Removing an incapacitated trustee

It’s legally awkward as well as personally sad when your fellow trustee develops dementia and no longer has capacity to make decisions. What happens, for example, when you want or need to sell the family home which is owned by the trust, but one of the trustees can’t act any longer?

The answer is that you need to apply to the Court to remove the person as a trustee on the grounds that he or she can’t act any longer. You can also ask the Court to vest the property in the remaining trustees. It’ll be straightforward enough as long as the remaining trustees agree, but that’s the mechanism that you need to use under current law.

In particular, the High Court has just confirmed that you can’t get around the problem by using an enduring power of attorney (EPA) that you hold for the incapacitated trustee. You can’t use an EPA to say that they retire as a trustee, to exercise trustee decisions on their behalf, or to appoint anyone else to act as a trustee instead.

This is because the EPA only covers the donor’s personal property, not anything they hold on behalf of others. It doesn’t give the attorney the power to act for the donor in relation to the donor’s obligations, rights and powers as a trustee. And a trustee can’t delegate their powers to anyone else.

This is why, for instance, Land Information NZ won’t accept documents transferring real estate belonging to a trust when an attorney under an EPA has tried to sign on behalf of a trustee who’s lost capacity.

Of course, any court action comes at a cost, however straightforward it is. It’s nice to avoid that hassle if possible. That’s why it’s worth reviewing your trust setup while everyone is hale and hearty, to check that it’s working as well as it could and that it’s going to last you into the future.

One option that some of our clients use is to create a corporate custodian trustee to hold the trust property. It’s much easier to change directors and shareholders as your circumstances change than it is to manage trustee incapacity.

Let us know if you’d like to discuss options for your trust – we’d be happy to help.