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Forced heirship and Manx law trusts

The following article explains how Isle of Man trust legislation works and how this may be used to minimise and possibly eradicate the issues related to forced heirship in some jurisdictions.

What is forced heirship?

In England, Wales and Northern Ireland clients can leave assets to whomever they choose. In most European countries, including Scotland, this is not the case. The laws of succession define specific rights for certain persons (the protected heirs). This is known as forced heirship.

The primary purpose of forced heirship is to ensure that individuals make proper financial provision for their dependants. To help mitigate these rigid provisions, it may be possible to create a trust which is governed by the laws of a jurisdiction other than that in which your client is domiciled. In order to understand how a trust may assist we need to consider the trust laws relating to the Isle of Man.

The law in the Isle of Man (Trusts Act 1995) recognises an individual’s right to create a trust under the Manx law, even if their home jurisdiction does not.

For more information on forced heirship, please see our article ‘An introduction to Forced heirship'.

Isle of Man as a location for offshore trusts

The Isle of Man is well established as a location for offshore trusts. It offers a secure base built on political and economic stability, low taxation and well established trust laws and practices.

Isle of Man trust legislation

The Isle of Man trust law has its origins in English trust law. The following table shows the main English acts and the Isle of Man versions.

English act

       Isle of Man equivalent

Trustee Act 1925

       Trustee Act 1961

Variation of Trusts Act 1958

       Variation of Trusts Act 1961

Perpetuities and Accumulations Act 1968

       Perpetuities and Accumulations Act 2009

Recognition of Trusts Act 1987

       Recognition of Trusts Act 1988

Trustee Act 2000

       Trustee Act 2001

 

The Isle of Man legislation is not identical to the English Acts, as they have been adapted to meet the requirements of the Island. For example, the Isle of Man Trustee Act 2001 extended the perpetuity period (i.e. the maximum period the trust can last before it must vest with the beneficiaries) to 150 years rather than 125 years under the Laws of England and Wales Perpetuities and Accumulations Act 2009.

The Isle of Man Trusts Act 1995 also contains certain provisions which are not contained in the laws of England and Wales such as a jurisdictional clause and an exclusion of foreign law clause. The following summarises how these clauses work.

Jurisdiction clause

The ‘jurisdictional clause’ (Section 2 Trusts Act 1995) states that if there is a dispute on a Manx law trust then this will be determined by reference to a Manx court.

Exclusion of foreign law clause

An ‘exclusion of foreign law clause’ (Section 5 Trusts Act 1995) states that where a foreign law renders a trust unenforceable or set aside, then Manx law will not recognise this part of that foreign law.

However, there are additional points to consider, see below.

Conclusion

If an Isle of Man trust has been declared, leaving assets to a beneficiary who but for the trust would not have benefited under forced heirship rules of the deceased’s home jurisdiction, the Isle of Man legislation provides guidance. Any dispute regarding the trust should be placed in the Isle of Man and, subject to public policy considerations, the Manx court should uphold the inheritance.

Additional points to consider

Situations against public policy

Where an Isle of Man court considers that there is a breach of public policy, it is unlikely to enforce the legislation as above. However, disinheriting an heir on its own is unlikely to be regarded as contrary to public policy in the Isle of Man. But for example, using an Isle of Man trust with the sole purpose to shelter assets from creditors is likely to be considered against public policy.

Challenge in courts other than the Isle of Man

Forced heirs disinherited by the trust may try to challenge the arrangement in the courts of other countries. Whilst the Isle of Man legislation claims jurisdiction, it would be for foreign courts to decide if they were willing to hear an action.

The information provided in this article is not intended to offer advice.

It is based on Old Mutual Wealth's interpretation of the relevant law and is correct at the date shown at the top of this article. While we believe this interpretation to be correct, we cannot guarantee it. Old Mutual Wealth cannot accept any responsibility for any action taken or refrained from being taken as a result of the information contained in this article.

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