Making an exit

There are three primary situations in which you will need to remove a fellow trustee from a position of fiduciary responsibility: when the fiduciary is willing and able to retire from the role; when they no longer have mental capacity to perform the role; and where you, as a co-fiduciary, request the removal of the fiduciary from their role, against their will.

In this article, we will look at the first two situations in detail and offer practical guidance to some of the common problems that arise. The third scenario is outside the scope of this article.

Voluntary retirement of a capable trustee

Voluntary retirement of a capable trustee is the most straightforward of these three scenarios.

There may be an express power in the trust instrument setting out authority and the mechanism for trustee retirement. Statutory provisions will apply otherwise. These are as follows.

Section 36(1) of the Trustee Act 1925

This is relevant where the retiring trustee will be replaced with an incoming trustee.

The person nominated (by the trust instrument or subsequent documents) to appoint new trustees can permit a trustee to retire and be replaced. If there is no such person, then the remaining trustee(s) has power to appoint and replace.

There must be either a trust corporation or at least two people to act as trustees, unless the original trustee was a sole trustee and the trust is not a trust of land.

Section 39 of the Trustee Act 1925

This deals with retirement where there is no replacement trustee. Again, there must be either a trust corporation or two people remaining as co-trustees. This is the case even if there was only originally one trustee. The co-trustees and any other person entitled to appoint trustees must consent by deed to the retirement and to the vesting of the trust property in the co-trustees.

Section 19 of the Trusts of Land and Appointment of Trustees Act 1996

This is an alternative provision, which can be used where all the beneficiaries (who must be adult, have capacity, and between them be entitled to all of the trust property) consent.

This provision cannot be used if someone has the power to appoint trustees under the trust instrument, or if the provision is expressly excluded by the trust instrument.

Beneficiaries can get around this express provision by terminating the trust and then replicating the trust, but this has possible adverse tax consequences.

The beneficiaries can give written direction to the trustees to retire. The technical effect of section 19 is that the trustee retires, as opposed to being removed.

If there are co-trustees, their consent is usually needed to vest the property.

Section 41 of the Trustee Act 1925

This enables the court to make an order appointing a new trustee in substitution for a trustee who:

• lacks capacity to exercise their functions as a trustee, or
• is bankrupt, or
• is a corporation which is in liquidation or has been dissolved.

This claim can only be made by a beneficiary or a trustee of the trust.

The court may be reluctant to use section 41 where the trustee wishes to remain in office, and the court will not act where there is a dispute of fact.

The court also has power to remove a trustee using its “inherent jurisdiction”. This can be used in an emergency, where the trustee is likely to resist a section 41 claim, or where a dispute is likely.

The welfare of the beneficiaries is the court’s priority. It will exercise its inherent jurisdiction to secure the trust property, the sufficient execution of the trust, and the sound exercise of the powers conferred on the trustee.

These statutory provisions are fairly simple. However, the practical aspects of retirement can be more complex.

Formalities

It is important to ensure the formalities set out in the trust deed or by statute are followed. If not, the appointment may not be effective. This can lead to significant problems down the line, particularly if the trusteeship goes through subsequent changes before the error is uncovered. If an appointment is invalid, all decisions taken and effected by the trustees will be likewise.

An example of a failed appointment can be found in Re Hare Trust (2001) 4 ITELR 288. In this case, the attempted appointment was effected by the trustee, but in the trust deed, the power of appointment was vested in the trust protector, rather than the trustees (a trust protector is an individual or entity chosen to oversee the trust). The appointment was not effective.

Duties of outgoing trustee to vest trust property

An outgoing trustee has a common law duty to cooperate fully and actively in the transfer of the trusteeship and assets. There are also statutory obligations in sections 37(1)(d) and 39(1) of the Trustee Act 1925 (TA 1925) and section 19(4) of the Trusts of Land and Appointment of Trustees Act 1996 (TOLATA 1996).

Where the appointment is made by deed, many categories of asset will vest automatically under section 40 of the TA 1925. However, some assets need additional requirements (for example, a stock transfer form is needed to vest stocks and shares).

