
Who should conduct the investigation?
Once it is decided that an investigation is appropriate, the next question is whether it can and should be conducted in-house or by an independent outsider. The right answer depends on a range of factors, including whether the organization has an adequate in-house investigative capability. Large companies generally have a human resources department capable of investigating most types of workplace complaints with the advice of in-house legal counsel. Small organizations may not have such in-house resources. Even when adequate in-house capability does exist, there are other factors that may favor the retention of an outside investigator, such as a conflict of interest, a subject matter requiring specialized knowledge, or when the allegation implicates one or more senior leaders within the organization. In any of these situations, engaging an independent outside firm with the expertise to conduct the investigation is generally the way to go.
How should the investigation be conducted?
After determining that an investigation is warranted, someone, whether the head of HR, an in-house attorney or the board of directors, depending on the nature and target of the allegation, should work together with the investigator to determine the scope of the investigation. This discussion should include, among other things, a timeline for completion, whether witness interviews can be virtual or must be in person, and details of document retention, if appropriate. If using an outside investigator, a budget should also be discussed. A detailed discussion upfront about the scope of the investigation will generally avoid unmet expectations at the end of the process.
What is the deliverable?
There must be agreement on exactly what will be delivered to the organization at the end of the investigation. Sometimes, the goal of the investigation can be accomplished with a verbal briefing by the investigator without a formal written report of the investigator’s findings. Other investigations demand a formal, written report. This decision will depend on several factors, including the subject matter, the nature of the allegations, potential regulatory implications and whether a parallel law enforcement investigation is also underway.
An internal investigation can be an important tool for an organization to understand the facts surrounding an allegation or report of misconduct or wrongdoing and any potential risk the organization may face as a result. Conducting an internal investigation properly is critical to mitigating that risk to the greatest extent possible.
Unions Now Have a Fast Track Method for Organizing the Employees of Nearly any Business.
By Mark J. Ricciardi, founding and managing partner, Las Vegas Fisher Phillips
Businesses across the country of every size and in every industry, (except for certain businesses engaged in agriculture), are now subject to new rules making it much easier for unions to organize employees. Beginning last year, the National Labor Relations Board (Board), has drastically changed how employers should respond to union recognition demands and in many cases, employers can now be required to bargain regardless of the results of an election. Lawyers who practice employment law may not be conversant in labor law. Therefore, businesses should reach out to experienced labor counsel to prepare for these new developments.
The Board’s August 2023 decision in Cemex essentially puts the onus on an employer confronting a union recognition demand to timely petition for a representation election and forces them to the bargaining table in response to unfair labor practices that would otherwise have warranted setting aside that election. That decision swept away over 50 years of precedent entitling employees and employers a secret-ballot election monitored by the NLRB.
Board has also limited the power of employers to implement changes during first contract negotiations and upon expiration of collective bargaining agreements, respectively. These decisions severely limit the changes that employers can unilaterally make once a union in in the picture.
In December, the Board’s so-called “quickie election” rule took effect, greatly accelerating the time between union petitions and elections and making life that much harder for employers responding to a union organizing campaign.
The Board has also overturned three Trump-era rules that had made it easier for workers to undo union representation via the decertification process.
The early returns show that these initiatives have achieved the intended effect, as illustrated by the 35 percent increase in union election petitions in the first half of 2024. More evidence comes from the 13-fold increase in election petitions filed by employers this year relative to the preceding decade, thanks to the new Board standard that requires employers to affirmatively request secret-ballot elections for purposes of contesting recognition demands.
What steps can businesses legally take before a union is in the picture? Here’s how they can reduce their risk of liability for potential unfair labor practice (ULP) claims while safeguarding the opportunity for employees to make informed decisions on the issue of union representation.
