Review Your Trust Deed Regularly

As legislation changes, trust deeds with outdated information can cause significant issues for those in charge.  Some issues are avoided by a simple wording amendment, providing it is completed in the right legal form.

A common example is where a sole Appointor loses their capacity, with no back up facilitated in the deed. An Appointor is a powerful role as they can add and, more importantly, remove trustees from a trust. This power is crucial to allow a trust to continue to function in times of change or need. An example is when a Trustee becomes incapacitated.

While most trust deeds specify what happens to the Appointer’s powers when they die, there is often no provision for what happens when they lose physical or mental capacity. Capacity is the ability of an individual to make and communicate rational decisions. To be deemed to have incapacity, a health practitioner must assess an individual and provide a report or certificate confirming that the individual is no longer able to make decisions or manage their own affairs. It is a common misconception that an Appointor’s Enduring Power of Attorney will be able to step into their shoes upon incapacity, which is not the case.

It is the view of the Court that powers granted under an Enduring Power of Attorney (EPA) apply to the donor as an individual only and not to any roles as a fiduciary, such as an Appointer. In Re Godfrey Family Trust, Nation J advised that trust property held by a donor does not amount to “his or her property” and as a result, trustee powers are not exercisable.[1]

Justice Nation further confirmed his position on the role of trustee powers in his judgment in Re Hetrick where he states ‘this power cannot be considered as a personal property right of the person who has granted the EPA because associated with the power are the fiduciary duties owed to the beneficiaries’.[2]

So, what then happens when a person who holds sole powers of appointment and removal, loses capacity? Some trust deeds include vague and broader powers that arguably could be used to deal with this situation. But under legal scrutiny, there is no guarantee that such use will be ratified by the Court, leading to uncertainty and adverse outcomes.

Our legislators are not completely unaware of this pitfall.  To limit the number of these cases having to be dealt with through Court proceedings, the Trusts Act provides some default provisions for this situation.  However, the process provided by these provisions is neither simple, nor quick - the timeframe may cause significant pressure and unnecessary legal costs if the Trustees are wishing to urgently sell assets, or advance funds to beneficiaries.

To avoid this situation, our advice is to proactively review your trust’s provisions and act accordingly. An Appointor can lose capacity very quickly, and without notice. If your trust does not adequately provide for this situation, completing a variation now with the assistance of your lawyer will be a time and cost saver for down the track.

For expert advice regarding your trust's affairs, please contact Whitney Keenan or a member of our Trusts and Succession Team.

[1] Re Godfrey Family Trust [2017] 3 NZLR 198

[2] Re Hetrick [2017] NZHC 472