DIVORCE & TRUSTS

DIVORCE & TRUSTS

A trust is a useful device to protect family wealth from divorce. If a spouse has an interest in a trust it is a resource that might be available for distribution on divorce. The trust has to be disclosed in divorce financial proceedings although the spouse who is a beneficiary or potential beneficiary of the trust may be successful in arguing that trust assets should be treated differently to other assets in the divorce.

Evolve divorce solicitors help and give advice to:

  • Beneficiaries of trusts who are going through a divorce and facing financial claims;
  • Potential beneficiaries of trusts who are facing financial claims on divorce  based on the possible benefits they may get from the trust;
  • The spouses of beneficiaries and potential beneficiaries of trusts who want the Court to take into account trust assets when making a financial award;
  • Engaged couples who are entering into prenup agreements to ring-fence or protect trust assets;
  • Spouses who are entering into postnup agreements to ring fence or protect a trust distribution;
  • The trustees of trusts who need advice on how much information to give out within divorce proceedings or need representation in financial Court proceedings.

If money is in trust, it can’t be touched on divorce, can it?

The relevance of a discretionary trust and how it comes into play in a divorce settlement will depend upon a range of factors including:

  • The powers given to the trustees;
  • The trust documentation;
  • Whether there is a prenup or postnup agreement in place and its terms;
  • The extent to which the trustees have exercised their discretion in favour of the divorcing spouse prior to the divorce. If there is a pattern of the trustees having paid out income or capital then the Court will be quicker to infer that the trust resources might be available in the future. That is why it is important that trustees and beneficiaries take early advice about the impact of distributions on any financial award in divorce proceedings.

Do you have to disclose that there is a trust if you have never had any money out of the trust?

The short answer is yes.

If a beneficiary or a potential beneficiary of a trust is getting divorced then they must disclose any trust interests in the divorce proceedings, even if they are only a potential beneficiary of a discretionary trust and may never receive anything from the trust. If they don’t then any financial agreement they reach or any award that the Court may make within divorce proceedings could be overturned at a later date. Non-disclosure adds to the cost and complexity of any financial Court proceedings.

The Court can order the beneficiary to disclose certain trust documents and they may request information from the trustees. Trustees have to consider the interests of the beneficiaries as a whole when they are asked to produce information or make decisions.

Trustees may be joined to divorce proceedings and maybe asked to explain the practice of distribution or to produce accounts, deeds and records of distributions which the Court considers necessary to decide on the divorce financial award.

What’s the point of putting money into trust if it has to be disclosed on divorce?

People put money into trust for a variety of reasons including tax and to protect family money for future generations. Whatever the type of trust often the fact that money is held in trust creates more of a hurdle to overcome for the spouse who wants the family Court to take into account the trust assets in the divorce. The trust will be more difficult to get the divorce Court to take into account if the list of beneficiaries excludes any prospective spouses.

A trust can be viewed as a bit like a prenup agreement – it can still be challenged and the trust can be taken into account in divorce proceedings but, with careful advice when the settlor sets up the trust, with the trustees considering distribution options and beneficiaries combining the trust protection with the likes of prenup and postnup agreements this gives the best possible chance of keeping money within the family.

Are there different types of trusts?

Trusts can be legally complex structures. Their main purpose is to provide wealth protection and to give flexibility so that the trustees can exercise their discretion on who, if, and when to make capital or income payments. Trustees will be guided on how to make their decisions by a letter of wishes prepared by the settlor of the trust who put the family money into trust.
In divorce proceedings it is important to establish if the trust is a nuptial trust or a non-nuptial or non-marital trust. The nature of the trust is important as the divorce Court powers depend on whether the trust is ‘nuptial’ or not.

Long-standing family trusts that were set up with the express purpose of protecting future generations from divorce, bankruptcy and the other vagaries of life will be regarded as non-marital in nature. As a general rule non-marital trusts won’t be invaded by the divorce Court where the needs of the other spouse can be met out of the marital assets built up during the marriage. Needs is a very loose legal concept and the extent of ‘needs’ depends on a number of factors, including the standard of living enjoyed by the family.

If a trust is set up during the course of or in contemplation of the marriage benefiting one or both spouses then the trust is likely to be regarded as being nuptial. The definition and nature of the trust is important as if the trust is classed as nuptial it is capable of variation by the divorce Courts.

What orders can a Court make over a trust on divorce?

The orders that the Court can make depends on whether the trust is a nuptial trust or not.

If the Court decides the trust is nuptial then it has very wide powers. The Court can:

  • Change the trustees and appoint new ones;
  • Transfer monies out of the trust;
  • Change who benefits from the trust.

If the trust is non-nuptial then the Court can still take the trust into account and could , for example, award the other spouse a greater share of the non-trust assets if it is necessary to do so in order to meet the spouse’s needs. Needs will be partially based on the standard of living enjoyed by the family during the marriage.

What happens if the trust is off-shore?

If a trust is offshore and based in a different jurisdiction then specialist legal advice should be taken.  There can be tactical issues and practical problems in enforcing orders against overseas trusts as the English courts have limited jurisdiction abroad. Robin Charrot is a Fellow of the International Academy of Family Lawyers, the world’s leading organization of expert international family lawyers and, where there are off-shore assets and trusts, he works with specialist solicitors in different countries to make sure that no stone is left unturned when either protecting beneficiaries of trusts or seeking a financial award on behalf of a spouse.