If you are creating a testamentary or discretionary trust, you want to know it will operate smoothly long after you are gone. But what happens if the trustee you appoint loses the capacity to make decisions? Without the right safeguards, the trust you designed to protect your beneficiaries could grind to a halt – leaving assets unmanaged, distributions delayed, and your intentions at risk. The good news is, with careful planning, you can build in mechanisms to ensure the trust continues to operate as you intended.
What is a trust?
Before you can plan for contingencies like trustee incapacity, it’s essential to understand what a trust actually is and how it works. A trust is not a company or a person – it is a legal relationship governed by a trust deed and relevant legislation. This relationship creates legally enforceable duties for the trustee and legally protected rights for the beneficiaries. When you establish a trust, you are creating a structure that can last for decades, sometimes generations, which is why the choice of trustee and the rules for replacing them are so critical.
A trust requires:
- A trustee who holds the legal title to the trust property and is responsible for managing it.
- A beneficiary who benefits from the trust property or income.
The trustee is the legal owner of the trust property but must hold and manage it for the benefit of the beneficiaries. This position comes with strict fiduciary duties: to act honestly, in good faith, and in the best interests of all beneficiaries.
If the trustee loses legal capacity, investment decisions may stall, distributions may be delayed, and the trust’s administration can grind to a halt. In some cases, the trust could even fail without a mechanism for appointing a new trustee.
Why the trust deed matters
The trust deed is the foundation document of your trust, setting out its operating rules and defining how key decisions are made. When it comes to managing the risk of trustee incapacity, the trust deed is the first and most important safeguard. It can spell out exactly how a trustee can be replaced, who has that authority, and what procedures must be followed. A well-drafted deed can save your beneficiaries time, cost, and stress by avoiding unnecessary court involvement.
Typically, the deed will set out:
- How the trustee is appointed and removed.
- What happens if a trustee loses capacity.
- Who has the power to appoint a new trustee – often the appointor.
Without clear provisions, your beneficiaries may be left navigating complex legal pathways, potentially requiring a Supreme Court application to have a new trustee appointed. This is costly, time-consuming, and can disrupt the trust’s operations.
An outdated or poorly drafted trust deed can cost your family or business dearly, call us on 1300 654 590 or email us to draft or review your trust deed.
The role of the appointor
In many trusts, the appointor is the ‘gatekeeper’ of control. This role holds the power to appoint and remove trustees, making it crucial to understand who your appointor is and what happens to this role if they die or lose capacity. Even though the appointor does not legally own the trust assets, they can significantly influence how the trust is run by determining who acts as trustee.
Here are some key points about appointors, they have:
- The power to hire and fire trustees – often triggered by specific events such as incapacity, death, or resignation of the trustee.
- Control without ownership – they influence trust management indirectly through trustee selection.
- A key role in succession planning – the deed should set out what happens if the appointor loses capacity or dies.
To summarise, without a named appointor or succession plan, disputes may end up in court.
Choosing between corporate and individual trustees
One of the most important decisions you’ll make when creating a trust is whether to appoint a corporate trustee (a company) or individual trustees (people). Each choice has distinct advantages and risks, especially when it comes to dealing with incapacity. Corporate trustees offer continuity and simpler succession, while individual trustees may be easier to appoint initially but carry higher long-term risks.
Corporate trustees
A corporate trustee is a company, often controlled by family members, that acts as the legal owner of the trust assets. Its key advantage is that a company does not ‘die’ or lose mental capacity the way an individual can. This allows for administrative efficiency: assets remain registered in the company’s name despite changes in directors. In turn, this allows for simpler succession: a director can be replaced without transferring asset ownership.
Individual trustees
An individual trustee is a person or persons, often a family member or members, who personally holds trust assets. While this can feel more personal, it carries additional administrative and legal risks in the event of incapacity, including the following:
- If there is only one individual trustee, their incapacity may require a deed-based or court-based replacement process.
- If the trust deed is silent, replacing a trustee can involve a formal court application.
- Changes in trustees often require asset transfers, potentially triggering stamp duty and creating administrative delays.
Powers of attorney
Your trust deed should explicitly allow a trustee to appoint an attorney if they are unable to act.
For individual trustees, you must ensure both the trust deed, and the individual’s personal enduring power of attorney specifically permit the attorney to be appointed as trustee; otherwise, the attorney may have no legal authority to step into the trustee’s role.
In the case of a corporate trustee with a sole director, it’s vital to put in place a Company Power of Attorney (CPOA). A CPOA grants a designated person the legal authority to manage company affairs, including executing documents and ensuring the trust continues to operate, even if the director is incapacitated or unavailable
Assistance from trustee legislation
If your trust deed does not adequately deal with trustee incapacity, you may have to rely on state or territory trustee legislation. While these laws can resolve the issue, they typically require formal court applications and can involve delays and costs. Legislation (often the Trustee Act) in most Australian jurisdictions gives the Supreme Court the power to remove an incapacitated trustee, appoint a new one, and ensure continuity of trust management.
Practical steps when establishing a trust
Good planning is the best protection against disruption caused by trustee incapacity. By making deliberate choices about your trust deed, appointor provisions, and trustee structure, you can safeguard your trust’s operations for decades to come.
When creating your trust:
- Include clear trustee replacement provisions.
- Name an appointor and plan for their succession.
- Consider using a corporate trustee.
- Put safeguards in place for sole director companies.
- Obtain specialist legal advice to ensure your trust is resilient.
How we can help
Trusts can be a very useful vehicle to protect, administer and transfer wealth but so much can go wrong, including at trustee level. At ADLV Law, we work with settlors to build strong, future-proof trusts. We can:
- Draft deeds with robust incapacity provisions.
- Advise on appointor roles and succession planning.
- Structure your trust with a corporate trustee for continuity.
- Put in place safeguards for sole director companies.
- Assist with Supreme Court applications where needed.
We have discussed trustee incapacity in this article, if you are curious about other occasions when a trustee should be replaced, read this article. If, you are establishing a trust or have run into difficulties with your trust, call us on call us on 1300 654 590or email us.
The information contained in this post is current at the date of editing – 7 November 2025.
