Trustees must be mentally fit for the job

Trusts and Estates

Given the ageing population in New Zealand, it is not uncommon for a trustee to lose their mental capacity. Whether or not the power of removal or appointment of trustees can be exercised, this can be a difficult situation to rectify.

New Zealand, like many other countries, has an ageing population. This is giving rise to an increasing number of elderly people losing their mental capacity.

When a trustee of a trust loses their mental capacity, it can lead to complications with proper administration of the trust, or in some cases, administration of the trust will become impossible.

Many trust deeds provide that trustee decision-making must be on a unanimous basis, however this becomes impossible when one trustee has lost mental capacity and is not able to participate in the trustee decision-making. When this happens, the trust will often be in limbo until such time as the trustee who has lost mental capacity is removed as a trustee of the trust.

Some trust deeds give the power to appoint and remove trustees to the settlor of the trust. However, if the trust deed does not make specific provision for the power to appoint and remove trustees, the provisions under section 43 of the Trustee Act 1956 (Act) shall apply. This section provides that the continuing trustees shall have the power to appoint a new trustee, in place of the trustee who has lost mental capacity.

If the removal and replacement of a trustee who has lost mental capacity becomes inexpedient, difficult or impracticable, the High Court will be able to alleviate the situation by exercising its powers under section 51 of the Act.

The provisions of sections 43 and 51 of the Act can only be relied upon when the trustee who has lost mental capacity is being replaced with a new trustee. Nonetheless, an application can be made to the High Court for an order not to replace the trustee who has lost mental capacity with a new trustee.

The process to remove and replace a trustee may seem quite simple, however this is not the case, especially when the trustee’s name needs to be removed from the title to the trust’s property. A trustee who has lost mental capacity cannot sign any documentation to transfer the trust’s property to the continuing and new trustees.

Many of us may think that an attorney appointed under an enduring power of attorney will be authorised to sign trust documentation on behalf of the trustee who has lost mental capacity, however, this is not the case. An attorney appointed under an enduring power of attorney can only act in relation to the trustee’s personal property, which does not form part of the trust’s property. This is also the view of Land Information New Zealand who oversees our land transfer system, and therefore, an attorney appointed under an enduring power of attorney is not authorised to sign land transfer documentation on behalf of the trustee who has lost mental capacity.

This leads to the only possible way to rectify the status of the trust’s property, being an application to the High Court for a vesting order under the provisions of section 52 of the Act. The provisions of section 52 of the Act provide that the High Court can make an order to vest the trust’s property in the continuing and new trustees.

An application to the High Court is a time consuming and expensive exercise, especially when a trust has no income and only owns a family home. The Law Commission is aware of the costly and unsatisfactory mechanism of dealing with trustees who have lost mental capacity, and proposals have been put forward to rectify this issue. However, until such time as a final decision is made by the Law Commission, trustees need to ensure that trustee meetings take place on a regular basis to ensure that all trustees are able to continue to act as trustees, and that a trustee whose health is deteriorating retires before it becomes necessary for the other trustees to apply to the High Court.

For more information regarding trustees or for any other trust advice, please contact us.

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