Train supervisors and managers. While the NLRB is increasingly regulating their ability to lawfully respond to union activity, employers technically retain statutory “free speech rights” about union representation. Employees may not always receive a complete picture of what it means to select a union as their exclusive representative from the union organizer alone. It is more important now than ever for supervisors to understand what can be said lawfully, the role they play in maintaining a positive employee relations infrastructure, and the importance of avoiding ULPs. It is also critical that supervisors understand how to respond to a union’s request for recognition. Supervisors are often the first line of exposure in such cases, but one that is properly trained can instead serve as the first line of defense, while serving as an indispensable part of any employer’s effort to lawfully keep employees fully informed.
Create positive relationships with employees. HR and frontline managers should commit to developing a positive workplace culture by regularly interacting with, seeking input from, listening to, and resolving employee concerns well before the onset of any organizing effort. Employers should consider implementing a regular process for auditing and confirming that wages remain competitive, while maintaining a robust communication process for reinforcing the “hidden value” of their benefits package.
Recognize that a “one size fits all” approach may not be best. Employers are encouraged to collaborate with their internal stakeholders and labor counsel to tailor an appropriate compliance strategy around the unique aspects of their workplace cultures.
Arbitration: Neither Your Business Nor Your Adverse Party Agreed To It? You Both May Still Be Bound!
By R. Duane Frizell, Attorney, Frizell Law Firm
Consider this: Your business did not sign an arbitration agreement, and your adverse party did not either. Your business does not want to arbitrate. Well, that just may be tough luck.
Many companies like to arbitrate disputes. Others try to avoid arbitration because, perhaps in their experience, they have found that arbitration was not faster or cheaper than court litigation, some arbitrators were not as seasoned as judges on the bench, or the loss of an opportunity for a substantive appeal proved to be a disastrous drawback. Regardless of a business’s opinion of arbitration, it needs to know when it and other parties are bound to that process.
“Generally, arbitration is a matter of contract and ‘a party cannot be required to submit to arbitration any dispute which [it] has not agreed so to submit.’”1 “Nevertheless, the obligation to arbitrate, which was executed by another party, may attach to a nonsignatory.”2 For example, “various courts have adopted ‘theories for binding nonsignatories to arbitration agreements: 1) incorporation by reference; 2) assumption; 3) agency; 4) veil-piercing/alter ego; and 5) estoppel.’”3 Long ago, the Nevada Supreme Court adopted all five theories.4
Up until recently, the question was this: “whether [a] nonsignatory can be compelled to participate in arbitration by another nonsignatory.”5 The Nevada Supreme Court has answered the question in the affirmative, holding “that a nonsignatory can be compelled to arbitrate by another nonsignatory after demonstrating both the right to enforce the contract and that compelling another nonsignatory to arbitration is warranted under one of the five theories” discussed above.6
Under an “incorporation by reference” theory, a business may be bound by an arbitration agreement, even if it did not sign the agreement, if the agreement is incorporated into another contract that is signed by the business.7 An “assumption” theory may apply when a non-signing party takes on or “assume[s] both the benefits and the obligations of … [a] contract[]” that includes an arbitration clause.8 With an “agency” theory, a company may be bound to an arbitration agreement when an individual or entity that signed the agreement “was acting in an agency capacity for the nonsignatory” company.9
A “veil-piercing/alter ego” theory may bind a corporation to an arbitration agreement entered into by one of its insiders, rather than the corporation itself, when “(a) [t]he corporation is influenced and governed by the [insider]; (b) [t]here is such unity of interest and ownership that the corporation and the [insider] are inseparable from each other; and (c) [a]dherence to the notion of the corporation being an entity separate from the [insider] would sanction fraud or promote a manifest injustice.”10 The alter-ego doctrine applies to other types of businesses as well, such as limited liability companies.11
An “estoppel” theory “‘precludes a party from claiming the benefits of a contract while simultaneously attempting to avoid the burdens that contract imposes.’”12 Thus, the estoppel “doctrine applies when ‘the nonsignatory party seeks, through [its] claim [in litigation], to derive a direct benefit from the contract containing the arbitration provision.’”13
In Nevada, it is now clear that under one or more of the five theories discussed above, a party that did not sign an arbitration agreement may enforce the agreement against another party, even if the other party did not sign it either. Businesses need to beware and seek legal advice as to how to bind others to arbitration or avoid it altogether.
