It has been reported that in New Zealand there are between 300,000 and 500,000 family trusts. This makes us one of the highest users of trusts per capita globally. It is becoming more and more relevant for trustees to keep trustee capacity in the back of their minds.
Where a trustee is elderly, it might be prudent at an annual meeting of the trustees to discuss whether it is time for that trustee to retire and have a new trustee appointed. Often some forms of dementia or other medical conditions may slowly begin to take hold of a trustee, which can mean that it is often too late by the time anyone recognises that there is an issue to be able to take appropriate action. If a trustee loses capacity, it can be a costly and drawn out process to deal with.
Although many trust deeds contain provisions which allow for trustees that have lost capacity to be removed, some do not. Most trust deeds require the trustees to make decisions unanimously and this cannot happen if one of the trustees has lost capacity. This means the trust is in limbo and the trustees cannot make decisions.
Removing an incapacitated trustee from a trust is one thing, but difficulty is also encountered if you need to transfer land where the incapacitated trustee is a registered owner. Many people erroneously believe that a power of attorney will provide an ability for the attorney to sign documents on behalf of that trustee if they lose capacity. However, a power of attorney cannot be used to sign documents on behalf of a trustee that has lost capacity. The only avenue you will have in this instance is to apply to the court for an order to either remove the trustee from the trust or to transfer land, or both.
This is also an important consideration if the incapacitated trustee holds the power to appoint and remove trustees. They may hold the power alone or jointly and it is a good idea as part of the succession planning for the trust to review matters carefully so this does not cause issues at a later time when it has already become too late to do anything about it.
The Trusts Bill currently before Parliament is an attempt to bring trust law up to date. The Trusts Bill does include a provision which would allow for incapacitated trustees to be removed in certain circumstances. However, the Bill is currently only at the Select Committee stage and it is not clear how long it will be before it becomes law. In the interim, it is important to keep trustee capacity issues front of mind.
Written by Ben King an Associate of TODD & WALKER Law based in our Wanaka office. Ben is a member of our Commercial Law team which provides advice on Estates and Trusts.