Divorce and the Family Trust – principles, planning and protection

“I've lived long enough to have learned
The closer you get to the fire the more you get burned
But that won't happen to us
Because it's always been a matter of trust.”

“A Matter of Trust”, Billy Joel

Billy Joel’s words about a challenging personal relationship are apt when it comes to looking at how the often complex financial and emotional issues that arise on divorce can be heightened when trust assets are also in the mix. Trust can give way to suspicion and the trustees as well as the couple themselves can feel that they’re caught in the inferno.

There are two main ways in which trust assets can come under fire in a divorce:

1. If a trust is found to be a “nuptial settlement” it can be varied directly by, for example, a direct distribution to a non-beneficiary spouse. Unfortunately, there is no clear definition of a nuptial settlement save that it has to have a “nuptial element”, which is not particularly helpful. It must have been made with reference to the marriage in question, but the identity of the settlor is irrelevant and the couple who are getting divorced don’t even have to be beneficiaries. Trusts that are nuptial at their inception will remain so even if changes are made later to them (perhaps removing a spouse as a beneficiary); a trust that isn’t nuptial at the outset can become nuptial later. However, the fact that a trust is judged to be nuptial and could be varied doesn’t necessarily mean that it will be. Furthermore, any variation will be limited to the extent necessary to produce a fair outcome between the divorcing couple, although it has to be said that fairness, like beauty, is in the eye of the beholder.
2. Trust assets can be a resource available to the divorcing spouse(s). If a spouse is entitled as of right to income from a trust, that is clearly going to impact on whether or how much maintenance is payable; but discretionary trusts are not immune from attack either. The court will look at the reality of the situation: where a spouse is the settlor and main beneficiary, and can simply write a “Dear Me” letter to get money out of trust, he is likely to be on a sticky wicket. The court will look at the pattern of payments to a beneficiary and the reasons for them. Letters of wishes and minutes of trust meetings will be disclosable, and orders may be made in the expectation that trustees will exercise their powers to enable the beneficiary to comply.

Although the family courts over the years have not been shy to go behind trusts in an attempt to distribute assets in a way that’s considered fair, the fact is that trustees have a duty to the whole class of beneficiaries. Trustees will often want to be separately represented in the proceedings, even where in practice they are taking the same line as one of the divorcing spouses. The ability to resist claims is going to be greater with offshore trusts. Trustees will need to decide whether to submit to the English divorce court’s jurisdiction and great care must be taken not to do this inadvertently.

The interests of other beneficiaries will be important. Minor beneficiaries must be joined in the proceedings unless the court considers their interests can be adequately protected without doing so. Adult beneficiaries might choose to intervene so that their views can be put independently - Mills & Reeve recently represented the adult beneficiaries in the leading case of Imerman.

Divorce is nearly always a difficult process, even where both sides are committed to sorting things out amicably. Where trusts are involved there is another layer of potential conflict. The availability of trust assets may enable a settlement to be reached where otherwise the divorcing couple’s resources would make that difficult, which the trustees might consider an appropriate exercise of their powers. In other cases, the trustees will feel it is their fiduciary duty to defend an attack on the trusts as robustly as possible. Whatever the position, it is essential to devise a strategy early on, and for the lawyers involved to work together to achieve the best outcome.