Trustees have important duties. If a trustee lose their mental capacity and cannot perform their trustee duties, action is needed in the best interests of the trust, and arguably in the best interests of the trustee themselves. So what happens?
What is meant by ‘loss of capacity’?
The Trusts Act 2019 (the Act) does not define what this means (except when it refers to people who are subject to an order appointing a manager under the Protection of Personal and Property Rights Act, or has a trustee corporation managing the person’s property under that Act).
Broadly speaking and depending on the circumstances, a trustee will have lost capacity if they do not have the capacity to make the future decisions required for their role as trustee. It is also useful to be aware that ‘capacity’ has been interpreted by the courts in numerous ways, depending on a variety of circumstances, including what the affected trustee is responsible for doing.
In New Zealand people are presumed to have mental capacity until proven otherwise. We suggest that only an appropriately qualified medical practitioner can truly make this evaluation. Not only is a medical practitioner’s decision authoritative, it is made independently from other trustees.
What needs to happen if a trustee loses capacity?
There may be negligible or substantial risks attached to an incapacitated trustee remaining in office. The more substantial the risk, the greater the need for action. Those affected by a trustee’s decision-making may need to be protected from potentially imprudent decisions, for example.
A trustee may or may not recognise that they have lost or are losing their capacity. If they do not recognise this and fail to remove themselves from the role, it falls to others to act.
The law is clear
The Act recognises the necessity of dealing with this issue. Anyone who “lacks the capacity to perform the functions of a trustee” is legally disqualified from being a trustee. Furthermore, a trustee who lacks capacity is legally required to be compulsorily removed from the role by the ‘person with power to remove trustees’ to act to remove them.
Who is the ‘person with power to remove trustees’?
The Trust Deed will normally state who has this power, and failing that, the other trustees are empowered to act. If the trustees are unwilling to act, a person holding an enduring power of attorney over the property of the trustee who is mentally incapable may act. Other options are set out in the Act.
What is the process for removing a trustee?
In most circumstances you can follow the process set out in your Trust Deed, or the process set out in the Act. If you are following the Act, you must give the affected trustee 20 working days’ notice in writing of their removal.
The affected trustee may make an application to prevent their removal within 20 working days of receiving notice of the removal decision. The affected trustee will need to produce evidence that raises a genuine dispute as to whether the removal decision was open to the person who made the decision. If the court finds that this evidence is sufficient, the onus then returns to the person who made the decision to remove the trustee to show the decision was reasonably open to them. (That is why it is advisable to have a reputable medical evaluation.) We recommend seeking legal assistance if things reach this stage.
How to give notice to a trustee
So many issues can be avoided by choosing the correct words. Our rule of thumb is to treat a trustee who has lost their capacity as you would like to be treated in the same circumstances. Although you are acting to remove the trustee, compassion is recommended as it is likely to minimise any unintended offence.
What if an incapacitated trustee refuses to leave?
The law makes provision for this situation because unfortunately it does arise—the court may make an order for removal. We suggest you seek legal assistance in this situation.
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This article provides an overview but it is not a definitive guide. For further assistance, please contact one of our team. You may also find this article about Enduring Powers of Attorney of interest.
If you have any further queries please do not hesitate to contact one of our experts at Parry Field Lawyers- stevenmoe@parryfield.com, yangsu@parryfield.com, sophietremewan@parryfield.com, michaelbelay@parryfield.com or annemariemora@parryfield.com
This article is general in nature and is not a substitute for legal advice. You should talk to a lawyer about your specific situation. Reproduction is permitted with prior approval and credit being given back to the source.
