If you have a family trust, you will (hopefully) have considered what will happen with your trust after you have died.  You may have signed a memorandum of guidance setting out your long term wishes for the trust and you may have nominated who you would like to hold the power of appointment of trustees after your death.

But have you considered what would happen if you, or one of your co-trustees became mentally incapable?  In this article I will look at the consequences of a trustee’s mental incapacity and what can be done to minimise any disruption to the functioning of your trust.

Who makes decisions for a trust?

Most trust deeds require that all trustees’ decisions are unanimous.  Each trustee must take an active role in the decision making process and, with some exceptions, must not delegate their decision making powers to anyone else.

If a trustee is no longer capable of making decisions or is unable to communicate those decisions, the remaining trustees are not able to make decisions until that trustee has been removed. 

How is a mentally incapable trustee removed?

The trust deed will often provide a mechanism for removing a mentally incapable trustee and appointing a replacement.  If the trust deed doesn’t provide a mechanism, then section 43 the Trustee Act 1956 allows the remaining trustees to remove the mentally incapable trustee and appoint a replacement.

After the process of removal has been completed, the trustees can once again exercise their decision making powers.  They could, for example, decide to rent out the trust property to a new tenant or decide to make a distribution to a beneficiary.

What happens when the trust owns land?

The retirement of the mentally incapable trustee is not the end of the matter if the trust owns land.  When a trust owns land, the names of the individual trustees are recorded as the registered proprietors on the certificate of title to that land.  The land cannot be sold or transferred unless each registered proprietor signs a client authority and instruction form (“A & I form”) to authorise the transfer of the land to the new owners. 

If the trustee is mentally incapable, they are not able to sign the A & I form.  Some lawyers have taken the view that if the trustee had appointed an attorney under an enduring power of attorney, then that attorney could sign the A & I form on behalf of the trustee. 

However, Land Information New Zealand has made it clear that, in its opinion, an attorney cannot sign an A & I form for a mentally incapable trustee.  The enduring power of attorney could be used to transfer land which the trustee owned in their personal capacity, but not land which they own as trustee for a trust.

The only solution is to apply to the High Court for an order vesting the land in the names of the new trustees.  Although this is a reasonably straightforward process, it does take time and can be costly.

Other solutions?

This situation is not ideal and the Law Commission has suggested changes to the legislation to allow for a more straightforward transfer of land where a trustee has become mentally incapable.  However, until those changes are implemented, trustees need to be aware of this potential problem.

As trustees get older, they should consider whether it would be prudent to retire and appoint a younger trustee.  Also, if a trustee has advance notice of diminishing capacity (for example an early diagnosis of dementia), they should seek legal advice as soon as possible.  In some cases, the trustee will have legal capacity for a period of time after diagnosis and the retirement process can be fully completed with the full knowledge and consent of the trustee.

As with most tricky legal situations, it is important to seek legal advice sooner rather than later.


Further information