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10 October 2022

Trust Issues – What can the English Family Court do with trusts on divorce

Trusts can be established for a wide variety of purposes, and for the benefit of any number of individuals, companies, or causes. The English Family Court has grown accustomed to dealing with wealthy families who have established discretionary trusts. These trusts manage (and minimise) the tax on the transfer of capital from one generation of an affluent family to the next, and also enable independent trustees to make impartial decisions as to how income and capital are applied to the beneficiaries. When a discretionary trust is carefully thought through and responsibly managed, it can minimise both taxes and inter-familial friction to benefit the family as a whole. This article will only deal with legitimate trusts and does not address the law relating to sham trusts, or improperly established or managed trusts.

When a beneficiary of such a trust goes through a divorce and concurrent financial remedy proceedings, they must disclose their interest in any trusts and provide extensive supporting documentation. Under Section 25 of the Matrimonial Causes Act 1973, the Court has a duty to consider all financial resources available to both spouses – and it has wide ranging discretionary powers to make orders in relation to the trusts (and sometimes even against the trustees). Accordingly, discretionary family trusts can become lightning rods of dispute in acrimonious divorces.

Whether or not the Court will consider it appropriate to take the relevant trust interest into account in making a final order will depend entirely on the circumstances of the case. However, solicitors for the spouse attacking the trust will, if possible, seek to demonstrate to the Court that the trust is a “nuptial settlement”. If the Court finds that the trust is a nuptial settlement, then pursuant to Section 24 (1) (c) of the Matrimonial Causes Act 1973, it has the ability to vary the trust by making orders directly against the trustees. Mr. Justice Munby has described this power in Ben Hashem v Ali Shyif [2008] EWHC 2380 as “unfettered and, in theory, unlimited”. In practice, if a trust is found to be a nuptial settlement, orders can be made to oblige trustees to transfer trust assets to a non-beneficiary spouse or third party, or to exclude an existing beneficiary. The question of whether a trust is a nuptial settlement can therefore become pivotal.

There is no statutory definition of a nuptial settlement and examples in previous cases are not prescriptive. The time-honoured description of a nuptial settlement comes from the 1929 case of Prinsep v Prinsep: “is it [the trust] upon the husband in the character of husband or the wife in the character of wife, or upon both in the character of husband and wife?… The particular form of it does not matter… What does matter is that it should provide for the financial benefit of one or other or both of the spouses as spouses and with reference to their marriage state”. In the 1995 case of Brooks v Brooks, the House of Lords stated that in order to make a trust nuptial “the disposition must be one which makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children”.

The multiplicity of family trust structures mean that these definitions are necessarily broad. The result is fertile ground for family lawyers, who seek to prove – or disprove – that a trust is in fact nuptial. Each case is fact-specific and the Court will consider any potentially relevant evidence, but the following factors are often persuasive:

  • The genesis of the trust: when was it established, why was it established, and the strength of the connection between its establishment and the marriage;
  • The identity of the trustees, the beneficiaries, and any excluded parties; and
  • The extent to which there is a connection between the trust assets / distributions and the marriage.

If the Court finds that a trust is nuptial, then it will have greatly increased powers over that trust – and all assets held by it.

However, one major consideration for parties to weigh before asking the Court to vary a nuptial trust is whether an order would face any enforcement difficulties. Many trusts are established in offshore jurisdictions – particularly those seeking favourable tax treatment, or funded via offshore sources of income or capital. Jurisdictions differ, but broadly speaking enforcing an order against the trustees of an offshore trust is often a prolonged, expensive, and uncertain process. Joining the trustees as a party to proceedings can assist with obtaining disclosure and enforcing an award, albeit that foreign trustees are often loathe to submit to the English Court’s jurisdiction.

The alternative angle of attack in financial remedy proceedings is to ask the Court to find that a trust is a financial resource of the beneficiary. This angle of attack may be used by litigants faced with a trust that has funded a spouse but is clearly not a nuptial settlement, or where the jurisdiction of a possibly nuptial trust is likely to cause difficulties with enforcement.

When determining whether a trust should be considered a financial resource of the beneficiary, the Court will consider all relevant evidence. Some trusts are expressly a financial resource of the beneficiary – i.e. the beneficiary has a fixed share of the trust assets, and the trust documentation will set out when the beneficiary is likely to come into possession of those assets. The Court is relatively quick to recognise these fixed trusts as financial resources to the beneficiary on divorce – particularly working on the “balance of probabilities” civil standard of proof. It is more difficult to prove that a discretionary trust is a financial resource of a spouse, as no beneficiary will have a fixed interest and the trustees have total discretion – even to override a letter of wishes left by the settlor. The Court will need to look at the size and identities of the beneficial class, and how the trust has applied funds in the past (if at all).

If the Court does find that a particular trust is a financial resource of one of the parties, it generally takes one of two approaches. The first is to make an order in relation to non-trust assets that presumes that the trust will make appropriate offsetting distribution(s) to the beneficiary spouse. For example, the Court may order that a beneficiary wife’s spousal maintenance claim is dismissed on the basis that she will receive income from her trust interests, or it may order an unequal division of non-trust assets on the basis that one spouse has an unmatched trust interest.

The alternative approach is for the Court to make an order which is framed in such a way that, in order to create fairness, it requires fresh money to be advanced from the relevant trust to the beneficiary. To take a simplified example, the Court may order that a non-beneficiary wife retain a London family home, on the basis that the husband’s trust fund will make a distribution to enable him to purchase a similar home. This approach requires the Court to satisfy itself that the relevant trust could make the required distribution without harming the interests of the other beneficiaries. If so, it can make an order that is akin to “judicious encouragement” of the trustees.

The treatment of trusts on divorce is a complex area of family law, particularly where trusts are discretionary and / or situated in foreign jurisdictions. Judges, practitioners and litigants alike will have to grapple with trust issues in the Family Court for as long as trusts are an integral part of wealthy families’ financial planning.

For further information, please contact Luke Scarratt by email or your usual contact in the Family Department or, alternatively, telephone on 020 7465 4300

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Luke Scarratt
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