Many people take on the role of trustee either professionally or as a trusted family member or a friend. The role of a trustee can go on for many years and it is not uncommon for someone to lose mental capacity and therefore need to remove a trustee who has mental capacity issues.
When an individual becomes, or starts to become, mentally incapable of performing their duties as a trustee they are not automatically discharged from their role and they cannot simply retire. Instead, other individuals, such as a person expressly nominated in the Trust Deed, continuing trustees or the beneficiaries, have to take steps to remove the trustee who has mental capacity issues.
The Trust Deed
There could be an express power in the Trust Deed which states what happens when a trustee loses capacity. However, if not, the powers granted by various statutory provisions in the Trustee Act 1925 will need to be exercised.
What powers are granted by the Trustee Act?
Who can remove trustees?
Under Section 36 there is power given to particular individuals in the Trust Deed to remove the trustee who is ‘incapable of acting’. If there are no such individuals, then power is given to the surviving or continuing trustees.
The first question for continuing trustees (or if there are none the continuing beneficiaries), to ask themselves is what does ‘incapable of acting’ actually mean?
There is no statutory definition of this in the Trustee Act although section 2 of the Mental Capacity Act 2005 states “a person lacks capacity in relation to a matter if at the material time he is unable to make a decision in relation to the matter because of an impairment of, or a disturbance of, the mind or brain”.
In many cases, the continuing trustees’ first action must be to get medical evidence of the lack of mental capacity.
The provisions of this section are only available where there is at least one continuing trustee, the trustee does not have a beneficial interest in the Trust and there is no dispute as to the lack of capacity or the removal and appointment of a new trustee.
What if the trustee has a beneficial interest in the Trust?
Where an incapacitated trustee has a beneficial interest in the Trust, i.e. they are a beneficiary of the Trust Fund or they have a beneficial interest in the land, section 36(9) of the Trustee Act requires the continuing trustee(s) to apply to the Court of Protection (COP) for permission to retire and replace the trustee.
This situation commonly arises when, for example, a husband and wife hold their home jointly, and one of them loses mental capacity. This loss of capacity means that they are unable to continue in their role as trustee, and the surviving capable spouse has to apply for them to be removed and appoint a third party in their place in order to sell the property. Unfortunately, some couples mistakenly think that by preparing Powers of Attorney and appointing each other they are prepared for the eventuality of one losing capacity. However, they still need to give consideration to the fact that an individual cannot sign as both a trustee and an attorney. It may be possible in this scenario for their attorney (if the trustee has a beneficial interest in the land) to step into their shoes and act as a trustee. An attorney could then appoint another trustee. This is possible under S1 (1) and S8 of the Trustee Delegation Act 1999.
How does this work in practice?
Example 1 – A married couple own a property as joint tenants. They both lose mental capacity. The nephew was the sole attorney for both of them. The house needs to be sold so they can move to a care home and pay the care home fees. The nephew can appoint another trustee so the property can be sold.
Example 2* – John and Margaret have a property as joint tenants and John had appointed Margaret as his attorney before losing mental capacity. Margaret can appoint another trustee.
What if trustees can’t agree?
If there is no agreement as to the replacement trustee or as to the mental capacity of the outgoing trustee, or there is no continuing trustee it may well be necessary to apply to the court under Section 41 of the Trustee Act for removal and replacement.
What if there is no surviving or continuing trustee?
Where there is no surviving capable trustee an application cannot be made under section 36 and instead an application under section 54 Trustee Act needs to be made by the proposed new trustee. This situation commonly arises where there is a Trust of Land as a result of husband and wife owning the property, one dying and the survivor losing mental capacity. The trustee has a beneficial interest in the land, and they are the sole surviving trustee, but they lack capacity. Under section 54, the COP will make an order appointing replacement trustees and vesting the property.
Trusts of Land and Appointment of Trustees Act 1996
Where nobody has the authority or is willing to appoint a replacement trustee, and all beneficiaries of the Trust are of full age and have capacity, they can give direction to the trustee to retire under section 20 of the Trusts of Land and Appointment of Trustees Act 1996.
There are various options available in this situation but often it is expensive and time consuming. It would be better for trustees to be aware of these issues and for the trustees to be updated before a trustee develops mental capacity issues and becomes incapacitated.
For more information on removing a trustee who has mental capacity issues, please contact Helen Kelly in our Trusts team on 0161 475 7685.
*Example two is taken from the STEP Guidance notes – removing a trustee who no longer has capacity.