Trusts and loss of capacity: a global challenge and a necessary response in fiduciary governance
Loss of capacity as a new systemic risk in trust structures The loss of mental capacity is today one of the most delicate – and yet still insufficiently addressed – issues in wealth planning through trusts. The increasing prevalence of dementia and other forms of cognitive vulnerability makes this risk ever more tangible. Where fiduciaries and advisers fail to consider such scenarios from the very inception of the trust, incapacity may become a destabilising legal variable, capable of undermining the entire fiduciary framework. A global problem without uniform standards Loss of capacity represents one of the principal areas of uncertainty within international trust structures. In many jurisdictions, clear legal rules are lacking as to what occurs when a central actor – whether the settlor, trustee, or holder of reserved powers – is no longer able to properly exercise their role. Legislative gaps emerge sharply when considering comparative experiences across legal systems. In Chile, for instance, civil law continues to rely on a model of total interdiction: once incapacity is declared, the individual is entirely deprived of legal capacity. Proceedings may take up to two years, often resulting in the freezing of assets and a significant increase in legal and financial burdens for families. In China, the opposite difficulty may arise, as the individual may remain legally capable throughout judicial proceedings, even when factual incapacity has already begun to compromise trust-related decision-making. In the Middle East, the Dubai International Financial Centre (DIFC), despite having trust legislation grounded in common law principles, lacks an express statutory definition of mental capacity. The matter is addressed more extensively under UAE civil procedure law, where incapacity triggers guardianship proceedings and where powers of attorney automatically lapse, without mechanisms equivalent to enduring powers of attorney in Anglo-Saxon jurisdictions. Even in well-established trust jurisdictions such as the Cayman Islands, definitional uncertainty persists. Incapacity has recently been characterised as a question of fact, determined at the time of the relevant decision and assessed in relation to the specific act at issue. This confirms that capacity is not an absolute status, but rather a contextual condition evaluated in light of the particular circumstances. Recognising incapacity: a practical and relational challenge Attention must therefore shift to the internal governance of the trust. Loss of capacity must be addressed proactively, as early warning signs may easily remain concealed, particularly in an era where communication increasingly takes place via e-mail and text messages. By contrast, changes are often far more evident during in-person meetings or telephone conversations. Vulnerability beyond ageing Incapacity is not solely linked to advanced age. It may also arise in situations involving substance abuse, bereavement, divorce, family coercion, or other circumstances of vulnerability. Maintaining a close connection not only with the settlor, but also with the broader family context, may assist trustees in identifying behavioural anomalies and emerging red flags before they become irreversible. The settlor and reserved powers: the most critical point One of the most sensitive aspects concerns the extremely common situations in which the settlor retains a direct role within the trust structure, whether as protector or through the reservation of significant powers, such as the appointment and removal of trustees or investment decision-making authority. In such circumstances, full mental capacity becomes an essential element to monitor. Should the settlor make decisions detrimental to the trust, trustees may face exposure to claims alleging breach of fiduciary duty. Family disputes and generational transition Loss of capacity often produces disruptive familial consequences. As the central family figure loses authority, disputes, tensions and power struggles may emerge. In this context, trustees may play a valuable role as independent third parties, facilitating communication and promoting a pragmatic approach that reduces the risk of irreparable deterioration in family relationships. Documentary governance as the primary response The most effective solution remains careful planning. The optimal moment to address incapacity is during the drafting of the trust instrument itself, by providing: -clear criteria for determining loss of capacity -procedures for the automatic cessation of roles upon incapacity -mechanisms for the orderly replacement of power-holders -continuity of administration, ensuring the trust is not paralysed Planning for incapacity in the trust deed It is advisable to incorporate express provisions regulating the assessment of incapacity, for example by referring such determination to: -a competent court ruling -a medical certificate issued by a qualified physician -an independent third-party evaluation Trust structures should also ensure that trustees may continue to exercise their powers without dependence upon the consent of an incapacitated individual, thereby safeguarding both the trust assets and administrative continuity. Conclusion: we cannot wait until incapacity strikes Loss of mental capacity is among the most pressing contemporary challenges in trust law, one destined to intensify with ageing populations and the expansion of cross-border wealth structures. While careful drafting cannot eliminate the complexity of incapacity, it can significantly mitigate practical disruption and litigation risk, preserving the trust’s effectiveness even in moments of profound fragility. Chiara Pascale Paolo Gaeta & Associati
