Trust issues can have a double meaning when it comes to divorce

In a world of off-shore bank accounts, tax havens and a certain straw hat (thanks Panama), we take a look at the options presented during a divorce when dealing with a trust.

What is a trust?

A trust is a way of managing assets (money, investments, land or buildings) for individuals. There are different types of trusts, and they are each taxed differently. Trusts are often established for a number of reasons which include:

• to control and protect family assets
• when someone’s too young to handle their affairs
• when someone cannot handle their affairs because they’re incapacitated
• to pass on assets while you’re still alive
• to pass on assets when you die (a ‘will trust’)
• under the rules of inheritance if someone dies without a will (in England and Wales)

Different types of trusts serve different purposes and it is important to seek the correct advice to ensure wishes are carried out correctly.

Trusts involve:

• the ‘settlor’ - the person who puts assets into a trust
• the ‘trustee’ - the person who manages the trust
• the ‘beneficiary’ - the person who benefits from the trust

Can I protect my assets on divorce in a trust?

There is a common misconception that assets held in trust are often fully protected from the courts during a divorce due to smoke and mirror tactics and potential offshore dealings. This is often not the case. However, there are practical steps to be considered when it comes to protecting trust assets.

How will the court treat assets held in trust on divorce?

If one or both parties have a beneficial interest in a trust, these interests will be considered by the court. The court will look at the resources available to both parties and seek to achieve a fair settlement.

There are two main ways in which the courts will treat trust assets during a divorce.

• As a ‘financial resource’ of one or both parties; or
• a ‘nuptial settlement’ which gives the court a wide range of powers concerning the trust.

The trust as a financial resource

Interest in assets held in trust may be regarded as a financial resource for a number of reasons, including the terms of the trust and the track record of the beneficiary receiving benefits from the trust. For example, if a beneficiary receives an annual payment from the trust, this will more likely be seen as a financial resource than a beneficiary who has not received any benefit.

If a trust is classed as a financial resource during divorce proceedings, the court may make financial orders against a beneficiary. This will then be enforceable on the basis that the trustees will come to the beneficiary’s rescue to enable them to meet the financial orders. This is known as ‘judicious encouragement’.

The trust as a nuptial settlement

If assets are transferred to a trust during your marriage, then it is likely to be classed by the courts as a nuptial settlement. This means that the court would have the ability to make an order to vary the settlement for the benefit of your spouse or civil partner.

The court has wide-ranging powers with trusts of this nature, including an order for the provision of capital or income for your spouse or children of the family, orders regarding the removal of trustees, and more.

How will the court approach an offshore trust?

While the courts in this country can alter trusts governed by offshore law, the key question becomes how likely enforcement is within that jurisdiction. This depends on the approach of the offshore jurisdiction.

Oftentimes, if there are sufficient assets within the trust(s) in this jurisdiction, it can be more beneficial to use those to fund an award rather than seek enforcement against a trust in an offshore jurisdiction.

Conclusion

The treatment of trusts during a divorce is heavily dependent on the specific facts of each scenario and each case will be dealt with on its own merits. Whether you are pursuing or defending claims against a trust in matrimonial proceedings, it is important that you obtain specialist advice.

For further information and trusted legal advice regarding Divorce, get in touch with us at Carlsons Solicitors.