New Zealand’s trust law had the most significant development in over 60 years when the Trusts Act 2019 (the Act) came into force early last year. The Act serves to clarify and improve the accessibility of trust law. This includes setting out how a trustee who loses the capacity to act is removed and replaced. Most trust deeds give the status of “appointor” to an individual(s), meaning they hold the power to appoint and remove trustees.
But what happens if there is no one with that power in the trust deed, or they have lost the capacity to use this power? In these cases, the Act sets out a streamlined process to follow when a trustee loses capacity and needs to be removed and/or replaced. This article sets out some “classic” trust examples that may apply to your trust.
An everyday family trust
Bob and Sarah are the trustees of their family trust. Bob’s brother, Sean, is the “appointor” under the terms of the trust, and can appoint and remove trustees. If Bob and Sarah both lose the capacity to act as trustees of the trust then Sean is required to remove them under section 104 of the Act. Sean may then appoint a new trustee (or multiple, if the trust deed requires more than one).
If Bob and Sean were to lose capacity, the Act requires Sarah, as the remaining trustee, to remove Bob as a trustee. Sarah may then appoint a new trustee, and may be required to do so if the trust deed requires there to be more than one. If the trust deed gives trustees the ability to change the terms of their trust, they may then remove and replace Sean as the appointor.
What happens when no-one has the power to remove/appoint trustees?
If all relevant people have lost their capacity to perform their duties, then the Act gives the power of appointment to the person(s) holding an enduring power of attorney over the property of Bob and/or Sarah. In those circumstances, the Act requires them to remove Bob and Sarah as trustees, and appoint new ones.
The most drastic circumstances occur when all relevant people lose capacity, the trust deed is silent on who takes over from the appointor on their incapacity, and there are no powers of attorney in place. Upon losing their mental capacity, a property manager would need to be appointed for Bob and Sarah each, in order to deal with their personal affairs. This can be done by application to the Family Court. As a consequence, the nominated property manager is then able to exercise the power of appointment under the Act, and can appoint new trustees. Orders for property managers can be made urgently. However, it may take months or even longer if a dispute arises during the application process.
When a trustee or appointor has capacity, but refuses to cooperate
Continuing our example of Bob, Sarah and Sean, if Sarah remains capable of performing her duties as a trustee, but continually refuses to do so, under the Act, Sean may exercise his power of removal and remove Sarah as a trustee.
If Sean was to refuse to perform his duties, the Act allows for the remaining trustees of the trust to appoint and remove trustees. If the trust deed allows for variations to be made by the trustees, then it would also be possible to remove and replace Sean as the appointor.
What the Act means for your trust
Although the Trusts Act simplifies the appointment and removal of trustees, the terms of the trust clearly setting out what happens in each of these scenarios remains the best position to be in. If you have a family trust, or are thinking about setting one up, checking who your trustees are and who has the power of appointment (as well as a clear way that these roles can be passed on) can save time, money, and stress.
If this topic has raised questions for you, please reach out, we'd love to help you work it out.
Disclaimer: The information contained here is of a general nature and should be used as a guide only. Any reference to law is to New Zealand law and legislation. We recommend before acting on it, you consult your accountant or tax adviser