1. Truck Ins. Exch. v. Swanson, 124 Nev. 629, 634, 189 P.3d 656, 660 (2008).
2. Id.
3. Id. at 634-35, 189 P.3d at 660.
4. See id.
5. RUAG Ammotec GmbH v. Archon Firearms, Inc., 139 Nev. Adv. Rep. 48, 538
P.3d 428, 430 (2023).
6. Id. at 435.
7. See Gvozdenovic v. United Air Lines, Inc., 933 F.2d 1100, 1103-05 (2d Cir. 1991)
(cited with approval in Truck).
8. Mt. Wheeler Power v. Gallagher, 98 Nev. 479, 482-83, 653 P.2d 1212, 1214 (1982).
9. Continental U.K., Ltd. v. Anagel Confidence Compania Naviera, S.A., 658 F.
Supp. 809, 813 1987 (S.D.N.Y. 1987) (also cited with approval in Truck).
10. NRS 78.747(2); see also Truck, 124 Nev. at 635, 189 P.3d at 660.
11. See NRS 86.376.
12. RUAG, 538 P.3d at 435.
13. Id.
Don’t Roll The Dice: Nevada Gaming Operators Must Keep Up With New Cybersecurity Regulations
By John T. Moran, III, Partner, Las Vegas office of Hutchison & Steffen
In September 2023, cyberattacks targeting MGM Resorts and Caesars Entertainment highlighted vulnerabilities that the gaming industry will face for years to come.1 The cybersecurity breaches have subjected these companies to litigation, investigations, and potentially regulatory penalties. As the gaming sector grows, and as gaming operators increasingly integrate technology into their operations, this surge in targeted cyberattacks will persist for the foreseeable future. Regulatory agencies are recognizing the financial toll a cyberattack has on companies and the threats consumers face when their private information unexpectedly falls into the hands of criminals. Consequently, gaming operators in Nevada must not neglect new regulations from the Securities and Exchange Commission (“SEC”) and the Nevada Gaming Commission (“NGC”) for filing cybersecurity disclosures.
New SEC Cybersecurity Disclosures
The SEC adopted rules mandating cybersecurity disclosures, with compliance required from all reporting companies by June 15, 2024.2 Within just four business days of concluding a “cybersecurity incident” is “material,” reporting companies—which means most gaming operators—must file disclosures on the new Item 1.05 of Form 8-K about the “material aspects of the nature, scope, and timing” of the event and the impact or reasonably likely impact on the company. Notably, the SEC defines “cybersecurity incident” broadly. Whether accidental or incidental, it includes any “unauthorized occurrence…that jeopardizes the confidentiality, integrity, or availability of a registrant’s information systems or any information residing therein.” Even material cybersecurity incidents concerning third-party services must be reported. Only the United States Attorney General, after determining these disclosures would lead to “a substantial risk to national security or public safety,” may extend the four-business-day deadline.
A second rule, Regulation S-K Item 106, requires periodic disclosures on the annual Form 10-K about the reporting company’s cybersecurity procedures for evaluating and managing material cybersecurity threats. Reporting companies must disclose “whether any risks from cybersecurity threats…have materially affected or are reasonably likely to materially affect” the business and its financial situation. The filing must describe how the company oversees material cybersecurity risks to third-party service providers. Also, Item 106 requires descriptions of the board of directors’ role in overseeing risks from cybersecurity threats and management’s role in assessing and managing material risks from cybersecurity threats.
