Dealing with trusts in divorce proceedings

There exists a widespread perception that assets held in a trust are, somehow, beyond the reach of spouses in cases of divorce. This is just not true. Trusts in divorce settlements are well within the reach of the courts, regardless of whether the spouse in question is a beneficiary, a settlor or both.

Generally speaking, in a divorce situation, the court will regard trust assets in one of two ways, either:

1. as the financial resource of one or both parties; or
2. as a nuptial settlement.

Trust assets as a financial resource

The beneficiary or the beneficiary's spouse may be deemed to have access to a financial resource if they have an interest in assets kept in trust. The provisions of the trust and the track record of the beneficiary receiving benefits from the trust are two of the important considerations for a court when deciding whether to recognise the trust assets as financial resources.

For instance, a beneficiary who holds a life interest in a trust, that distributes income on a quarterly basis, is much more likely to be deemed to have access to financial resources than a beneficiary who belongs to a class of beneficiaries of a discretionary trust but has never actually benefited from the trust at all.

If the court is satisfied in all the circumstances that the resources of the trust are available to either party or both parties, then the court is empowered to make an order varying the terms of the trust by, for example, ordering that payments of income from the trust that are normally paid to the beneficiary named in the trust, are diverted instead to the spouse of the that beneficiary.

Alternatively, the court can make what is known as a “judicious encouragement” order. Where the court is satisfied that the trustees of a trust would make assets from the trust available to meet any financial settlement that a beneficiary was ordered to make in order to replenish his or her assets, e.g., a lump sum payment that is subsequently made up by the trust assets. However, the impact of any such order on other beneficiaries will also be taken into account.

It is crucial to bear in mind that there are no blanket rules when it comes to trusts and each case is considered on its own merits and circumstances. Discretionary trusts in divorce may be regarded very differently from family trusts in divorce, depending upon the terms.

Trust assets as part of a nuptial settlement

When it comes to “nuptial settlements'', the court has wider, and far-reaching powers.

A nuptial settlement is a trust which is settled (that is to say, created) by one or both parties to the marriage during the course of the marriage and provides for the benefit of one or both of the parties to the marriage, and makes some form of continuing provision for one or both of the parties to the marriage. Even if one spouse settled the trust before the marriage, it may still be considered as a nuptial settlement if, for example, a spouse is included as a class of beneficiaries.

In either case, the court’s powers are broad, it can:

1. add or exclude beneficiaries;
2. change the terms of the trust;
3. remove or replace trustees and protectors; or
4. order the trustees to make a payment from trust assets to a spouse, whether or not they are a beneficiary.

In the case of a trust settled before the marriage where the spouse is not included as beneficiary, then the court will still want to know how the trust has been implemented, who has benefitted from the trust and to what extent. If the court considers that you have attempted to disguise or conceal the true extent of your wealth from your spouse in divorce proceedings, it may deem that those trust assets form a part of your wealth.

What about offshore trusts?

The terms of any trust fund in a divorce may be modified by the courts of England and Wales, notwithstanding that the trust may have been settled outside of their jurisdiction. However, the enforceability of any such modifications must be taken into consideration. For example, if the offshore trust has liquid assets within England and Wales then those may be utilised towards a divorce award. Where assets are not situated in the UK, an order against an offshore trust can be made but execution and enforcement may be all but impossible.

I want to create a trust. What steps should I take to protect it?

Careful consideration needs to be given to the drafting and structuring of a trust and any ancillary documents, such as a letter of wishes or any special instructions. Furthermore, it may be advisable for the trust not to be governed by English law and also administered by offshore trustees, possibly located in a country with tough “firewall legislation” in place.

In light of these complexities, it is absolutely crucial to obtain professional advice at the earliest stage possible and certainly before any assets are put in the trust. An experienced lawyer can provide you with the correct guidance to make your trust as “bulletproof” as possible.

For further information and trusted legal advice regarding matters of divorce, get in touch with our Resolution-accredited divorce lawyers in London at Carlsons Solicitors.