As the average life expectancy in New Zealand continues to increase, so too do issues relating to trustees losing mental capacity as a result of dementia, Alzheimer's and other age-related concerns. A trustee lacking the mental capacity to manage his/her affairs may lead to situations where he/she is unable to exercise the trustees' duties and can make it impossible to properly administer the trust or deal with trust property. Where a trustee is unable to fulfil the duties due to incapacity his/her decisions and actions may be considered invalid causing significant financial consequences for the trust, and as a result, the beneficiaries of that trust.

In most circumstances, it is not crystal clear the exact moment when a person has lost mental capacity to the extent that they are unable to perform their duties as a trustee. Losing mental capacity is typically a process which takes place over some time rather than a singular event. If, however, there is doubt regarding whether a person has the capacity to make the decisions required of a trustee then they should be removed. As outlined in section 92(1)(a) of the Trusts Act 2019 (the Act) the power to remove a trustee who has lost capacity initially falls on the person nominated in the trust deed with the power to appoint and remove trustees. If the trustee who holds the power of appointment and removal loses mental capacity, there is the ability (among other options) for the person who holds an Enduring Power of Attorney for Property of the incapacitated trustee to remove that person and appoint a new trustee if needed/required. This was not previously possible under the 1956 Trusts Act which required an application to the Court in order to exclude the incapacitated trustee.

Vesting/Transferring of Trust Property

In addition, the new Act has streamlined the process of vesting trust property in new trustees. Under the 1956 Act, if a trustee lost capacity and the trust property included land, to meet the requirements of the Land Transfer Act 2017 (LTA), you would need to apply to the court for a vesting order. This is no longer the case, section 117 of the Act states that the vesting of land takes effect once a transfer instrument is registered under the LTA. Meaning that where a trustee is removed due to incapacity or otherwise and a new trustee is appointed then a transfer must be registered to change the ownership of the trust's land. Under section 118(2) of the new rules, if a trustee is removed and is unable to sign an Authority and Instruction form because for example, he/she is incapable the new and continuing trustees will be able to sign on behalf of that person.

Consequently, the Trust Act 2019 has simplified the method for removing trustees and vesting trust property in circumstances of incapacity. In order to take advantage of this simplified process, it is important that trust deeds are reviewed to take into account the new legislation, and it is strongly recommended that trustees consider having powers of attorney set up should the circumstances arise.

Written by Mina Kiryakos (Property Solicitor)