Nevada Gaming Commission’s Cybersecurity Regulations
Effective last year, the NGC adopted amendments for regulations concerning cybersecurity requirements and cyberattack reporting.3 Given “the ongoing threat of cyberattacks,” NGC Regulation 5.260 calls for “gaming operators [to] take all appropriate steps to secure and protect their information systems.” The regulations apply to “covered entit[ies],” which means gaming operators holding either nonrestricted licenses or gaming licenses for operating a race book, a sports pool, and interactive gaming.
Covered entities must conduct an “initial risk assessment” of their business and create “cybersecurity best practices it deems appropriate.” On an “ongoing basis,” they must monitor cybersecurity risks and update their best practices and risk assessments. And in the event of a cyberattack, covered entities must provide written notice to the NGC Board within 72 hours of learning about the incident—a tighter window than the four-business-day deadline for SEC disclosures. The victim or a third-party must investigate the attack and share a report of the results with the NGC Board upon request. The report must describe the incident and actions taken or planned to be taken to avoid future cyberattacks.
Cyberattacks pose an existential threat to the gaming industry. Winning in the digital age requires strong cybersecurity safeguards and proactive risk management. Nevada gaming operators must seek competent counsel to comply with these stringent regulatory requirements, which include both periodic and post-incident disclosures.
1. https://www.nbcnews.com/tech/security/caesars-entertainment-says-was-also-victim-cyberattack-rcna105050.
2. https://www.sec.gov/files/rules/final/2023/33-11216.pdf.
3. Nevada Gaming Commission Regulation 5.260
Working Capital Adjustments in M&A Transactions
By Krisanne S. Cunningham, Managing Partner and Hailey C. Nicklin, Associate, Rice Reuther Sullivan & Carroll
Working capital adjustments are often an integral part of merger and acquisition (M&A) transactions. The working capital of the business being sold (often referred to as the target) changes daily, making it difficult for parties to assess the target’s exact working capital at the closing of an M&A transaction. Adjustments to the agreed-upon purchase price may be made based on the target’s working capital to ensure the final purchase price reflects the actual economic value of the business.
Working capital is typically defined as the difference between a company’s current assets (e.g., cash, accounts receivable, inventory, etc.) and a company’s current liabilities (e.g., accounts payable, debts, and other obligations due within a short term). Buyers want to purchase a company with a positive working capital balance, knowing that they’ll have enough current assets on hand to pay current liabilities as they become due during the initial period after closing. Buyers also want to purchase a business whose working capital is generally equivalent to the historical working capital on the financials the buyer reviewed during diligence.
By its very nature, the target company’s working capital will fluctuate due to its daily business operations, making it difficult to estimate and determine its actual working capital on the closing date. And, buyers often negotiate the purchase price of a business assuming a certain level of historical working capital will be present at closing. If actual working capital at closing is different than historical working capital (often called target working capital), it is typically seen as fair for a buyer or seller to make adjustments to the purchase price at closing. However, even adjustments at closing are based on estimates since working capital is fluctuating on a daily basis and actual numbers on any given date typically some take time to finalize. Therefore, often, there is a post-closing period designed to allow the parties to determine and agree on the final working capital calculation at closing, and the final purchase price is either increased or decreased at the end of this post-closing period based on the calculation of actual working capital, instead of estimates, on the closing date.
Generally, the target will need a minimum amount of working capital post-closing to continue its operations smoothly and efficiently. This amount, usually estimated at the letter of intent stage and based on a historical average of six to twelve months, is the target working capital. Once this target working capital is agreed upon, the purchase price is often adjusted based on the actual working capital at closing.
Suppose the company has more working capital at closing than the agreed target working capital. In that case, the purchase price might be adjusted upwards as the buyer gets more value from the company’s operational liquidity. Alternatively, if the actual working capital at closing is less than the agreed target, the purchase price might be adjusted downwards.
For example, buyer and seller agree on a purchase price of $10 million and, based on historical working capital, agree on a target working capital of $1 million. If at closing, the actual working capital is $1.2 million, the purchase price might be adjusted upwards (to $10.2 million) to reflect the additional working capital that is transferring to buyer at closing. Conversely, if the actual working capital at closing is only $800,000, the purchase price might be adjusted downwards to reflect this shortfall (to $9.8 million).
