As our population ages, individuals are more frequently losing decision-making capacity and unable to manage their own affairs for longer periods of time.
Where an individual who holds a controlling role in a trust loses decision-making capacity, there can be serious implications for the day-to-day management and succession of the trust, especially where the individual is the sole trustee or sole director of a Corporate Trustee.
The result can be a trust with no “driver at the wheel” and no option but to make an application to the Supreme Court to address the situation – an expensive solution that can often be avoided with proper planning for incapacity as part of a comprehensive estate plan.
Roles in a Trust
The persons holding controlling roles in trusts are important and have different duties. These roles can be filled by companies or individuals.
The controlling roles in a trust usually are:
- The Trustee – who has day to day control.
- The Appointor – who has the power to appoint and replace the trustee.
- The Guardian – who has to consent to the trustee exercising certain powers.
Individual Trustees
Trust deeds – particularly older ones – usually say how control of the trust is passed when a sole trustee dies, but often do not consider what happens when a sole trustee loses decision-making capacity.
It is common in discretionary trusts for a sole trustee to also hold the power to appoint a new or additional trustee in a Trust Deed, or for the trustee and appointor to be the same person. As a trustee must act personally and cannot delegate their responsibilities to others, then depending on the trust deed, this may mean the incapacitated trustee’s attorney has no power to remove the incapacitated trustee and appoint a replacement one.
The Trustee Act
While section 28 of the Trustee Act 1958 (Vic) (Trustee Act) does permit the appointment of an agent “to transact any business or to do any act required to be transacted or done in the execution of a trust”, this is not generally regarded as extending to an attorney being able to exercise the power to appoint or remove a trustee and is often insufficient, on its own, to allow an attorney to make day-to-day decisions about the trust’s management.
Where a trustee is “unfit to act”, section 41 of the Trustee Act allows the appointor or any continuing trustees or the personal representative of the last surviving trustee to appoint a new trustee. However, the definition of “personal representative” does not extend to an attorney of a person who is alive but is incapacitated. Therefore, if the incapacitated person is the trustee and appointor, there may be nothing their attorney can do to appoint a new trustee until the incapacitated trustee dies and their executor can exercise the power.
When there is no other way to remove an incapacitated trustee (which is increasingly common), the only option may be to make an application to the Supreme Court of Victoria to appoint a new trustee.
Section 48 of the Trustee Act gives the Court the power to appoint a new trustee in substitution for, or in addition to, any existing trustee/s when it is “expedient to do so” and it is “inexpedient, difficult or impracticable” to do so without the assistance of the Court. If the situation has arisen where a trustee has lost capacity and there is no other mechanism to appoint a new one, the Supreme Court will usually agree it is not appropriate for a trust to be left without a trustee and will provide assistance.
Corporate Trustees
Where a company is the trustee, it is important to review its constitution and consider:
- What are the voting rights of the directors?
- Who are the shareholders and what proportion is required to alter the directorship? Can this result in a minority shareholder being effectively excluded from the decision-making process?
- How many shares do each of the shareholders have? Many constitutions require that in the event of jointly held shares, only the first named person is entitled to have their vote count. This can be relevant where multiple executors or attorneys take up shares on behalf of the original shareholder.
- Are there any other agreements that impact on the trust’s assets (e.g. – business succession agreements, shareholder’s agreements)?
If a trustee company with a sole director loses decision-making capacity, then, subject to the provision of the company’s constitution, section 201F of the Corporations Act 2001 (Cth) allows the director’s personal representative to appoint a new director. Personal Representative can mean the sole director’s attorney. As such, should an individual who is the sole director of a trustee company have a validly appointed attorney, this attorney may be able to appoint a replacement director.
How can you plan to avoid the need for an application to the Court appointing a new trustee?
For existing trusts – it is critical that legal assistance is sought to review the trust deed and, subject to tax and duty considerations, the trust deed and/or constitution amended to account for the situation where a person in a controlling role loses capacity.
It may also be appropriate to consider whether special conditions need to be included in a financial power of attorney, or whether a deed of succession is required to appoint alternate trustees upon incapacity.
For new trusts – it is critical that the trust deed provides a mechanism for what happens if a trustee loses decision making capacity.
Consideration of what will occur upon the loss of capacity of a trustee (or controller of a trustee) plays a vital role in a comprehensive estate plan. If care is not taken to address this issue, then even the best laid estate plans could be unravelled by the time the trustee dies.
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