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Conveyancing and Law of Property Act — Statutory Trust Under Section 73 |
Most of us would have, at some point or another, either thought of or bought a life insurance policy for the benefit of our family members or spouse and children. Section 73 of the Conveyancing and Law of Property Act comes to bear upon policies expressed to be for the benefit of spouses and children. Elizabeth Wong explains the effect of section 73 and the circumstances under which the statutory trust provided for by the section would come into play, thereby preventing insurance proceeds from forming part of an insured’ s estate.
Introduction
Section 73(1) of the Conveyancing and Law of Property Act (‘CLPA’) provides for the creation of a statutory trust as follows:
A policy of assurance effected by any man on his own life and expressed to be for the benefit of his wife or of his children or of his wife and children or any of them, or by any woman on her own life and expressed to be for the benefit of her husband or of her children or of her husband and children or any of them, shall create a trust in favour of the objects therein named, and the moneys payable under any such policy shall not, so long as any object of the trust remains unperformed, form part of the estate of the insured or be subject to his or her debts.
Therefore, a statutory trust under section 73 only arises where the beneficiary under a life insurance policy is the spouse, child/children, or the spouse and child/children, of the insured.
This article considers the following questions in the context of section 73(1):
Section 73 of the CLPA is in pari materia with section 1 of the UK Married Women’s Property Act 1882. The equivalent provision in Malaysia is section 23(1) of the Malaysian Civil Law Act 1956. Accordingly, UK and Malaysian cases and textbook commentary on the said UK or Malaysian provisions are instructive.
Beneficiaries who are neither spouse nor child
The benefits of section 73 are only available to the spouse or children of the insured. If a policy is expressed to be for the benefit of persons outside of this class, it will not be protected by the section even though the spouse or children of the insured are also named as beneficiaries. In such a case, no statutory trust in favour of any of the beneficiaries will arise and the policy will remain the absolute property of the insured and his estate.
In Re Parker’s Policy [1906] 1 Ch 526 at page 530, it was held that ‘as soon as you introduce as an object of the trust a person not a member of the limited class, then the policy is not within the Act.’
A fortiori, section 73 will not protect a sole nominated beneficiary who is neither spouse nor child: see Kishabai v Jaikishan [1981] 2 MLJ 289 where the insured nominated his nephew.
Once a trust is deemed to arise by virtue of section 73, even if the insured were to cash out the policy by surrendering it, he would be holding the proceeds on trust for the beneficiaries. In Re Fleetwood’ s Policy [1926] Ch 48, the insured exercised an option contained in the policy of discontinuing the policy and receiving the entire cash value. The company paid the proceeds into court. It was held that by exercising the option, the insured could not defeat the beneficial interest of his wife, and that the proceeds must accordingly remain in court until the parties could come to an agreement as to distribution or until one of them dies.
Revocable Trust — Reserving the Right to Appoint New Beneficiaries
In Cousins v Sun Life Assurance Society [1933] 1 Ch 139, the English Court of Appeal decided that the interest of the wife named under a section 73 policy vested immediately in her, and passed to her legal personal representative even if she predeceased her husband, the policy moneys not being payable until his death.
However, the Singapore High Court in Re Yeo Hock Hoe’s Policy [1938] MLJ 33 took a contrary view. The policy in question had the following provision:
I reserve the right without the consent of the beneficiary to revoke the appointment of such beneficiary and substitute my own or any other name therefor, and also without such consent to receive every benefit, exercise every right and enjoy every privilege conferred upon the insured by such policy.
In the light of the express power to revoke, the court held (without citing any authorities) that no trust had arisen and that the policy formed part of the deceased’s general estate and passed to his personal representatives.
However, the Singapore High Court in the later decision of Re Choong Chak Choon [1937] MLJ 258 reached a different conclusion. In this case, the insured took out a policy in favour of his wife and children and similarly reserved for himself the right to revoke the appointment of the named beneficiaries and to appoint new beneficiaries and also to assign, charge or surrender the policy without the consent of the named beneficiaries. The court held that the trust created by section 73 of the CLPA, not having been revoked, still subsisted in favour of the named beneficiaries.
It is submitted that the decision in Re Choong Chak Choon is preferable to that in Re Yeo Hock Hoe’s Policy because at the time that Re Yeo Hock Hoe’s Policy was decided, the English decision of Cousins v Sun Life Assurance Society had not been decided yet.
In Re Choong Chak Choon, the court recognised that the interest of the beneficiaries was liable to be defeated because of the revocation clause.
Therefore, the position appears to be that, if the insured reserves the right to revoke the beneficiaries and to appoint other beneficiaries, the statutory trust arising under a section 73 policy is revocable. However, until it is revoked, the statutory trust will subsist in favour of the named beneficiaries.