A post-closing working capital adjustment can be made at various points during the transaction process but typically takes place between 30 and 120 days after closing. At this point, accounts are closed, and financials are finalized, allowing the buyer’s team sufficient time to calculate an accurate working capital figure as of the closing date. This final calculation of actual working capital at closing is then compared with the target working capital, and the final purchase price is adjusted based on differences between these two numbers.
In summary, the working capital calculation and subsequent adjustment to the purchase help achieve a fair purchase price for both the buyer and the seller in an M&A transaction. This adjustment ensures that the buyer acquires a financially stable and operationally viable business and, also, pays a fair price based on the actual working capital delivered at closing. The adjustment also reduces the seller’s incentive to manipulate working capital by accelerating the collection of receivables, delaying payables, and taking other actions to maximize cash distributable to the seller prior to closing while also ensuring the seller is compensated for any discrepancies in the working capital from what was anticipated.
Act Now: Transfer Assets Tax-Free with SLATs Before the 2025 Deadline
By Stephanie B. Casteel, Partner, Snell & Wilmer
A closing window of opportunity exists now until the end of 2025 to transfer $13.61 million ($27.22 million per married couple, and in both cases, as further adjusted by inflation in January) out of one’s taxable estate without federal gift or estate tax. Unless Congress acts, these amounts are scheduled to be cut in half after 2025 when portions of the Tax Cuts and Jobs Act of 2017 expire. The federal gift and estate tax exemption has never been this high, other than the year in which there was no estate tax (but still gift tax), and many people may want to use this exemption before it expires, who are concerned about losing access to the transferred assets.
A solution is create a spousal lifetime access trust (“SLAT”), which allows someone to transfer significant assets out of their taxable estate while providing her spouse access to such assets. In this manner, the SLAT grantor has access to the trust assets. A SLAT is an irrevocable trust usually for the ultimate benefit of the grantor’s descendants, but the grantor’s spouse also is a trust beneficiary. The trustee may make distributions to the grantor’s spouse for health, education, maintenance, and support in the spouse’s accustomed manner of living and, if the trustee is independent, the trustee can be given the discretion to make distributions for any reason. A SLAT is akin to a credit shelter trust or “family trust” to be created under a person’s revocable trust after death, except that a SLAT is created during life so that the trust grantor can access trust assets indirectly if necessary. Another benefit is that future appreciation of the SLAT assets is removed from the grantor’s estate and will not continue to augment it. A SLAT is only one tool in the estate planning toolbox, but someone wanting to lock in the gift and estate tax exemption who is concerned about transferring so much out of their estate can use a SLAT and continue to have access to the trust assets.
Of course, the grantor’s access to SLAT assets is available only as long as the grantor and their spouse are married, and the spouse is living (although the trust could define spouse to include future spouses if the grantor were to remarry). For these reasons, many couples decide to create SLATs for each other so that even if the spouse dies, and the grantor loses access the SLAT she created for their spouse, the grantor remains a beneficiary of a SLAT created for their by her spouse. It is very important, however, that these SLATs have sufficiently different provisions, or the Internal Revenue Service will argue that the SLATs are “reciprocal” and that each spouse in fact created a trust for his or her own benefit, thereby causing each SLAT to be included in its grantor’s taxable estate under Section 2036 of the Internal Revenue Code. With foresight that the gift and estate tax exemption is scheduled to expire next year, a couple could create SLATs in different tax years, which is one factor in determining whether SLATs are not reciprocal.
