Divorce & Trusts

If you are separating and getting divorced, it's natural to be worried about family money held in trust and how to protect it. In this divorce and trusts guide, our Northwest financial settlement solicitors explain how the court treats money and assets held in Will trusts and lifetime trusts. Consult Evolve Family Law Today.   This guide covers: Why are trusts relevant when a couple divorces? What is a trust? The definition of a trust Nuptial or non-nuptial trust Will trusts Lifetime trusts Bare trusts Informal trusts Offshore trusts Prenups, postnuptial agreements and trusts Trusts in divorce proceedings and financial settlements Talk to Evolve Family Law   Why are trusts relevant when a couple divorces? If you are a beneficiary of a trust fund, it's frequently assumed that you don’t need to disclose the existence of the trust to your estranged spouse or to your divorce solicitor, family mediator or the court. Even if your estranged husband or wife knows about the trust, you may believe that the trust monies can be legitimately ignored when providing financial disclosure. These assumptions are wrong. That’s why it's best to speak to a specialist divorce and trusts lawyer with experience advising on the relevance of trusts in divorce proceedings. A trust may need to be disclosed – it depends on its nature. Even if a trust must be revealed, that doesn’t mean the court will view the trust funds as relevant to the financial settlement. However, not disclosing a trust puts you on the back foot with your ex and their divorce lawyer, who may wonder what else you haven’t disclosed, and the court may be more inclined to find you have other nondisclosed assets. What is a trust? There are several different types of trust. The type of trust you are a beneficiary of, or potential beneficiary, will determine its relevance to your financial settlement. Trust types include: Trusts in Wills Lifetime trusts Bare trusts Informal trusts Offshore trusts The definition of a trust A trust is a legal structure for managing property, money, or other assets. A trust is created when a settlor establishes the trust and places assets into it. At that point, the assets no longer belong to the settlor. Trustees must act in accordance with the trust's rules and trust law. A Will trust may specify the trust beneficiaries and the amounts they will receive at a specified age. In a discretionary lifetime trust, the trustees can distribute capital or trust income in accordance with the trust terms and the settlor's letter of wishes. Nuptial or non-nuptial trust When a beneficiary or potential beneficiary of a trust fund divorces, the court must decide whether the trust is nuptial or non-nuptial. The categorisation of a trust as nuptial or non-nuptial applies to any trust in which the beneficiary has an interest, such as a Will trust or living trust. A trust connected to the marriage and created for the benefit of one or both spouses or their children may be a nuptial settlement. This label matters because, if a trust fund is classed as nuptial, the court has wide powers to vary the trust settlement. With a nuptial trust, the court can: Vary the beneficiaries Alter the terms of the trust Transfer the assets in a trust to a beneficiary's spouse If the court decides that a trust isn't a nuptial trust, the family court judge doesn’t have these variation and transfer powers. With a non-nuptial trust, financial disclosure is still required. The court can make a financial court order taking into account the existence of the trust fund. For example: Awarding one spouse 100% of all the non-trust assets, or Making a financial court order that can only be complied with if the spouse who is a beneficiary of the non-nuptial trust fund receives a capital distribution from the fund or receives regular trust income so the spouse can pay a spousal maintenance order or school fees order A divorce solicitor with experience in financial settlements and trust assets can advise on the likelihood of a trust being classed as nuptial or non-nuptial. Will trusts The most common type of trust is found in a Will. Will solicitors like to include trusts in a Will because they provide flexibility for Will makers and can ensure that reasonable financial provision is made for relevant family members at the time of the deceased’s death. If your parents made Wills, they may have included a trust so that you may be a potential trust beneficiary. It's common to leave an estate to a surviving spouse, and to say that if a spouse predeceases the Will maker, the residuary estate is left in trust for the children. If your parents or grandparents have left money in trust for you in their Wills, the trust isn't likely to be relevant to your divorce settlement unless they have passed away. That’s because there's no guarantee that you will inherit anything, as: Your family member may change their Will By the date of the deceased’s death, they may have spent all their money. For example, on care home fees If your family member has passed away, your divorce solicitor can argue that the Will trust isn't relevant to your ex’s financial claims because: You are only entitled to a lifetime interest in the trust income – the Will leaves the capital to future generations, such as your children or grandchildren The trust is a discretionary trust, and the trustees in the Will may not release any income from the trust or capital payments to you The deceased passed away after your separation, so you can argue that any monies received from the trust fund aren’t family wealth and should be ignored If you have knowledge of a Will trust, it's best to mention it to your financial settlement lawyer. The solicitor can either set your mind at ease or explain why the trust could be relevant and ask for more information. A trust in a Will can be relevant to a financial settlement if the deceased has passed away and: There is a history of the trustees advancing regular income payments or capital advances The pool of discretionary beneficiaries named in the Will trust is narrow, and the beneficiaries' needs are not extensive, so it's unlikely that the trustees will advance them all the trust income or capital A former spouse can argue that their needs trump the legal argument that the trust funds aren’t relevant because the fund is a non-nuptial settlement and should be ignored Lifetime trusts A lifetime trust, or living trust, is set up by a settlor outside their Will. A settlor may have set up a trust on the legal advice of their estate planning solicitor as part of a tax mitigation strategy following the sale of a family business, or it may have been in place for several generations. Many lifetime trusts are protected by prenuptial or postnuptial agreements. However, in financial court proceedings, the trust must still be disclosed, and the argument made that the trust isn't a family asset and should be shielded.    