Divorce and Remarriage
In the case of Eng Li Cheng Dolly v Lim Yeo Hua [1995] 3 SLR 363, the husband had taken out a life insurance policy on his own life and had named his wife as the beneficiary in the policy. No reference to section 73 of the CLPA was made in the policy. Subsequently, the parties divorced and the insured died leaving a will in which his personal property, which was not specifically disposed, was given to his fiancee. The issue was whether the naming of the wife in the policy created an immediate trust in favour of the wife under section 73 of the CLPA.
GP Selvam J in the High Court held that since the named spouse would take an immediate vested interest in the policy, and a divorce will not in itself affect that spouse’s beneficial interest. GP Selvam J was also of the view that it did not matter that the policy did not mention section 73 of the CLPA as that is not a requirement of the section.
It seems the position will be different if the wife is not named in the policy and if the insured had remarried. In Re Browne’s Policy [1903] 1 Ch 188, a man who had a wife and children effected a policy under the UK provision. The policy was expressed to be ‘for the benefit of his wife and children’. The wife died. The insured remarried and had a child by the second wife. In holding that the widow and her child were entitled to participate jointly with the children of the first marriage in the insurance proceeds, the English High Court made the following observations:
Regarding the case apart from the language of the Married Women’s Property Act 1882, one is met by the presumption … that a married man speaking of his wife intends his wife at that time, and does not contemplate one whom he may marry after her death … But, in construing an instrument intended to make provision for a wife after the husband’s death, this seems to lose weight, and is countervailed by the consideration that he in all probability intended to provide for her who survived him, and for that reason stood in need of the provision. A similar line of reasoning points to the conclusion that he intended to benefit all the children …
Similarly, in Re Parker’s Policy [1906] 1 Ch 526, the policy moneys were expressed to be made payable to the insured’s wife and children. The English High Court held that:
in my judgment ‘widow’ means the person who at the death of the husband shall become the widow.
Although in both Re Browne’s Policy and Re Parker’s Policy, the first wife had died whereupon the insured remarried, it is submitted that there should be no difference whether the insured remarried because the first wife died or because he had divorced the first wife. As was said by GP Selvam J in Eng Li Cheng Dolly v Lim Yeo Hua (at page 365I), ‘there can be no difference between death and divorce of the wife’.
Estate Duty Perspective
When a life insurance policy taken out by an insured comes within the purview of section 73, the insured no longer has any interest in the policy. However, this does not necessarily mean that the insurance proceeds do not form part of the insured’s estate upon his death.
Pursuant to section 8(1)(f) of the Estate Duty Act, property passing on the death of a person shall be deemed to include:
money received under a policy of assurance effected by the deceased on his life where the policy is wholly kept up by him for the benefit of a donee, whether nominee or assignee, or a part of such money in proportion to the premiums paid by him, where the policy is partially kept up by the deceased for such benefit.
Therefore, a policy effected by a deceased under section 73 of the CLPA for the benefit of his wife and/or children would still constitute property passing on the death of the deceased.
However, such a policy will constitute a separate estate pursuant to section 23(2) of the Estate Duty Act so that it need not be aggregated with the other assets in the deceased’s estate. The advantage of non-aggregation is that the separate estate will be taxed at a lower rate of estate duty than if it was aggregated with the rest of the estate and taxed at the higher ad valorem rates.
Section 23(2) of the Estate Duty Act provides as follows:
Any property so passing, in which the deceased never had an interest, shall not be aggregated with any other property, but shall be an estate by itself, and the estate duty shall be levied at the proper graduated rate on the principal value thereof.
In Barclay’s Trustee v IRC [1975] 1 Lloyd’s Rep 345, the House of Lords decided that an insured who took out a life policy expressed to be for the benefit of his wife and children had no interest in the policy so that, although the policy was assessable to estate duty, it was not aggregated with the rest of the estate and was, accordingly, taxed at a much lower rate (8% compared to 75%). The following passage is relevant:
Section 4 of the Finance Act, 1894, requires the property to be aggregated unless the deceased ‘never had an interest’ in it. It is common ground that the appellant can only succeed if he can show that in no possible event could Mr Barclay have become beneficially entitled to the policy … In my view, it is clear from the terms of the bequest that he intended the whole benefit of these policies to go to one or other of the three named beneficiaries. The policies were to be issued under the provisions of the [Married Women’s Property Act] for the benefit of one or other of the three named beneficiaries and no one else … In my view, it is quite clear that Mr Barclay never intended to retain any interest in any event.
If the deceased had a contingent interest, either expressly or by way of resulting trust, the policies will be aggregable: Cleaver v Mutual Reserve Fund Life Association [1892] 1 QB 147; Sharp’s Trustees v Inland Revenue [1951] SLT 284.
Elizabeth Wong
Allen & Gledhill