Trusts and divorce, unhappy bedfellows

While the divorce rate in England and Wales appears to be falling, the courts do still hear a significant number of divorce cases each year including cases involving foreign nationals.  No doubt many readers will be aware of the very public, high profile divorce proceeding that was launched in the London High Court over the summer. 

In a proportion of the cases, including those involving foreign nationals, an offshore trust may be a matter of contention. The divorce of a beneficiary and/or settlor can prove challenging for the trustees.  

Often the offshore trust fails to provide the level of protection on divorce that was expected. This is due to the extensive statutory powers available to the English family courts.  

What happens during divorce proceedings?

On divorce, the basic position is that: 

  • both parties must provide full and frank disclosure;
  • all sources of spouses’ wealth will be presumed to be shared equally;
  • the Court will identify two types of asset – ‘matrimonial’ and ‘non-matrimonial’ assets;
  • ‘matrimonial’ assets being all property acquired by the parties after marriage; and
  • ‘non-matrimonial’ assets being property acquired before marriage/civil partnership, inherited property and gifts.  

It seems the Court’s view is the existence of ‘non-matrimonial’ assets may be a good reason for departing from the premise of an equal division of wealth.   

The Court looks at all financial resources, including those available to each party at the date of the trial, and crucially, resources which on the balance of probabilities each spouse has, or is likely to have, in the foreseeable future. This includes access to trust assets.  

The Family Courts of England and Wales and trusts

The law gives the Court extensive powers and whilst many people may think discretionary trusts are immune to this type of scrutiny, this is not always the case. Assets are vulnerable to a court order even when they are not under the individual’s direct control (eg when they are under the control of trustees). In considering trust assets in divorce cases, the Court is likely to assess a trust’s history, distribution patterns, etc.   

An offshore trust might find itself open to an order of the English Court to: 

  • set the trust aside; 
  • vary the terms of the trust; or
  • order the trustees to transfer the content of the trust to someone else (eg the applicant in divorce proceedings).  

If the Court cannot ‘crack’ an offshore trust with any of the above powers (eg due to firewall legislation in the foreign jurisdiction), it might take a different approach and issue an order to achieve what it considers is the right thing. This might be an order a respondent cannot fulfil on their own and for which they might instead need to look to the trustees of one of the trusts of which they are a beneficiary for assistance; this is what the court might call ‘judicious encouragement’. 

Strategies

Strategies can be adopted when a trust is created and/or actioned during the trust’s lifetime to make the trust as robust as possible against an attack on divorce. RSM can help with these strategies which might include: 

  • advising on the terms of trust deed at creation; 
  • ensuring the letter of wishes addresses the issue of divorcing beneficiaries/settlor;
  • the creation and maintenance of a family charter/constitution; 
  • ensuring the trust remains as robust as possible during its lifetime (eg considering the manner and regularity of provision to beneficiaries; reviewing beneficial provisions as the trust matures); and
  • educating the beneficiaries of the trust as appropriate.

Conclusion

It is clear that considering the various issues that may arise in advance and planning accordingly is likely to result in a better outcome for all (ie trustees, beneficiaries and divorcing couples) should divorce proceedings come knocking on the trust’s door.  

For more information please get in touch with Sophie St John.