Trustee Incapacity
The majority of Trusts operative within New Zealand provide for unanimous decision making at Trustee level. Unanimous decision-making means exactly what it says – all current Trustees of the Trust must be involved in all decisions made, all agree with a decision, and all agree to implement such decisions. If one or more of the Trustees do not agree, then a unanimous decision cannot be made which means no decision at all is the result (and so, the Trust cannot implement the subject matter of what may have been proposed).
By way of example, if the Trustees of a Trust decide to purchase a property, then a meeting of the Trustees would be required to discuss the property purchase, analyse the pros and cons and make a decision, with which they all agree, to meet the unanimous decision-making criteria for the Trust.
It is a common misperception, that if one of the Trustees of a Trust has for some reason lost the capacity to understand matters, then the “other Trustees” can simply continue without reference to the incapacitated Trustee. Unfortunately, that is not the case.
The Case Law is clear that unanimous decision making requires each of the Trustees of a Trust to participate not only in the decision to be made but also understand the nature of what is being decided, contribute to the decision and join their fellow Trustees (in a way that they are cognitive of the process) in the decision made.
It follows therefore that where a Trustee is incapacitated, a unanimous decision cannot be made, which means that no new decisions can be made by the Trustees of the Trust. All previous decisions of the Trust (assuming that the Trustees all had capacity at the time those decisions were made), remain in force, and results thereof in place, but from the moment a Trustee lacks capacity, there is a need to assess whether or not such capacity will return (i.e. it is of a temporary nature) or where incapacity is permanent how to remove the incapacitated Trustee to enable the Trust to continue to be operative as far as any new decisions required are made.
Prior to the Trust Act 2019, the most common method of removing an incapacitated Trustee was by an application to the High Court for what are described as “directions”, and generally to seek the removal of a Trustee because of his or her incapacity. In many of the cases before the Courts, the question of Trustee capacity has resulted in argument as to whether or not the Trustee being removed does lack capacity. This is assessed via medical evidence to that effect provided to the Court together with testimony of those who can point to incapacity by virtue of the behaviour of the Trustee concerned and any observation of their lack of cognitive ability.
The Trust Act 2019 includes provisions which provide a pathway where the Trust Deed itself in question does not do so. This new legislative pathway is very useful because in most cases it will avoid the need to seek directions from the High Court as described above.
Section 104 of the Trust Act 2019 applies, which briefly provides for the person with the Power of Appointment of Trustees to remove a Trustee if “(a) a trustee loses the capacity to perform the functions of a trustee;”.
There is still a procedure to follow under the Trust Act 2019, however, in circumstances where a Trustee was incapacitated the abovementioned provision would provide a pathway for the Trust to continue to operate.
Whilst the above provides the pathway, our suggestion is that documentation should be completed to clearly set out agreement between the Trustees as to what happens where one of their number becomes incapacitated. The advantages of this are as follows:-
Reference to sections of legislation, whilst useful, are not as clear cut as a straightforward document signed by those who may be affected by the removal provisions (due to incapacity) that the document sets out, and
With documentation signed and in place a Trustee who may become incapacitated at some future date will likely be more accepting of being removed because he or she has agreed to that outcome, and
Medical evidence of an individual’s incapacity is all that is required to give effect to previously signed documentation which sets out the incapacitated Trustee removal process.
It is our view, that whilst The Trust Act 2019 provides the legislative pathway, documentation signed by the current Trustees of a Trust, binding each one of them to an agreed pathway as to removal, due to incapacity, is more compelling. We also are of the view that once these documents are signed, providing copies to organisations such as a Bank, Share Registry, WINZ and Government departments generally will be more compelling to such organisations and enable them to act on the documentation. Lastly, other family members and beneficiaries of the Trust will have a greater understanding of why a Trustee may be removed due to incapacity when he or she has agreed to the process to be followed. It is difficult to argue in the face of signed documentation (providing for Trustee removal where incapacity applies) and so completion of such documentation is “best practice”.
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If you are interested in discussing how your Trust can be future proofed regarding incapacity by way of documentation tailored to give effect to that, please do not hesitate to contact us.
