Ensuring the valid execution of trusts and other documents

We have previously mentioned and it is well known that, as far as trusts are concerned, whilst in England  there are no special legal formalities to satisfy in order  to make a trust (other than for trusts of land or equitable interests which must be in writing), most trusts will be set up by means of a trust deed, with the usual formalities that apply to deeds having to be complied with. It should be remembered though that trusts of life assurance policies may also be created by means of a trust request, if done at the time the policy is applied for, which does not involve a deed so no witnesses should be necessary. Indeed, most life assurance providers who offer so-called "online trusts" allow for trusts of new protection policies to be set up without the need for witnesses and, indeed, in the case of some trusts, even without the need for the settlor's signature.

We have also previously mentioned that some providers of draft trusts were actively looking for ways to simplify the process of executing documents, whilst ensuring their legality. This would mainly involve relaxation on who can be a witness or allowing for electronic signing. However, there are also a couple of other possible options that perhaps are not sufficiently, or not at all, taken advantage of.

Let's start with the basics.

What are the legal requirements for a trust to be valid?

As mentioned above, while it is usual for the trust to be evidenced in writing, there is generally no requirement that, to be valid, a trust must be in writing (except for trusts of land or equitable interests).  However, it must be certain which property is subject to the trust, who the beneficiaries are, and the words used must show a clear intention to set up the trust.  These are the so-called “three certainties” of a trust.  If any one of them is missing, for example at any time it is not possible to ascertain who exactly the beneficiaries are, the trust will fail. 

The settlor can either convey the property to the trustees or he may declare himself to be a trustee of the property.  Where the trust is created by a transfer of property to the trustees, it will usually take the form of a deed.  For example, generally speaking, the only way to vest legal title in a life assurance policy in the trustees is to assign the policy to the trustees by way of a deed which requires certain formalities, in particular the use of certain words as prescribed in the Law of Property (Miscellaneous Provisions) Act 1989 which also stipulates that the deed must be signed and witnessed in an appropriate way. As stated above, however, in most cases there is no need for a trust declaration to be in the form of a deed. More on the subject of vesting later.

Special requirements for the establishment of a valid trust apply in Scotland, including a requirement for delivery of trust assets to the trustees (which can be satisfied by intimation).

The importance of additional trustees

Whilst under English law a person may declare that they hold an asset as trustee and a valid trust will exist without the need for any other act (such as delivery in Scotland or an appointment of additional trustees), practical problems will clearly arise if such as sole trustee/settlor were to die. This is because in order to establish who can step into the settlor's shoes and act as the new trustee a grant of probate or letters of administration, as appropriate, will be required. The executor /administrator will then be able to act as trustee or appoint new trustees to administer the trust. Needless to say there will be some delay before an executor can act. If at least one trustee survives the settlor, such a delay will be avoided.

So, most people recognise the importance of the appointment of additional trustees, especially where the asset in question is a life assurance policy.

It is the appointment of additional trustees (which, as mentioned above, normally takes place by a deed) that is problematic in the current circumstances.

So what happens if a trust is created by a trust request rather than a deed of trust? Can trustees be validly appointed?  Will the policy vest in the trustees who are appointed in a trust request rather than in a deed of trust or a deed of appointment?

Appointing trustees in a trust request

Trust requests will include statutory trust requests, for example under the Married Women's Property Act (MWPA) 1882 and other trust requests. In fact, some trusts should only be created this way, e.g. Business Protection trusts and Relevant Life Policy trusts where, for tax purposes, it is essential that the policy is not in existence when the trust is declared.  The request will normally include a direction for the life office to issue the policy being applied for to the applicant as trustee subject to the terms of the trust as specified. Such a policy would normally be endorsed to the effect that it is subject to a trust. Frequently, additional trustees will also be named (appointed) in the trust request.

Unless the provisions of the Contracts (Rights of Third Parties) Act 1999 apply (see later) , then given that there are only two parties to the contract (the applicant and the life office) the policy should be issued by the life office to the applicant (as the other contracting party) as  trustee. If additional trustees are appointed then, for non-MWPA trusts,  to properly vest legal title to the life policy (after it has been issued by the life office) in all of the trustees, the original trustee should transfer the title by executing a deed of assignment of the policy to himself and the additional trustees together as trustees. This is because at the time of the trust request the policy does not exist so there can be no assignment of the policy to the trustees by a deed (to satisfy section 40 Trustee Act 1925). The Policies of Assurance Act 1867 would require an assignment in writing (normally by a deed) and notice to the life office and, again, this can also only take place once the policy has been issued.

Of course where the appointment of the additional trustees takes place after the policy has been issued, the deed of appointment will normally incorporate the assignment.

Typically,  the Contracts (Rights of Third Parties) Act 1999 (which could vest the title to the policy in a third party, i.e. the additional trustees) will be  specifically excluded under the terms of the policy so,  in such a case, strictly speaking, it would not be possible for a policy to be issued to other than the original applicant.

Statutory trusts

Only when statutory trusts are used can additional trustees be legally validly appointed in the trust request, i.e. the policy will vest in all the trustees named in the trust request without the need for any other act (of vesting). This is because the relevant statutory provisions allow for this.

These are trusts under the Married Women's Property Act 1882 (MWPA), the Married Women's Policies of Assurance (Scotland) Act 1880 and the Law Reform (Husband and Wife) Act [Northern Ireland]) 1964. Statutory trusts have been less popular in recent years because of their limited range and flexibility.

