The Woes of Incapacity when you have a Trust
Like most developed countries New Zealand has an aging population. As people are living longer this usually brings with it physical and mental challenges that may result in unanticipated legal issues unless you have taken the time to keep your legal housekeeping up to date. As a country that loves trusts, the implications are significant where we have aging trustees who lose capacity.
The Trusts Act 2019 clearly sets out the expectations on Trustees. There are both mandatory duties and default duties that Trustees must carry out. While default duties can be modified by the terms of the trust deed or variation, mandatory duties cannot.
So what happens when a Trustee is no longer fit to carry out the mandatory duties imposed on them as Trustees? How can Trustees act unanimously when one can no longer make considered decisions, understand the meaning and effect of those decisions or be held accountable for their actions as a Trustee? Where does this leave the remaining Trustees who find themselves unable to act without breaching the terms of the Trust, and are now powerless to manage and administer the Trust as they are required to do?
Under the old Trust law unless there was provision in the Trust Deed to remove an incapacitated Trustee, the process was arduous and required an application to the Court. While there are still many old Trust Deeds around if the Trust Deed sets out a process for removal of a Trustee who has lost capacity, then this is the first port of call.
However, where there is no procedure in the Trust deed, then we can rely on the Trusts Act 2019, which overhauled Trust law and introduced several changes including making the procedure to remove Trustees easier.
Section 104 of the Act makes it compulsory to remove a Trustee if they no longer have the requisite capacity to perform their functions as a Trustee. The Act sets out who has authority to assume the power to remove Trustees where it has not been delegated under Trust Deed. That person must then inform and give notice to the Trustee advising them that they are being removed. Unless they oppose their removal, it will occur 20 working days from the notice being received, although there are exceptions to this in certain instances. A new Trustee can then be appointed in their place.
As our average life expectancy continues to improve, age related cognitive decline is a natural consequence. However, just as it is important to maintain good physical and mental activity as you get older, we would also encourage you to keep on top of your legal housekeeping by undertaking a regular legal health check to make sure that Wills, Enduring Powers of Attorney and Trust administration are up to date and relevant in the current circumstances. Having a good relationship with your lawyer and regular check-in’s are important as you get older to help avoid unnecessary legal complications later.