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What happens when a trustee of a trust loses capacity?

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.

Trustee loses mental capacity

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.

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.

Removal or replacement of Trustee

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. At present 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

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 remove the trustee. Applications to the High Court are expensive and slow. 

To avoid issues with incapacitated trustees it is important for any trustees who may be at risk of losing capacity (through old age or certain health issues that may affect their capacity) to be retired and if necessary, replaced as trustees.