The procedure for dealing with the removal and replacement of a Trustee who has lost or, is losing, mental capacity by Stephen Meredith - Private Client Department.
This is not straightforward and considerable care needs to be taken to get it right. The following will need to be considered:
- Whether the Trust Deed or Will contains an express power of removal
- Removal pursuant to S36 (1) Trustee Act 1925 (‘TA 1925’) either with or without Court approval depending on whether the incapacitated trustee also has a beneficial interest in the property (S36(9) TA 1925)
- Appointment of Additional Trustee pursuant to S36(6A-6D) as inserted by S8 of the Trustee Delegation Act 1999 (‘TDA 1999’)
- Removal by the Court pursuant to S41 TA 1925
Removal by Express Power
Consideration of the terms of the Trust Deed or Will is always the starting place. However, while the appointment of new trustees is nearly always included, it is increasingly rare for modern trusts to contain an express power to remove a trustee. For example, the Kessler standard precedents do not contain such a power.
Removal under S36(1) TA 1925 with or without Court Approval
This section contains a power to remove a trustee who is incapable of acting and to replace them with a new trustee but S36(9) TA 1925 contains an important restriction on this power. S36(9) TA 1925 requires the leave of the Office of the Public Guardian (OPG) to be sought if the trustee who lacks capacity ‘…is also entitled in possession to some beneficial interest in the trust property.’ A ‘beneficial interest’ can include an ‘interest-in-possession’ or ‘life interest’ but not an interest under a discretionary trust.
Accordingly in the classic situation of a married couple jointly owning their home ‘as trustees’ if one of them loses capacity, the other of them cannot invoke s36(1) to remove the incapacitated spouse without leave of the OPG as that spouse owns a half share of the property outright. However, all is not lost as S36(6A-D) TA 1925 may assist if the property is to be sold (see further below).
Appointment of Additional Trustee for Purposes of Overreaching and Giving a Valid Receipt for the Payment of Capital Monies
The ‘two trustee rules’ require that capital monies arising from the sale of land must be paid to at least 2 trustees (Law of Property Act 1925 S27(2). S7 TDA 1999 specifically provides that this requirement is NOT satisfied where monies are paid to a ‘relevant attorney’. A ‘relevant attorney’ includes an attorney who is acting ‘both as a trustee and as attorney for one or more other trustees…’ Therefore, returning to the classic case of a married couple who own their home jointly, if one of them loses capacity, the other cannot sell the house acting as both ‘trustee and attorney’ as there is only one person to give a receipt for capital monies. We have already seen that, in these circumstances, S36(1) TA 1925 will not assist to remove the incapacitated spouse without the prior approval of the OPG which will entail time and expense.
However S8 TDA 1999 (as now enshrined in S36(6A-D) TA 1925 comes to the assistance by enabling an attorney under an enduring power (EPA) created after 1 March 2000 to appoint an additional trustee in order to satisfy the 2 trustee rule. For example, in the classic scenario described above, the spouse who has capacity can appoint an additional trustee eg a child or professional to satisfy the 2 trustee rule. It is important to note that in this scenario the incapacitated spouse has not been removed as a trustee (which would require Court approval) but will continue as a trustee, albeit that the spouse holding the EPA will need to sign on their behalf (S1(1)TDA 1925).
Removal by the Court
For various reasons, it may not always be possible to make use of either an express power or the S36 power to remove a trustee who has lost capacity or appears unwilling or unable to act in the administration of the trust. In these circumstances S41(1) expressly permits the court, ‘whenever it is expedient to appoint a new trustee or new trustees.….in substitution for a trustee who….lacks capacity to exercise his functions as trustee….’
The need to invoke this Section may arise where there is a dispute between the trustees as to whether or not a trustee has lost capacity and should be removed or who he should be replaced by. If there is doubt about capacity then an application pursuant to S41 TA 1925 is safer than using the S36 power, since if the requirements of S36(1) are not met, then the replacement of the’ incapacitated’ trustee would be invalid as would any subsequent decisions of the trustees which could lead to claims being made against the trust.
In short the rules relating to the removal of incapacitated trustees are not straightforward and great care should be taken in applying the correct legislation which in turn will depend upon the particular circumstances of each trust.