Alternatively, if the SLAT is properly structured in Nevada, the grantor also could be a beneficiary of the SLAT they create from inception, or the grantor could be added later as a trust beneficiary if the grantor’s spouse dies or the couple divorces without causing the trust assets to be includable in the grantor’s estate. Nevada is one of a growing number of states in which someone can create a trust and be a beneficiary (a self-settled trust) and keep the trust assets from the reach of creditors. In these states, because the grantor’s creditors cannot reach the trust assets under state law, they are not includable in the grantor’s taxable estate under Section 2036 of the Internal Revenue Code. The grantor cannot control distributions or be entitled to them, but this is an option if the grantor can accept these restrictions.
Individuals have an opportunity before the end of 2025 to transfer out of their estates an unprecedented roughly $14 million ($28 million for a married couple) without gift or estate tax. For those who can afford to make such a transfer, they should consider engaging in estate planning and use the gift and estate tax exemption before it expires. For those who want to do this planning but are hesitant about losing access to the transferred assets, a SLAT may be the ideal solution.
Agents Under Powers of Attorney and Successor Trustees: Problems Encountered in Declaring an Individual Incapacitated Under the Estate Plan.
By Dana Dwiggins, partner, Solomon Dwigins, Freer & Steadman
When an individual creates his or her estate plan, they, in part, plan for their potential incapacity and select individuals and/or entities to make financial and healthcare decisions on their behalf. Whether through financial and healthcare powers of attorney or successor trustees, one or more mechanisms are set forth in the document(s) so as to trigger the designations of the agents or successors to become effective. The mechanisms in one’s estate plan generally require: (a) a declaration by a court of competent jurisdiction; (b) a guardianship proceeding; or (c) a certificate executed by one or more licensed physicians opining as to the individual’s inability to handle their affairs, most commonly requiring the opinion of two (2) licensed physicians. Despite the clarity of these mechanisms, the determination of one’s capacity is often difficult to establish. As one of the purposes of creating an estate plan is to avoid guardianship proceedings and the public nature of them, most individuals generally attempt to rely upon a certification from one or more licensed physicians. This becomes problematic more often than one would anticipate and for several reasons. For example, some individuals only have one regular physician that would even be capable of making such a determination, or none at all. Even when individuals have a primary physician and one or more specialists, unless the specialist is a neurologist or other physician overseeing an individual’s cognitive impairments, physicians are reluctant to state whether an individual is, in fact, capable of handling his or her own financial affairs or making his or her own decisions. Additionally, more and more physicians are reluctant to provide a certification because of potential litigation among family members. With litigation involving a parent disinheriting one or more children in favor of another on the rise, physicians are cautious when a child presents requesting a letter determining his or her parent’s ability to manage their affairs. Physicians are concerned that it will result in a family dispute in which they will be designated as a witness and have to testify. This is especially true when a physician does not routinely see the patient or the patient is new to the physician. In such situations, guardianship proceedings become necessary, resulting in time delays, expense and disclosure of the individual’s finances. It also results in utilizing the individual’s assets during his or her lifetime, which could be detrimental to him or her in the long run. Courts disfavor utilizing an individual’s assets to fund a sibling battle over control of the parent’s finances and ultimate disposition of assets.
To avoid these problems, more and more estate planning attorneys are drafting estate planning documents in a manner so as to allow the appointment of a “Capacity Determination Committee,” generally consisting of family members, advisors, friends and/or a physician. The purpose of a Capacity Determination Committee is to evaluate situations in which the principal or grantor of the trust has suffered a substantial impairment of his or her ability to manage his or her own financial affairs or to manage and care for his or her property due to advanced age, illness, infirmity, mental weakness, or other causes. While the Capacity Determination Committee may either collectively make the determination or select one or more licensed physicians to provide opinions on the extent of the individual’s impairment to the unanimous satisfaction of the committee members, licensed physician are less reluctant to provide an opinion in such situations. This is largely due to the fact that the individual intentionally selected multiple individuals to make the determination and the likelihood of one family member exercising influence is significantly lessened, if not nonexistent.
When creating an estate plan, individuals need to consider the foregoing situations and ensure that the plan created actually will accomplish the goal intended in an efficient manner.
