Alex Strickland, Solicitor, shines a light on the options for replacing incapacitated Trustees.
Of course, it is hoped that a Trustee will be able to carry out their functions without issue for as long as they are willing to do so. Unfortunately, there are times when a Trustee may lose their mental capacity whilst carrying out the role. This Article will explore what a Trustee is and what their duties are; how to determine whether a Trustee has lost mental capacity; and methods for removing or replacing Trustees where capacity is an issue.
We will explore specifically:
- Removal and appointment under section 36 Trustee Act 1925
- Circumstances where the Court of Protection will need to become involved under section 36(9); section 41 and section 54 of the Trustee Act 1925.
- Removal of a Trustee under section 20 Trusts of Land and Appointment of Trustees Act 1996.
What is a Trustee?
A Trustee is a person who has been appointed to manage assets for the benefit of another person or class of people. Whilst Trustees manage assets, they are legally responsible for them.
Trustees have a fiduciary duty to the beneficiaries of the Trust – this means that a Trustee must act in the beneficiaries’ best interests. In adhering to their responsibilities, Trustees must administer Trust assets and avoid intermeddling Trust assets with their own assets; comply with any reporting requirements with HMRC and file Tax Returns (where necessary); make and record decisions about any potential distributions from the Trust; and where necessary, invest the Trust assets and produce comprehensive Trust Accounts.
What is Mental Capacity?
Mental capacity is simply the ability to make a decision. This can range from those which affects daily life such as what to eat and what to wear or more significantly whether to undergo an operation or sell a property. It is important to realise that it is the ability to make the decision that’s important, not that it is a wise decision.
Mental capacity for Trustees is governed by the Mental Capacity Act 2005. Trustees must be able to understand and carry out the duties of their role. A person is considered to have mental capacity until such time as it has been established that they do not do so.
The Mental Capacity Act sets out a two-stage test for capacity:
- Is the individual able to make the decision in question, with support if needed?
- If the individual cannot make the decision, is it due to an impairment or disturbance in the function of, the mind or brain.
Capacity is dependent upon the circumstances; you may be considered to have capacity for one thing but not another. You may also be considered to have fluctuating capacity.
If there are concerns about an individual’s mental capacity, the first step should be to obtain a Mental Capacity Assessment. There are qualified professionals who carry out these assessments for a multitude of reasons including (but not limited to) assessing capacity to make a Will and Lasting Power of Attorney; fitness to act as an Executor, Attorney or Trustee, and whether they have lost capacity for the purposes of a Court of Protection application.
An assessment needs to be carried out each time a decision needs to be made.
Avoiding the problem
Of course, a loss of capacity can be sudden and unexpected such as where the individual becomes injured. However, in many cases a loss of capacity can be a gradual process and can often be linked with age or illness. The Settlor, when creating the Trust, can put in place the mechanisms for Trustees retiring and being replaced, such as an ageing out clause. In addition, the Trustee themselves may decide to retire when they can feel themselves no longer being able to keep up with their duties.
Another option available to Settlors is appointing a Trust Corporation as a Trustee. A Trust Corporation will never die or lose mental capacity and in addition to that, Settlors gain legal expertise at the heart of decisions which need to be made.
Legal Options for Removing or Replacing a Trustee
The law governing the removal of Trustees who have lost mental capacity is contained in legislation and should be considered in addition the powers contained within the Trust document or Will.
Express Power in the Trust document
The Trust document (or Will) may make provision for the removal of Trustees. However, this is becoming increasingly rare.
Section 36 Trustee Act 1925
As it is increasingly rare to find Trusts with an express power of removal, it is far more common to rely on section 36 of the Trustee Act 1925.
The effect of section 36 is to create a power to appoint a Trustee to replace a Trustee. Note, this is not simply a removal.
