Removing a trustee who has lost mental capacity
19 October 2022
19 October 2022
Niki Patel, Tax and Trusts Specialist, Technical Connection Ltd
Estate planning is becoming increasingly popular, in part thanks to the nil rate band remaining at £325,000 since 2008/09 and being capped at this level until 2025/26. With many family trusts, the settlor will usually act as one of the trustees and appoint other family members to act alongside them.
Those who take on this role must be aware that they have an overriding duty of care to the trust beneficiaries — acting with honesty, integrity, loyalty and good faith. They must act in the best interests of the beneficiaries at all times, and be actively involved in any decisions. However, issues can arise when one or more of the trustees lose capacity and are thus no longer able to effectively fulfil this important role.
With the trust registration deadline fast approaching, it's important to consider who should be appointed as a lead trustee, as well as the capacity of the current trustees — and whether they need to retire, or be replaced. While it’s possible for a trustee to lose mental capacity suddenly, this usually happens gradually, often following diagnosis of an illness such as Alzheimer’s.
Under English Law, trustees are generally required to act unanimously, so a trustee who has lost capacity can cause problems. A trustee (including the settlor, if they are also acting) who has lost capacity is not able to volunteer their retirement, nor appoint their own replacement; these decisions have to be made by the remaining trustees.
But what does "incapable of acting" mean? There is no statutory definition of this in the Trustee Act. However, under section 2 of the Mental Capacity Act 2005, a person lacks capacity in relation to a matter if, at the material time, they are unable to make a decision because of an impairment, or a disturbance, of the mind or brain.
In many cases, it may be necessary to obtain a GP report to clearly show that the trustee in question lacks capacity. Generally, provided there is at least one capable trustee, it should be possible to replace incapable trustees without having to go through the courts. It is, however, not possible to use these provisions if the incapable trustee "is also entitled to some beneficial interest in the trust property."
The starting point for any such discussions is to consider the terms of the trust. It may be that there is an express power within the deed, where, for example, the remaining trustees can remove an incapable trustee, under section 36 of the Trustee Act 1925 which applies in England and Wales. Section 36 (1) (a) enables the person nominated to appoint, in writing, a replacement where an existing trustee is "incapable of acting." If no one is nominated to appoint new trustees, or the nominated person is unable to act, section 36 (1) (b) gives this power to the continuing trustees.
Under section 41 of the Trustee Act 1925, a court may appoint new trustees if it is "inexpedient, difficult or impractical" to use the powers in section 36 (1). The court may appoint a new trustee or trustees in substitution for, or in addition to, existing trustees. The court is also able to appoint a new trustee where there is no existing trustee.
Another option, provided by section 20(1) of the Trusts of Land and Appointment of Trustees Act 1996, allows the beneficiaries of a trust to give direction for the replacement of a trustee who lacks mental capacity, by appointing a specified person in writing. In this instance, all beneficiaries must be of full age and capacity, and together have absolute entitlement to the trust property. It is imperative to check that the power is not excluded within the trust deed.
Ideally, the trust deed ought to include a power whereby the settlor or the co-trustees can remove and replace an incapable trustee. Even if the incapable trustee has a power of attorney in place, an attorney cannot act on behalf of the donor when the donor is acting as a trustee.
There are some provisions allowing a trustee to delegate their powers. Section 25 of the Trustee Act 1925 enables a mentally competent trustee to delegate their authority to act to another person, but only for a maximum of 12 months. A special form of power of attorney is needed for this. However, the attorney automatically loses the authority to act on behalf of a trustee if that trustee loses mental capacity.
While there are options available to deal with these cases, it's always necessary to seek legal advice before an appropriate deed can be drafted.
Now is the time to liaise with clients who have set up trusts, or are in the process of doing so, to ensure they choose trustees who are fully capable of acting. With the deadline fast approaching, it's vital to identify a responsible lead trustee, while still having enough time to make any changes if necessary.