Protection of outgoing trustee

A key concern for an outgoing trustee will be to protect themselves from liabilities properly incurred as trustee. A trustee remains personally responsible for any liabilities they incurred as a trustee. They can rely on their right to an indemnity out of trust assets (known as the trustee’s lien). However, trustees will usually require additional protection in the form of an express indemnity from the new trustee, unless they retain sufficient assets to cover the liability, or take a charge over specific assets. These are usually only used where there are known or potential liabilities.

The process of removing a trustee who is no longer able to perform the role can be very demanding, both emotionally and financially

Negotiating the indemnity can become protracted, particularly if there has been criticism of the outgoing trustee during their time as trustee. This is because an outgoing trustee remains liable for breaches of trust committed during their trusteeship, unless protected by a widely drawn indemnity.

Therefore, if the outgoing trustee is concerned about criticism of their stewardship of the trust, they are likely to seek a wide indemnity – quite possibly offering greater protection than would usually be afforded to them by law. Beneficiaries / incoming trustees may have to make a commercial decision as to whether to ‘let them off the work or not’. Outgoing trustees are not responsible generally for breaches committed by their successor trustees, although an outgoing trustee may be responsible for breaches of trust that occur after they have retired, if they retire in anticipation of a breach and to avoid being involved in it.

Costs

The costs of voluntary retirement will usually be limited, and in any event, payable from the trust fund. There may be difficulty in negotiating costs if the trustees require an indemnity which the outgoing trustee objects to. It’s usually only in a hostile removal situation that costs will escalate significantly and may have to be paid from a source other than the trust fund.

Retirement of an incapable trustee

Unfortunately, no matter how well we plan, sometimes problematic situations arise to which it can feel like there is no easy or straightforward answer. The mental incapacity or poor behaviour of a trustee, whether in relation to a property trust as a result of co-owning property with somebody else, or to a more formal trust set-up, is one of those situations.

The rest of this article aims to provide clear and pragmatic solutions to the most common problems that occur as a result of trustee incapacity or a trustee acting fraudulently or irresponsibly.

Removing a trustee without mental capacity

The process of removing a trustee who is no longer able to perform the role (P) can be very demanding, both emotionally and financially, as it is often the case that funds from the trust are needed to pay for care fees, a new property, or to assist a vulnerable beneficiary. The situation is not assisted by the following legal facts.

• P cannot simply retire.
• There is no automatic statutory discharge of P on the onset of incapacity.
• There is no automatic statutory vesting of the assets that were vested in P in the remaining trustees.
• Once they have lost capacity, P cannot appoint further trustees to act on their behalf, nor use a power of attorney to delegate trustee functions (under section 25 of the TA 1925).
• A deputy is not automatically permitted to act for P in a trustee role (section 20(3)(c) of the Mental Capacity Act 2005 (MCA 2005)) – separate Court of Protection (CoP) authority will be required under section 18(1)(j) of the MCA 2005.

The matter of how to remove P as quickly and efficiently as possible will depend on several factors, primarily whether P has a beneficial interest in the trust, and if they made a lasting power of attorney (LPA) or enduring power of attorney (EPA) before losing capacity. The example below explains.

(A useful flowchart setting out a basic course of action in situations where a trustee has become incapable is available here.)

1. LPA or post-2000 EPA in place

The simplest outcome for everyone concerned will be if Mr Carter had made an LPA or recent EPA before he lost capacity, that appoints one or more attorneys to act for him in relation to his property and financial affairs.

Here, and in any situation where there is a power of attorney in place made after 1 March 2000 and registered after 1 March 2001, where the act that needs to be done by the attorney is in relation to land, capital proceeds of conveyance of land, or income from land, an attorney can act as trustee (section 36(6A)‑(6B) of the TA 1925, and section 1 of the Trustee Delegation Act 1999 (TDA 1999)).

There is no need to discharge / appoint a new trustee in place of the incapable trustee, as the ability to act is automatic (section 22(3) of the Law of Property Act 1925). However, if a new trustee is needed to ensure that good receipt for funds can be given, as one trustee cannot give this receipt on their own, then the new attorney / trustee can do this under section 36(6)(b) of the TA 1925 and section 7 of the TDA 1999.