They can be used only for own life single life (except for Northern Ireland – see below) policies being made subject to trust from outset (i.e. they cannot be used with existing policies), and the trust can only be for the benefit of the proposer's/applicant's spouse/civil partner and/or children, although it is not necessary to name specific beneficiaries. For example, a trust can be declared “for the benefit of my wife/husband and such of my children as will survive me”, or it could simply name the spouse/civil partner or the child or children. 

A statutory trust can also be offered on a flexible power of appointment/discretionary basis, provided the only possible beneficiaries will be the settlor’s spouse/civil partner and children.

Often no detailed trust provisions are set out in the MWPA trusts, the trusts instead relying on the statutory provisions. Sometimes the trust will provide for basic trustee powers, for example, a wide power of investment or to apply capital for the benefit of beneficiaries. 

The nature of the trust will depend on the precise wording of the beneficial clause. If the beneficiary(ies) is/are named and it is stated that he/she/they are to benefit absolutely, the trust will be an absolute trust. This is the most common situation. However, it is possible to provide for a contingent interest (i.e. entitlement on survival to a certain specified age) in which case the trust may be subject to the IHT relevant property regime. 

As mentioned above, additional trustees can be appointed at outset, i.e. in the trust request itself, which means that there is no need for a separate deed of assignment vesting the title to the policy in the trustees. Further trustees can of course be appointed later if required.

The provisions of the Scottish and Northern Ireland Acts are similar, except that in Northern Ireland joint life policies can also be effected under statutory trusts.

The additional advantage of statutory trusts over non-statutory ones is that they provide some additional protection against the claims of creditors which is not available to other trusts. This protection means that in the event of the bankruptcy (whenever this should occur) of the person paying the premiums, the policy is outside the estate of the bankrupt (i.e. protected from creditors) and only the premiums that have been paid under a policy effected with the intent to defraud creditors can be claimed by the trustee in bankruptcy.

Since the changes to the inheritance tax treatment of trusts in 2006 the most popular trust on offer from life offices has been a fully discretionary trust with its endless possibilities as far as trust beneficiaries are concerned. But is it not the case that, especially with protection policies, most people are content to restrict their potential beneficiaries to their immediate family, i.e. spouse and children? It does seem that statutory trusts are somewhat underused, maybe because they sound quite antiquated. After all, who would these days consider needing special rules for married women?  However, especially in the current situation, perhaps there is more scope to reintroduce these arrangements?

What does this mean in practice?

Leaving statutory trusts aside, we are faced with the present situation where additional trustees will frequently be appointed in a trust request. The question is therefore: does it matter that, strictly speaking, if there has been no formal assignment, the additional trustees so appointed have no proper legal title to the policy?

It may be said that the question of the actual legal vesting of the policy in the additional trustees is to some extent academic, and indeed many insurance companies accept a valid appointment of additional trustees in trust requests. This is generally on the basis that the additional trustees are parties to the trust request and as such their names and signatures are communicated in a written form to, and verified by, the life office. So even if a policy is issued to the settlor, the life office will record the names of all trustees and will deal with those trustees without requiring a formal assignment/vesting.

Clearly neither the life office nor the trustees are likely to raise the question, say in the event of a claim, whether the policy is legally vested in the trustees. However, can there be a risk that a third party may raise this, say an executor or estate beneficiary, after the death of the settlor? It is considered that the risk of such an action is very small for a number of reasons.

First, any such objection would not affect the validity of the trust itself, only whether the individuals named as trustees have legal title to the policy. If they have not, the legal title would pass from the deceased settlor to his executors, but they would be obliged to deal with the trust fund in accordance with the trust (and not use it to benefit estate beneficiaries). Clearly there would be no incentive to make such a challenge. Indeed, if the policy proceeds were to fall into the estate of the settlor, they would very likely be subject to 40% IHT charge, yet another disincentive to challenge the trust.

Second, there would be equitable remedies available to the originally appointed trustees, especially if they are also trust beneficiaries.

So, the chances of a successful challenge (on what is frankly a quite obscure legal/technical point) in the courts by a third party, if it came to that, are considered to be remote. Nevertheless, those who want 100% legal certainty should consider appointing additional trustees by a separate deed after the policy has been issued, rather than in a trust request.

Avoiding trusts altogether - contracts for the benefit of third parties

It has been possible since May 2000 to issue a contract, such a life policy, for the benefit of a third party. This could be a named person or persons. This is provided for in Contracts (Rights of Third Parties) Act 1999.  So it would be possible for an applicant for a life policy to ask an insurance company to issue the policy he/she is applying for in such a way that when a benefit becomes payable, say on death or maturity of the policy, it would be paid directly to the third party, who could be a spouse or child etc. Such arrangements are very common in civil (European) jurisdictions.

It is hard to believe that this piece of law has been in place for 20 years and yet there is not one office who  is prepared to innovate in this area. Most if not all life assurance contracts include a clause expressly excluding this Act from applying.  This may well be because of the fear of potential claims from third parties but surely it should be possible to draw up the terms and conditions of a contract that would protect both sides while simplifying the process of issuing the policy and claims. It may be that the current problems with obtaining signatures of additional trustees may provide some impetus in this area of product development.

Comment

While the current crisis has presented a number of challenges for trust practitioners, it may also have provided some opportunities for innovation. 

Next month we will look in more detail at other formalities to ensure valid trust creation as well as at executing powers of attorney and option agreements. We will also consider how trustees can carry out their duties during periods of lockdown and social distancing.