Incapacity of Trustees

Felicity Hayman

May 2018 . . . Trustee capacity issues are becoming increasingly common as life expectancies increase. In New Zealand there is no automatic consequence of a trustee losing capacity ie an incapacitated trustee is not automatically disqualified from holding office. Failure to act promptly to remove a trustee showing early signs of incapacity can have costly consequences.

It is not advisable for a possibly incapacitated trustee to continue in office. All trustees must be involved and participate in decision making and if a trustee is unable to fulfil their duties due to incapacity the trustees’ decisions and actions may be invalid. As losing capacity is often a process of deterioration and not an overnight event, determining someone’s capacity is open to interpretation. If there is any doubt as to whether a trustee has capacity to make decisions that are required to be made in the normal course of holding office as a trustee then that trustee should be removed.

In circumstances where a trustee lacks capacity they will not be able to retire their position themselves and the person holding the power of removal of trustees in the trust deed will be required to remove the incapacitated trustee from office. There are also provisions in the Trustee Act 1956 that enable existing trustees (where there is no one with the power to remove trustees) to remove the incapacitated trustee.

All trust property must vest in the continuing trustees. For trust property that has a registration mechanism like land and shares, automatic vesting cannot occur which causes difficulties where the trustee does not have the capacity to transfer the property. An attorney under an Enduring Power of Attorney does not have the authority to sign transfer documents on behalf of an incapacitated trustee and the only alternative is to make application to the Court for orders vesting the trust property in the names of the continuing trustees. This is a cumbersome and expensive exercise and best avoided if possible by removing the trustee and vesting the trust property in the continuing trustees before the trustee is unable to sign the necessary documents themselves.

The Trustee Bill 2017, which is currently before a Select Committee, proposes to make substantial changes to Trust Law in general, including providing a more streamlined
approach to vesting trust property in continuing trustees. Pending the enactment of the proposed legislation application to the Court for vesting orders to transfer trust property to the continuing trustees may still be necessary.

If you have any concerns about trustee capacity and would like to discuss this further please contact us on 03 477 7312 (Dunedin) or 03 443 0044 (Wanaka).