Divorce and Trusts as an available resource

By Nigel Rotheroe

Divorce is never nice, and it is perhaps the mental stress aspects of divorce, aside from any issues concerning minor children, that is ultimately worse than any financial ones.

Discretionary Trusts are increasingly settled by high-net-worth individuals to preserve family wealth and provide for future generations.  The creation of the trust is often accompanied by a letter of wishes written by the settlor specifying his/her non-binding requests to the trustees to take stated matters into account when exercising their discretion. In addition, the appointment of a protector, who may have the ability to appoint and remove trustees, may give the settlor some comfort over any negligent actions of trustees and/or them not being in accordance with his/her wishes, but perhaps more importantly, a degree of influence over a trustees’ exercise of discretion.

It is therefore not surprising that the effectiveness of a trust as an estate planning and wealth protection vehicle has come under threat when the marriage of the settlor breaks down. Matrimonial legislation in Common Law jurisdictions, such as England, empowers family courts to include trust interests in divorce proceedings and consequently a divorcing spouse may attack a trust in order to increase the size of the matrimonial estate available for distribution.  With a Court in England having the ability to vary the terms of a trust to provide more for a named beneficiary or a non-beneficiary spouse the attraction of bringing proceedings in England are high.

In England a party to a divorce petition must file a Financial Statement Form prior to any ancillary proceedings.  The form requires an individual to give details of their assets including “trust interests” even if the party concerned is a mere beneficiary of a discretionary trust, where a beneficiary only has a hope that the trustees may exercise their discretion in their favour as regards any income or capital appointments/benefits. A discretionary trust may thus become vulnerable in divorce proceedings as an English Court may seek to vary the trust or make an order in relation to any benefits provided from it as it will consider the trust a “financial resource”.

In England, family courts have the power to vary a trust as a pre- or post- nuptial settlement.  The onus of proof as to whether a trust is a pre- or post-nuptial settlement lies with the applicant and any subsequent court order which may be made, may have difficulty in being implemented if the trust is an offshore trust and the trustees are not resident in England.

Alternatively, where the assets within a trust are deemed to be a “spouse’s resource” it is the court itself which makes a determination against that spouse.  Thus, even if the trust in question is non-nuptial, it may still be possible for a court to treat it as a financial resource on the back of an assertion and proceedings by the divorcing spouse that the other party to the marriage is a beneficiary of a trust (created by him/her or another third party) or is capable of being one.

In such circumstances courts have been willing to attribute the whole of a trust’s assets as the spouse’s where the spouse was the settlor and the trust assets were matrimonial assets acquired during the course of the marriage. However, where the trust was set up by a third party with non-matrimonial assets acquired by the parties during the course of marriage, the courts appear more reluctant to do so.

In determining whether trust assets are resources available to a beneficiary-spouse, the court is likely to look at:

  • The proper law of the trust
  • The residence of the trustees
  • The powers of the trustees
  • The composition of a trust’s assets
  • Management of the trust’s assets
  • Correspondence between the trustees, any protector and the spouse-beneficiary
  • Past distribution history
  • Whether, if the spouse-beneficiary were to request the trustees to advance the whole or part of the capital of the trust to him [or her], the trustee would be likely to do so.
  • What is likely to happen in the future

Whilst English courts have sought to vary and enforce changes to a non-English settlement, or claim they are nothing but a sham, offshore jurisdictions have acted strongly to any such attempts.

So, having regard to the actions of the English courts, what should offshore trustees do in response?

  • Act independently and not seek to favour one spouse to the divorce in preference to the other, although this may prove difficult at times
  • Seek directions from local courts as to how to respond to any English court order(s)
  • Do not acquiesce to the jurisdiction of the English courts, for if this happens, local courts are likely to give effect to an English order without reconsidering its merits
  • Seek legal advice and support in England
  • Be mindful of the provisions within a trust deed and giving benefit to a non-beneficiary may be a fraud on a power if, for instance, funds are given to a husband to benefit his former spouse who is not a beneficiary of the trust, or was, but previously excluded herself.

To find out more contact Nigel Rotheroe

[email protected]