What Happens if a Beneficiary Becomes Mentally Incompetent?

by Rob Jennings
A mentally incompetent beneficiary may need a guardian appointed.

A mentally incompetent beneficiary may need a guardian appointed.

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The mental incompetency of a beneficiary can create complications for the trustee of a trust or anyone else who stands in a fiduciary relationship to that beneficiary. A duty to manage assets for another's benefit can conflict with a duty to pay money or distribute assets to an individual who may be incompetent to handle her own affairs. Fortunately, this conflict is not impossible to resolve.

Assessing Mental Incompetency

Not all strange behavior equates with mental incompetency. While the law on incompetency varies from state to state, the general rule is that a person must be unable to handle her own personal or financial affairs in order to be considered mentally incompetent. A person who still understands the concept of money, is oriented to time, date and place, and who appears capable of taking care of his health and hygiene will probably not be held incompetent by a court even if he exhibits odd behavior. Understand the difference between eccentricity and mental incompetency before making any decisions that affect the beneficiary's receipt of money or property.

Determining Incompetency

Even if a beneficiary appears clearly incompetent, making this decision isn't your job. Depending upon your jurisdiction, the power to declare an adult mentally incompetent may lie with a magistrate, clerk of court or a judge. Until this declaration is made, your express duties to the beneficiary under the trust -- or whatever document created your fiduciary relationship -- continue. You can't decide on your own to withhold distributions just because you believe the beneficiary is incompetent.

Relying on Durable Power of Attorney

A durable power of attorney authorizes another person, called the attorney-in-fact, to act on the principal's behalf even if the principal becomes mentally incompetent. If a beneficiary you suspect has become incompetent has a durable POA in place, notify the attorney-in-fact of what you've been seeing. This person will be empowered to handle the beneficiary's money and property even in the absence of a judicial declaration of incompetency.

Guardianship or Conservatorship

A guardianship proceeding, called a "conservatorship" proceeding in some states, may be necessary if the beneficiary is mentally incompetent, even when a durable POA exists. In a guardianship proceeding, a petitioner--who isn't necessarily asking to become guardian--asks an appropriate judicial official to declare the respondent incompetent and appoint a guardian. Unlike an individual who has merely named an attorney-in-fact under a POA, a declared mental incompetent cannot legally convey property or enter into contracts. This can prevent the beneficiary from wasting or giving away funds or property that you have to distribute to him.