Trusts and divorce can be complex areas to navigate without expert legal assistance.
Trusts can be established for a variety of reasons and there is a great deal of uncertainty as to how they should be treated on divorce. In Financial Remedy proceedings the Court has the power to ‘invade’ a trust in order to meet a spouse’s needs even if that spouse is not a beneficiary to the trust in their own right.
Do trust interests need to be disclosed to the other party and the Court?
During the Financial Remedy process, parties have a duty of full and frank disclosure which includes disclosing any trust interests. The relevant documents will often include:-
- Trust Deed;
- Any Letter of Wishes;
- Trust accounts; and,
- The history of income and capital distributions from the trust or any loans made by the trust;
It may well be that a spouse who is beneficiary to various trusts may have an absolute entitlement or a discretionary entitlement and it is often the case that they may not have access to all the trust documentation. If this is the case, disclosure may be sought from the Trustees themselves. However, on the basis that the Trustees are not parties to the proceedings an application to join the Trustees into the proceedings may need to be made. The joining of Trustees can often be justified where there are other issues in the proceedings that require such joinder, such as:-
- Validity of a trust;
- Variation of a trust as a nuptial settlement; and,
- Enforcement of a final order regarding a trust.
There are three ways in which trusts may be considered in Financial Remedy proceedings, as follows:-
The trust is a financial resource
Discretionary trusts are commonly used for asset protection and tax planning. A party’s interest in a discretionary trust as a financial resource for the purposes of Section 25(2)(a) of the Matrimonial Causes Act 1973 can be uncertain as it depends on the manner in which the trustees decide to exercise their absolute discretion in the future (assuming it is a discretionary trust). However, judges will look at the “reality of the situation” (Thomas -v- Thomas [1995]) rather than the form of the trust – i.e. whether the party has already received substantial, and regular, distributions from the trust and what he / she will receive in the foreseeable future. In order for the Court to be able to ascertain whether or not a trust may be treated as a financial resource for one of the party’s, it may be necessary to ask the following questions:-
- What do the Trustees say they will do?
- How much power or influence does the beneficiary have on the Trustees?
- What have the Trustees done in the past?
- Previous discussions or agreements between the beneficiaries.
- What are the interests of any other beneficiaries?
- How liquid are the trust assets?
- What long-term objectives does the trust have?
If the Court finds that a trust is a financial resource to the interested party they can make orders taking that into account.
The trust is a nuptial settlement and therefore capable of variation
On divorce, the Court has the power to vary a trust if it is found to have a nuptial element.
Effectively, it has been held that a settlement which is non-nuptial at the time of its creation could later attain a nuptial character, if there was a flow of benefit to the parties during the marriage from the settlement. By way of an example, if the matrimonial home was purchased by, say, the Husband’s family trust, then the Wife may be able to establish that this is a nuptial trust and therefore capable of variation.
In a case concerning the variation of a nuptial settlement, the disclosure sought is likely to be focused principally on information that demonstrates the following:-
- Nuptial character of the settlement; and,
- Nature and value of the assets contained within the trust.
The trust is invalid or a sham
A sham trust is a deliberate attempt to pretend an arrangement is a trust when in reality it isn’t. A sham trust appears to be valid but is based on “acts done or documents executed by the parties to the ‘sham’ which are intended by them to give third parties or to the Court the appearance of creating between the parties legal rights and obligations different from the actual rights and obligations (if any) which the parties intend to create” (Snook -v- London & West Riding Investments Ltd [1967]).
By way of example, in Joy -v- Joy-Morancho & Ors (No 3) [2015], the trustees had apparently excluded the husband as a potential beneficiary of the trust that he had established which held assets of approximately £50 million. Singer J found that the Husband was blatantly dishonest and that it was certainly foreseeable that he would be allowed to access the trust assets once the financial remedy proceedings had been concluded.
The advice therefore has to be to take advice early if either party has trust interests when trying to reach a financial settlement on divorce.
For more information of the topic please contact Kate Barlow or a member of our Family team.
