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Banking on statutory trusts

Since recent high-profile bankruptcies, it is worth remembering the benefits of statutory trusts.

The statute in question is the Married Women&#39s Property Act 1882 (MWPA).

This act applies in England and Wales. Scotland has its equivalent in the Married Women&#39s (Policies of Assurance) Act (Scotland) 1880 and in Northern Ireland the Law Reform (Husband and Wife) Act (Northern Ireland) 1964.

Although there are minor differences between these acts, we will concentrate on the MWPA but highlight any significant differences in approach for the other two acts.

So, when can your client use an MWPA trust? Curiously, although the title of the act includes the words “married” and “women”, your client does not have to be married or a female to be able to enjoy the advantages of a trust subject to this statute.

Section 11 of the act states that: “A policy of insurance effected by any man (or woman) on his (her) own life and expressed to be for the benefit of his wife (her husband) or of his (her) children or of his wife (her husband) and children…shall create a trust.”

This results in three limits. First, for a policy to be subject to an MWPA trust, it must be an own life policy.

Thus, neither joint life policies nor life of another policies can be subject to an MWPA trust.

Sometimes, the Northern Irish Act allows a joint-life policy to be subject to a trust within the Law Reform (Husband and Wife) Act (Northern Ireland) 1964.

Second, the trust must benefit no one other than the applicant&#39s spouse and children. “Children” includes illegitimate children but not stepchildren unless legally adopted.

Under the Northern Ireland Act, “children” includes not only illegitimate children but also stepchildren, adopted children and anyone for whom the policyholder is the legal guardian.

Because trusts effected under the MWPA are restrictive, many advisers opt to use a flexible power of appointment trust. There is a common misconception that this style of trust cannot be subject to the MWPA.

But you can have the best of both worlds. Provided only your client&#39s spouse and children are included as default or potential beneficiaries, then there is no reason that a flexible power of appointment trust should not be subject to the MWPA.

Third, since section 11 refers specifically to a policy “effected” under the act, the policy must be subject to trust from outset.

This means that if you want to put an existing policy subject to a trust, you cannot use the MWPA, so the trust will have to be non-statutory.

Thus, as long as the trust is of an own-life policy, restricts the beneficiaries to spouse and children and is effected when the policy is, what significant advantage exists compared with a non-statutory trust?

There is a greater degree of protection if the policyholder becomes bankrupt. If a non-statutory trust is effected and the policyholder becomes bankrupt within two years, the courts could ignore the existence of the trust and use the assets to pay the bankrupt&#39s creditors.

Full protection from bankruptcy does not exist until a non-statutory trust has been in force for at least five years.

If bankruptcy occurs bet-ween two and five years, protection will be available under a non-statutory trust without recourse to the money that had been placed under trust.

This is, however, provided the policyholder was solvent at the time he created the trust. Where this was not the case, no protection will be available and the trust funds could be used to settle the bankrupt&#39s liabilities.

Such complexities melt away where the trust is effected under the MWPA. Provided the creditors cannot show the policy was effected under the MWPA with an intent to defraud them, protection on bankruptcy is available from the start.

However, even if there were a demonstrable intent to defraud, the maximum the creditors could gain within the first five years (two years under the Scottish Act) would be the premiums paid.

Any excess amount would still be held for the beneficiaries. Clearly, this excess over the premiums could be big if the life assured had died, for example.

In summary, where the settlor is happy to limit the beneficiaries to spouse and children, an MWPA trust offers significant extra protection on bankruptcy.

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