When a Trustee Loses Capacity

March 07 2014

Removing and replacing incapacitated trustees

With New Zealand’s ageing population, more and more people are losing mental capacity as they grow older. When this happens to a trustee of a trust, it can make trust administration difficult or, in some cases, almost impossible.

Complications to trust administration

The majority of New Zealand’s trust deeds require trustees to act unanimously when exercising their trustee discretions. There are good reasons for this; this, however, becomes impossible when one trustee has lost mental capacity and is not capable of being involved in decision-making. Decisions cannot be made unanimously if one trustee is not capable of making a decision. In practice, this means that the trust is in limbo until the incapacitated person is removed as trustee.

How can an incapacitated trustee be removed?

Many trust deeds provide for a named person, most often the settlor of the trust, to have the power of appointment and removal of trustees. If the deed is silent as to who has the power of appointment and removal of trustees or the person with the power to remove and appoint trustees is the incapacitated trustee, then s43 of the Trustee Act 1956 provides for the continuing trustees to have the power to replace the incapacitated trustee on the basis that they are unfit or incapable of acting. If the person with that power is not the incapacitated trustee, then that person with the power can remove and, if necessary, replace the incapacitated trustee with a new trustee. This is usually done by deed. Under s51 of the Act, the High Court also has the power to remove and replace an incapacitated trustee if it’s inexpedient, difficult or impractical to do so without the court’s assistance. Old age and infirmity have been held sufficient grounds for the court to make an order.

Sections 43 and 51 only apply, however, when you are replacing the incapacitated trustee with a new trustee. These sections cannot be used to remove an incapacitated trustee who is not being replaced. In this situation an application to the High Court will need to be made.

Removal or replacement of the trustee is, however, only the first step, and there can be lingering issues. The incapacitated trustee’s name will have to be taken off the title to the trust’s assets. Being incapacitated, the trustee cannot sign any documents, transferring the trust’s property to the new trustees.

Where the incapacitated trustee has an attorney appointed under an enduring power of attorney, that attorney can complete documents and make decisions about the incapacitated trustee’s personal property. This does not extend, however, to the property the incapacitated trustee owns as trustee of a trust as trust assets are not the personal property of the trustee.

Land Information New Zealand (LINZ) which administers our land title system takes the view that an attorney for an incapacitated trustee cannot sign documents relating to trust assets on behalf of the incapacitated trustee.

Vesting orders

The only satisfactory way to rectify the title to the trust’s property is to make an application to the High Court for a vesting order under s52 of the Act. Under s52, the court has the power to vest the trustee.

Looking ahead

Applications to the High Court are expensive and slow. It’s not satisfactory that a problem such as this cannot be resolved by a quick and inexpensive process. This problem has been raised in the Law Commission’s recent report on the Law of Trusts and also on previous occasions. Reform is urgently needed and has been recommended to the Law Commission. Hopefully changes will be made soon; otherwise many ordinary trusts will have to meet the cost and experience unnecessary delays. It’s assets in the names of the new trustees.

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