CONCEPT OF TRUSTS IN LIFE POLICY :
The concept of Trusts in a Life policy is necessitated by the applicability of estate duty on transfer/inheritance of benefits under a life insurance policy, including annuities. While with the abolition of estate duty in India, the concept of Trusts may no longer be preferred, it is beneficial to understand the subject in detail. Further Section 6 of the Married Women’s Property Act, 1874 provides for security of benefits under a Life insurance policy to the wife and children and this is also been discussed later in this chapter.
A Trust under a life insurance policy is created by the Policyholder holding the policy on his own life and where the survival benefits inure to the policyholder. The Trust is set-up under a irrevocable, non-amendable Trust Deed and can hold one or more insurance policies. It is important to appoint a trustee for administration of the Trust property, being benefits under the life policy. By creating a Trust to hold the insurance policies, the policyholder gives up his rights under the policy and upon the death of the life insured, the Trustee invests the insurance proceeds and administers the Trust for one or more beneficiaries. While, it is a practice to create the Trust for the benefit of the spouse and children, the beneficiaries can be any other legal person. Creating a Trust ensures that the policy proceeds are invested wisely during the minority of the beneficiary and also secures the benefits against future creditors.
Section 6 of the Married Women’s Property Act, 1874 also provides for creation of a Trust. It lays down that a policy of insurance effected by any married man on his own life, and expressed on the face of it to be for the benefit of his wife, or of his wife and children, or any of them, shall ensure and be deemed to be a trust for the benefit of his wife, or of his wife and children, or any of them, according to the interest so expressed, and shall not, so long any object of the trust remains, be subject to the control of the husband, or to his creditors, or form part of his estate.
If the Policyholder does not appoint a special trustee to receive and administer the benefits under the policy, the sum secured under the policy becomes payable to the Official Trustee of the State in which the office at which the insurance was effected is situated.
Creation of a Trust under the Act does not destroy or impede the right of any creditor to be paid out of the proceeds of any policy of assurance, which may have been effected with intent to defraud creditors.