What Happens if a Trustee Loses Mental Capacity?

What happens to a trust when a trustee is unable to act or loses mental capacity?

There are a number of reasons why someone may choose to establish a trust, but what happens to that trust is a trustee is unable to act or loses mental capacity?

In its simplest form, the role of a trustee is to manage assets on behalf of someone else.

Due to the fact that trusts do not have their own legal personality (a trust cannot own property or borrow money unlike a company, for instance), the legal title and ownership for trust assets vests in the trustees. They are seen as the owners and therefore need to provide instructions and consent for any actions in relation to trust assets. What the trustees can or cannot do with those assets is governed by the Trust Deed. In some cases this will grant them discretion over who should benefit, whereas other trusts will state that the trustees must act in certain ways to benefit a specific person or group of people.

Because trustees are the legal owners, it can be problematic if they are unable to act. As a general rule, trustees must act unanimously and so if one trustee loses capacity then the ability for all trustees to make decisions is impacted. This can result in an inability to access trust assets. So what can you do if this is the case?

1. Look at the Trust Deed 

The trust deed may confirm who holds the authority to the appoint or remove a trustee/s. If this is specifically included in the trust deed then that person can use this authority to enter into a deed of retirement, which would remove the trustee. In most cases, this authority will usually rest with the settlor (person who created the trust) or the other trustees.

A general rule is that trustees are not allowed to delegate their discretion, except where specifically permitted by the trust deed or in very limited cases under statute. Where the trust deed does however allow delegation, this can be done through a registered Lasting or Enduring Power of Attorney. Where you hold a trust deed which includes the authority to delegate, you should therefore confirm whether or not the incapacitated trustee had a Lasting Power of Attorney.

It is also worth checking if the trust deed automatically removes a trustee who loses mental capacity. This is more common with foreign trusts than UK trusts. There may be requirements for this to be evidenced by a medical practitioner, however if this is included then their removal will be automatic, unless they are the sole surviving trustee.

2. Look to the Trustee Act

Where the trust deed contains no express power of replacement, but there are co-trustees capable of acting, statutory provisions enable those co-trustees to remove and replace a trustee who has become incapable of acting.

This authority is limited, and is usually used to name a replacement, rather than reducing the overall number of trustees.

Statute is always subject to the terms of the trust deed, and so any requirements around the number of trustees or who can be appointed must be adhered to.

If there are no living trustees, then the Trustee Act allows the executors of the last surviving trustee to exercise the power to appoint new trustees.

3. Beneficiaries May Be Able to Remove a Trustee

In limited circumstances, beneficiaries can collectively remove or appoint trustees. This is only possible if:

• All beneficiaries are adults with mental capacity.
• They are all absolutely entitled to the trust assets.

If all the beneficiaries of the trust are adults (over 18), have capacity and are between them unconditionally entitled to the trust fund, then they can appoint or remove trustees. This is often difficult to show with discretionary trusts as it is common for such trusts to include beneficiaries who may not yet be born (for example when the class of beneficiaries includes “issue” which is a term for all lineal descendants of any degree, it may be impossible to confirm who could be entitled to the trust).

4. Seek Court Approval

If none of the statutory provisions can be relied on and there is someone named to appoint and/or remove trustees, but that person has lost capacity (but not died) then it may be necessary to apply to the Court of Protection.

The Court of Protection is a body whose purpose is to make decisions on behalf of individuals who lack mental capacity (in a wide range of circumstances). This would include making a decision in their shoes as a trustee.

This application would ask the Court to exercise their authority on behalf of the incapable trustee. This is because, unless specifically stated in a valid Lasting Power of Attorney (and permitted by the Trust Deed), no one has the authority to make trustee decisions on behalf of an incapacitated trustee.

Such an application would generally spell out the decision needed, the reason why the incapacitated person is the only one authorised to make that decision, and the preferred outcome. There is no guarantee that the Court will agree with the application, and so this will usually be treated as a last resort.

So what should you do?

If you find yourself in a situation where a trustee lacks capacity, then you should seek professional advice on your options, as this is a very complex area of law.

At Blanchards Family Law, our Trust specialist Ashley Minott, is a full member of the Society for Trust and Estate Practitioners (STEP) and has been administering trusts for over a decade. She also has experience in applying to the Court of Protection to exercise trustee powers on behalf of someone who has lost mental capacity.

If you would like to discuss any of the points raised then please contact us on 0333 344 6302 to arrange an initial meeting.