Note that this ‘easy route’ is only available if the act that needs to be done is in relation to land, capital proceeds of conveyance of land, or income from land. If that is not the case, then the attorney (or any remaining competent co-trustee) must apply to the CoP for authority to appoint a new trustee and discharge the incompetent trustee (section 36(9) of the TA 1925) and for an order vesting the trust property in the new trustee, if required. Practice direction 9F of the Court of Protection Rules 2017 helps to explain how to make an application for the removal and appointment of incapable trustees. It costs £365 and takes around six months to be processed.

2. No LPA or post-2000 EPA in place

Unfortunately, if there is no valid power of attorney in place, Mr Carter’s situation may be far more complex to resolve.

The appropriate route to take will depend on whether there are any remaining competent co-trustees or persons authorised to appoint or remove trustees. Mrs Carter could act as a competent remaining co-trustee and apply to the CoP to remove her husband as trustee and appoint a new trustee in his place (in accordance with section 36(9) of the TA 1925, above).

However, if there are no remaining competent co-trustees, a deputy will need to be appointed as a precursor to any further action. The deputy can apply to the CoP (or the High Court, if they prefer) for authority to remove Mr Carter, appoint a new trustee, and vest any assets if necessary (section 54 of the TA 1925).

Procedurally, it is important to note that while these two applications (that is, one for a deputyship, and one for authority to appoint a new trustee) will contain a lot of the same information, they are separate applications, and will attract two fees. It is likely that they will be dealt with alongside each other, so it is important to not leave too large a gap between submitting each application, as otherwise the processing of the application submitted first will likely be slowed down by the arrival of the second.

While this example involves a domestic property trust, the actions we outline could also apply to any situation where the trustee also has a beneficial interest in the trust, which is often the case in family trusts.

1. LPA or post-2000 EPA in place

In this case, the attorney can simply ‘step into the shoes’ of the trustee under paragraph 3 of schedule 4 to the MCA 2005. The attorney can do whatever the trustee could have done in their role, if they had capacity.

2. The beneficiaries are all of full age and competency, and fully entitled under the trust

The beneficiaries can simply wind up the trust, or appoint a new trustee to act in the place of the incompetent trustee, provided they do so in writing and they all agree (section 20 of the TOLATA 1996). The persons they can appoint are:

• P’s deputy
• an attorney under a power of attorney, or
• a person so authorised by the CoP.

3. There are remaining competent co‑trustees or persons (or their personal representatives) with the right to appoint a new trustee

They can simply remove the incompetent trustee and replace them with a new one, provided it’s done in writing (section 36(1) of the TA 1925).

4. There are no remaining capable trustees, but some capable beneficiaries

The remaining capable beneficiaries can apply to the High Court under section 41 of the TA 1925 to make an order appointing a new trustee(s), either in substitution for or in addition to any existing trustee(s), or even if there is no existing trustee. The application needs to be made under the procedure set out in part 8 of the Civil Procedure Rules 2015, using the part 8 claim form.

An application can be made by any person beneficially interested in the trust (or by a remaining trustee, if appropriate). All beneficiaries must be made parties to the application, except for those who cannot be found or are outside the jurisdiction. Any liability of the trustee is not limited by their removal.

5. There are no remaining capable trustees or beneficiaries

In this unhappy situation, or indeed in any circumstances, it is open to any interested person to apply to the CoP under section 18(1)(j) of the MCA 2005, to ask the court to “exercise any power (including the power to consent) vested in P whether beneficially or as a trustee or otherwise”. The powers of the court are wide, and include vesting (paragraph 5(1) of schedule 2 to the MCA 2005). Again, the application is made under practice direction 9F.

Practical tips

A way around the complexities of dealing with mentally incapable trustees, at least for any trust that has an associated trust deed, is to draft any new trust document, or amend existing trust deeds, to cite that any trustee who is confirmed by a medical professional to have lost mental capacity for at least three months is deemed to be dead for the purposes of the trust (credit is due here to Professor Lesley King for this suggestion).

In such circumstances, it is also sensible to ensure that in addition to the trustees having authority to remove and appoint new trustees, a third party – potentially a trust corporation – is given this power. This avoids the stalemate situation in which there is nobody authorised to remove a mentally incapable trustee.