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13 May 2024

Divorce and dissolution – fastening trust assets when a beneficiary ties the knot

Whether you’re getting married, becoming a civil partner or entering into a co-habiting or co-parenting arrangement, modern relationships can be complicated. This is particularly the case where either party has substantial assets, and even more so where those assets are held via complex trust structures or similar arrangements.

For trustees responsible for safeguarding family wealth for younger generations of beneficiaries, particularly where those beneficiaries are beginning to make serious decisions about the next stages in their romantic relationships, the question of how to manage trust assets and future-proof them against potential relationship breakdowns is key.

In this article, originally published by TL4, Clementine Dowley and Rosie Sells look at some of the pre-emptive steps trustees can take to protect trust assets when a beneficiary marriage or civil partnership is in prospect, including how to safeguard those assets against court intervention should the couple subsequently decide to split up.

When a marriage or civil partnership ends through divorce or dissolution, couples can seek financial orders under the Matrimonial Causes Act 1973 or the Civil Partnership Act 2005. Under these statutes the English court has wide-ranging powers to make orders for the redistribution of the parties’ property. This includes in relation to “nuptial settlements” and trusts deemed to be a “financial resource” of one or more of the parties. Whilst the former are trusts established for the benefit of either spouse or partner (or their children) because of, or with reference to, the marriage or partnership, the latter are trusts from which a party has received substantial, regular distributions during the course of the marriage or partnership and expects to do so in the foreseeable future. It is worth noting that “financial resource” arguments are much more commonly run. In each case, courts will look at the reality of the situation, rather than the form of the trust, which can lead to trustees unexpectedly being obliged to provide for a beneficiary’s former spouse or partner following a divorce or dissolution.

Implementing a suitable trust structure from the outset rather than waiting until a relationship breakdown is on the cards can help to reduce the risk of a court deciding that a particular arrangement is a resource or nuptial in character. Pre-emptive measures can therefore be very important.

Some key questions for trustees to ask on learning that a beneficiary is contemplating a marriage or civil partnership are as follows:

  • What is the governing law of the trust? Certain jurisdictions have firewall legislation in place, which is designed to protect trusts settled in them from being interfered with by foreign judgments, including those of the English courts. Firewalls vary between jurisdictions, as do the attitudes of governments and the judiciary towards them. Selecting a suitable jurisdiction therefore requires careful thought, and adjustments may well be needed as circumstances change.
  • Where are the trust assets located? Irrespective of the governing law of a trust, it may be possible (for example, under an applicable convention or treaty) to enforce a foreign judgment in the jurisdiction in which the trust’s assets are located. In the event of a marriage or civil partnership, therefore, it can sometimes be appropriate to relocate certain assets to different jurisdictions, or to restructure them in a more protected way.
  • Is ring-fencing particular trust assets appropriate? Where the value of the trust funds justify it, it may be worth creating a sub-fund for the marrying or partnering beneficiary, and ring-fencing the main trust assets separately. This approach can help support an argument that any nuptialisation of trust assets should be limited to those held within the relevant beneficiary’s sub-fund, leaving the remainder untouched. It can also work particularly well for second generation beneficiaries where the trust assets comprise wealth generated by earlier generations, rather than during the course of the marriage or civil partnership.
  • Is the trust instrument suitably drafted? As a general rule, from a divorce or dissolution-proofing perspective, the wider the definition of beneficiaries in the trust instrument the better: it reduces the risk of a court finding that the trust is nuptial in character. It is, however, important to ensure that the definition is not so wide that the trust fails for want of certainty of objects. Equally, it will be crucial to ensure that the class does not inadvertently include spouses or partners where that is not the intention, or beneficiaries for whom that status could be disadvantageous from a tax perspective.
  • Should the beneficiary’s spouse or civil partner be added as a beneficiary? It is worth remembering that there is no need to include a beneficiary’s spouse or partner as a beneficiary from the outset. In fact, it can often be preferable to leave spouses and partners out of the beneficial class altogether, and instead ensure that the trustees have a power to add them. If this approach is taken, it is helpful for the relevant letter of wishes to be clear on the circumstances in which the trustees should exercise that power. For example, it may be appropriate to make the exercise conditional on the spouse or partner entering into a pre-nuptial or pre-registration agreement on pre-approved terms (although care would need to be taken to ensure that this did not undermine the validity of any such agreement).
  • Is a divorce or dissolution policy appropriate? Trustees may wish to consider adopting a policy outlining the approach they will take in the event of a divorce or dissolution, on the basis that a court may be less likely to intervene if it can see that a sensible, fair policy is in place. If trustees do decide to implement such a policy, they will need to ensure that it does not fetter their discretion, and that it strikes the right balance between meeting the needs of the parties and not being over-generous.
  • How should requests for distributions be managed following the marriage or partnership? A trustee’s approach to distribution can significantly influence the court’s view on whether the trust is a financial resource for one of the parties and thus what order it might make. Clearly, if trustees agree to every request for a distribution from a beneficiary, that can be fairly persuasive evidence that the trust is such a resource. If trustees instead interrogate and occasionally decline requests (and document this) the court may be more inclined to find otherwise. This approach can also be helpful from an expectation management perspective – if spouses and partners understand that the trustee will not accede to every request, they may not even seek to target the trust in the first place.

It is important to recognise that, even with the benefit of pre-emptive action, it is likely to be difficult for trustees of family assets to eliminate completely the risk of becoming embroiled in divorce or dissolution proceedings. But asking these questions at an early stage, obtaining suitably tailored legal advice and implementing appropriate measures as part of a considered, long-term strategy, ideally with the buy-in of all interested parties, can go a long way towards insulating trustees from at least some of the expense, stress and uncertainty that a dissolution or divorce can bring – and so too to reassuring younger generations of beneficiaries seeking to navigate the already complex world of romantic relationships that their assets need not be an additional complication.

Our Trust and Divorce specialist team, have created a Trustee’s Guide to Divorce, which is an essential guide for trustees seeking to future-proof against or navigate through divorce. Click here to read our guide. To seek Trusts and Divorce advice, please contact Jessica Henson, Clementine Dowley or Rosie Sells, or alternatively, telephone on 020 7465 4300.

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Clementine Dowley
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Rosie Sells
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