The relevance of a lifetime trust depends on whether there has been a history of income or capital distributions to the beneficiary who is getting divorced, and whether their spouse and children's reasonable needs can be met through sharing the matrimonial assets. Bare trusts A bare trust, or an absolute trust, is where a settlor places an asset or funds in trust for a beneficiary, and the trustees have no discretion over who the trust monies can be distributed to. An example of a bare trust is one set up by grandparents, with their grandchild entitled to receive the trust monies when they turn 30. With a bare trust, it is easier for a spouse to argue that the trust funds are relevant to a financial settlement. Informal trusts Informal trusts are surprisingly common. They often arise when elderly parents transfer ownership of their family home to their child, possibly as part of a care home fee strategy.  When their child divorces, the elderly couple's son or daughter-in-law may try to claim half the equity in their in-laws' property, since their estranged spouse owns it. At this point, it's usual for the spouse and their parents to claim that the parents' house may be legally owned by their child, but a trust arrangement protects or ringfences the property. Offshore trusts Some trusts are set up offshore and are subject to non-UK trust law. Although the trust may have been set up overseas, a spouse must still disclose its existence when providing financial disclosure. Family law solicitors and trust lawyers can then argue the offshore trust's relevance and the extent of financial disclosure of trust assets. The existence of an overseas trust may influence your decision on divorce jurisdiction, which country to get divorced in, and where to apply for a financial court order. Prenups, postnuptial agreements and trusts It's best to seek specialist family law legal advice on either a prenuptial agreement or postnuptial agreement if you are: A beneficiary of a trust and planning on getting married, or If you are married and planning on setting up a trust fund, or If you are due to receive a distribution as a discretionary beneficiary Under current English family law, prenuptial agreements and postnuptial agreements aren’t legally binding, but courts are increasingly holding husbands and wives to the terms of their agreement, provided: They both took legal advice on the agreement They weren’t coerced into signing the agreement Financial disclosure was provided so the terms of the agreement were properly negotiated The terms of the agreement meet both the husband and wife's needs If your family is considering setting up a trust, or if the trustees of a generational family trust are considering capital or income distributions, it is common for a settlor or the trustees to flag up the appropriateness of a prenuptial agreement or postnuptial agreement. Trusts in divorce proceedings and financial settlements If a spouse is a beneficiary of a trust, any income or capital they receive may be treated as a financial resource. The first question the family law court will consider is whether the trust is a nuptial settlement. If it is, the court can vary the trust. If the trust is a non-nuptial settlement, the court could factor in the trust assets if the other spouse’s needs can't be met without recourse to them. When deciding on whether a trust is a nuptial settlement, the family court will examine: The trust deed The settlor’s letter of wishes The assets in the trust and their value and liquidity The history of capital or income distributions Early, complete financial disclosure and specialist financial settlement legal advice can help dispel the assumption that a spouse is entitled to a share of the trust assets as of right and avoid unrealistic expectations. Concealing the existence of a trust can lead a spouse to refuse to settle, or the court to draw adverse inferences about wealth. That’s why it's best to strike the right balance with early financial disclosure and information about the trust status. Talk to Evolve Family Law The treatment of trusts in divorce proceedings and financial settlements is a highly specialised area of family law. At Evolve Family Law, our expert divorce solicitors have substantial experience advising on asset protection and prenuptial and postnuptial agreements, and in reaching financial settlements where one spouse is a trust beneficiary. We work closely with our Will and trust lawyers who advise on Wills, trusts and estate planning. This easy access to estate planning solicitors helps us provide seamless, expertly joined-up trust, estate planning, and family law advice needed by families at the beginning of a relationship, during a marriage, or at the end of a relationship. Consult Evolve Family Law Today. Frequently Asked Questions on Family Money Held in Trust Is the trust untouchable? Possibly. It all depends on whether the trust is classed as a nuptial settlement or a non-nuptial trust. Even if the family court can't vary the trust's terms, the judge can make a financial court order that awards more of the non-trust assets to a spouse or an order that means the trustees will need to make a capital distribution so the spouse who's a beneficiary of the trust fund can comply with the court order. Can a trust be ring-fenced from a financial settlement? Possibly. Depending on the nature of the trust and whether a prenuptial or postnuptial agreement is in place, it may be possible to shield and fully ring-fence assets held in trust. Does the existence of a trust need to be disclosed? Yes, court rules require full and frank financial disclosure. When providing basic financial disclosure about the trust, your divorce solicitors can make it clear that the trust is considered a non-nuptial asset and irrelevant to the financial settlement negotiations. Consult Evolve Family Law for all your family law and estate planning advice needs.