9.3 Trust Nominations and Trustee Control

Study Focus

A qualifying non-Muslim family nomination creates a statutory trust. A parent qualifies only where no spouse or child is living at nomination.

Nomination and Statutory Trusts (Schedule 10 FSA 2013)

One of the most important consumer protections in Malaysian insurance law is the statutory nomination system in Schedule 10 of the Financial Services Act 2013 (FSA 2013), given effect by Section 130. Without a nomination, life insurance proceeds fall into the deceased's estate, so the family may have to wait for a Grant of Probate or Letters of Administration, and the money is exposed to the deceased's creditors. Schedule 10 speeds up payment and, for close family members of non-Muslim policy owners, creates an immediate statutory trust.

Schedule 10 applies to a life policy (including a policy under Section 23 of the Civil Law Act 1956) and to a personal accident policy, where the policy owner has insured their own life and the policy pays out on their death.

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How a Nomination Is Made (Paragraph 2)

• Age: A policy owner who has reached 16 years of age may nominate.
• Who can be nominated: One or more individuals. A company, society or charity cannot be a nominee.
• Details required: The nominee's name, date of birth, MyKad or birth certificate number, and address, notified to the insurer in writing, either when the policy is issued or later by written notice or endorsement.
• Witness: The nomination must be witnessed by a person of sound mind who is at least 18 and is not a nominee.
• Shares: Where there are several nominees, the policy owner may specify each nominee's share; otherwise the insurer pays them in equal shares.
• Insurer's duties: The insurer must record the nomination in its register of policies and endorse the policy, and the nomination takes effect from the date the insurer registers it. The nomination form must prominently warn that a policy owner who wants a nominee other than a spouse, child or parent to receive the money beneficially, rather than as an executor, must assign the policy benefits to that nominee.

Schedule 10 divides nominations into two categories:

1. Trust Nomination (Statutory Trust) under Paragraph 5.
2. Non-Trust Nomination (Nominee as Executor) under Paragraph 6.

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Trust Nomination (Statutory Trust) Under Paragraph 5

When a Trust Arises

A nomination by a policy owner other than a Muslim policy owner creates a trust of the policy moneys in favour of the nominee if:

1. The nominee is the policy owner's spouse or child; or
2. Where no spouse or child is living at the time of the nomination, the nominee is the policy owner's parent.

The FSA defines "child" to include an illegitimate child, a step-child and an adopted child. If an unmarried policy owner with no children nominates their mother, a statutory trust arises. If a married policy owner with children nominates a parent, the nomination does not create a trust and falls under Paragraph 6.

Legal Effects of a Trust Nomination

1. Outside the estate and free of debts (Paragraph 5(2)): Notwithstanding any other written law, policy moneys paid under a trust nomination do not form part of the deceased's estate and are not subject to the deceased's debts. The insurer pays the trustee on proof of death, without a Grant of Probate or Letters of Administration.
2. Fraud on creditors (Paragraph 5(6)): If it is proved that the policy was effected and the premiums paid with intent to defraud a creditor, that creditor is entitled to receive from the policy moneys a sum equal to the premiums paid, but not the rest of the policy moneys.

Trustees (Paragraph 5(3) and (4))

• Appointed trustee: The policy owner may appoint any person other than himself or herself as trustee, in the policy or by written notice to the insurer.
• Default trustee: If no trustee is appointed, the trustee is:
  1. the nominee, if the nominee is competent to contract (an adult of sound mind); or
  2. if the nominee is not competent (for example, a child under 18), the parent of that nominee other than the policy owner, and if there is no surviving parent, the Public Trustee or a trust company nominated by the policy owner.
• Where several adult nominees are competent to contract, they are joint trustees, and any consent must be given by all of them.
• The trustee's receipt fully discharges the insurer.

Trustee Consent Restricts the Policy Owner (Paragraph 5(5))

Once a trust nomination exists, the policy owner must obtain the trustee's written consent to:

• revoke the nomination, or add a nominee who is not their spouse, child or parent;
• vary or surrender the policy; or
• assign the policy or pledge it as security (which includes using it as security for a loan).

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Non-Trust Nomination (Nominee as Executor) Under Paragraph 6

When It Arises

Any nomination that does not fall within Paragraph 5 is a non-trust nomination, for example where the nominee is:

1. A brother or sister;
2. A fiancé or fiancée, friend or business partner (who must be an individual);
3. A parent, where the policy owner already has a living spouse or child when the nomination is made; or
4. Any nominee of a Muslim policy owner, because Paragraph 5 trusts do not apply to Muslim policy owners.