Section 36 may be relied upon if there is no dispute about the removal of the incapacitated Trustee, and crucially that there is at least one other continuing Trustee. Section 36(1) emphasises that the power can only be used in limited circumstances. The Trustee may only be removed (and replaced) if:
- they are dead;
- has remained outside of the United Kingdom for more than 12 months;
- “Desires to be discharged from all or any of the trusts or powers reposed in or conferred on him”;
- refuses to act;
- is unfit to act;
- is incapable of acting;
- has unsoundness of mind;
- or by reason of age and infirmity (including being a minor).
Removal and appointment of Trustees under section 36 is usually done by way of a Deed so that the property held in the Trust will vest in the new Trustee(s) as per section 40(1) of the Trustee Act 1925.
Section 36(9) Trustee Act 1925
However, if a Trustee is also a beneficiary who has an interest in the Trust Fund or has a beneficial interest in the land, and they lose mental capacity, then section 36(9) of the Trustee Act 1925 requires that an application to the Court of Protection to request permission to remove them must be made.
This situation commonly arises where spouses own their property as Tenants in Common and one loses their capacity. Many people will appoint their spouse as their sole Attorney, and this unfortunately would not be sufficient to circumvent the ‘two-trustee rule’ required to give good receipt for sale of property as there would be only one individual acting, albeit in two separate roles.
If a sole surviving Trustee, who has lost mental capacity, has a Lasting Power of Attorney in place, and provided the Lasting Power of Attorney is effective in delegating the donor’s trust functions, the Attorneys may take over the functions of a Trustee. It is worth noting that the collective group of Attorneys (if more than one) only amounts to one Trustee. So, in situations such as a transfer of land, which requires two Trustees to provide good receipt, the Attorneys may need to appoint a further Trustee by way of an application to the Court of Protection.
This could be demonstrated by an example where a spouse dies and the other has lost mental capacity. The Executor of the deceased can act as a Trustee for the deceased’s share and the Attorneys of the incapacitated may also act as Trustees. However, problems may arise where the Executor and Attorney are the same person and an application under section 36(9) would need to be made to appoint another Trustee.
Another circumstance a need to apply to the Court of Protection under section 36(9) arises is where the incapacitated Trustee is also a Life Tenant of an Interest in Possession Trust. As they are treated as beneficially entitled to the income that the Trust produces, if they lose capacity, permission must be granted by the Court of Protection for their removal and a replacement appointed.
Section 41 Trustee Act 1925
If there is a question as to whether a Trustee has lost capacity and whether they should be removed, it is possible to rely upon section 41 of the Trustee Act 1925. Here, the Court may, wherever it is expedient to do so, appoint a new Trustee. Section 41 specifies that it may be expedient to substitute a Trustee if they lack capacity to exercise their functions as a Trustee.
A claim under section 41 may only be brought by a Trustee or beneficiary of the trust. So, for example if there is no continuing Trustees (or beneficiaries) then it would be appropriate for a third party to bring a claim under the court’s inherent jurisdiction, rather than section 41.
Section 54 Trustee Act 1925
If a sole surviving Trustee has lost mental capacity an application cannot be made under section 36 Trustee Act as there are no continuing Trustees. A proposed new Trustee must instead make an application to the Court of Protection under section 54.
This circumstance would arise, for example, where a husband-and-wife own property as Tenants in Common but one dies and the other loses their mental capacity (and the incapacitated person does not have a valid Power of Attorney). There would be no continuing Trustee and therefore the Court of Protection will need to make an order to appoint new Trustees so that the property can be effectively dealt with.
Section 20 of the Trusts of Land and Appointment of Trustees Act 1996
Under this provision, if a Trustee lacks capacity under the meaning of the Mental Capacity Act 2005 (as discussed above) then the beneficiaries of the Trust, subject to them being of full age and having capacity, may provide written direction by Deed for the Trustee to retire.
Conclusion
In summary, if a Trustee has lost mental capacity, there are several options available both with court and without court intervention. The general recommendation is that if there is any uncertainty about whether to remove a Trustee or how to remove a Trustee, you should make an application to the Court of Protection to seek permission to remove and appoint a new Trustee. If you need support replacing a Trustee who has lost mental capacity, please contact us to speak to our PWI Team.
