Trusts In Divorce Proceedings

Trusts in divorce proceedings are an increasingly common issue in family law cases. They can arise in many circumstances and, in divorce proceedings, when spouses are unable to agree how their assets should be divided and how their housing and other needs are to be met, the Court may have to decide how a Trust should be treated.

Explaining Trusts

There are many types of Trusts, some more simple and others more complex in nature. Common Trusts include:

Other Trusts, such as offshore Trusts, allow individuals to avoid UK tax charges by living from capital contained within a Trust that has been created abroad.

A Trust will contain assets given to it by a “settlor”.  The assets are legally owned by “trustees” who hold the assets for the benefit of those specified within the terms of the trust, the “beneficiaries”. The assets contained in a Trust can include money or property in respect of which the beneficiaries are to receive the benefit.

The fact that the trustees hold legal ownership of the assets contained in a Trust does not necessarily mean that they are entitled to benefit from it. Instead, they have what is called a “fiduciary duty” to manage the Trust in the interests of the beneficiaries as intended by the Trust deed, which sets out the terms of the Trust. Sometimes, the fact that a person or beneficiary is entitled to an interest in a property or asset, does not mean that it is easily capable of being shared with a spouse in divorce proceedings.

Trusts in divorce proceedings

In family law proceedings, disputes can arise as to whether the assets of the Trust are matrimonial and available for division between the parties, or whether they are non-matrimonial and should be excluded from the “matrimonial pot”. There can also be arguments about whether a Trust has been created with a genuine purpose or as a means of defeating the other spouses’ financial claims, particularly where the assets held in a Trust would otherwise have been considered matrimonial.

In other circumstances, the Court might be called upon to decide whether Trust assets should be used to meet the needs of the parties or to achieve equality and fairness in long marriages, or in marriages where the other assets may not be sufficient to achieve the right outcome.

The Court has a duty under section 25 of the Matrimonial Causes Act to consider all of the available assets and resources of the parties as well as having wide and varied powers to make orders that achieve a fair outcome in each case. This means that when the Court is faced with a dispute involving a Trust, they have often looked past the sometimes complex structures of a Trust and examined the reality of the situation to decide what assets are available to the parties.

How do the Courts deal with Trust assets in divorce proceedings?

Given the increasing popularity of trust arrangements, family law has developed to deal with Trust assets on the breakdown of a marriage.

The Court has the power to vary what is called “nuptial settlements”, and can use the law of property or Trusts to show that a Trust is a “sham”, intended to prevent one spouse from claiming an entitlement to assets. The Court can treat Trust assets as income or capital available to one spouse and therefore available for division between the parties.

In order to be valid, there must be an intention on the part of the “settlor” who provides the Trust assets to create a Trust. There must be certainty as to what the assets of the Trust include and who is to benefit from them.

If these constituent parts exist, then further consideration will have to be given as to the appropriate way to deal with the Trust on the breakdown of a marriage.

Depending on the circumstances or ways in which the Trust assets can be treated by trustees or beneficiaries, the Court may have scepticism as to whether or not a trust is genuine. Judges are used to coming across Trusts in divorce proceedings and will take a robust approach if they consider that a Trust has been created to hide or obscure the financial reality. There is a duty on each party to be open and honest about their financial position and there could be serious consequences in cases where attempts are made to deceive the Court, or your spouse, as to the true financial picture.

That being said, most Trusts will be genuine and, in such circumstances, the resources that the Trust provides to the spouse will be of importance in deciding what the assets of the marriage are and how they should be divided.

In some circumstances, there may be other assets outside of the Trust, which are sufficient to meet the needs of the spouse who does not benefit under a Trust but, if not, that spouse may have to claim against the Trust assets themselves.

Any party to marriage breakdown should seek legal advice. However, this is even more important when the assets of that marriage include Trust assets given the complex nature of a Trust, the components to ensuring that a Trust is valid and the varying extent of the trustees’ powers in respect of any particular Trust and the rights and expectations on the beneficiaries, who may also be third parties to the marriage.

The genuine Trust

Trusts can be set up for various genuine reasons, including:

• To avoid or manage tax;
• To invest inherited assets;
• To protect wealth for generations to come;
• To give third parties beneficial interests in property; or
• Provide discretionary income or capital to a class or classes of beneficiaries.

If your spouse is a beneficiary under a Trust, then it would be relevant to consider what income or future capital they may receive as a result of what other benefit they are entitled to. The Court will take this income, capital or other benefits into consideration when deciding what resources your spouse have available to him or her, along with the extent to which the Trust assets are available or will be available in the future.

Of course, the resources available to any beneficiary spouse under a Trust will depend on the Trust assets themselves, along with the terms of the Trust deed. As mentioned above, there are different types of Trusts set up for different purposes and they will contain different assets of varying value depending on the purpose of the Trust.

The Court has frequently said that it must look past the often complex structure of the Trust itself to the reality of the situation and financial or other benefit received as a result of one spouse being the beneficiary of a Trust.

The question that the Court will most often ask itself when determining the reality of the situation is would the trustees, if asked to do so by the beneficiary, advance all of the capital available in the Trust immediately or in the foreseeable future.

If you believe that your spouse is a beneficiary under Trust then it is important that the following are considered:

1. The drafting of the Trust deed itself.
2. Is your spouse the settlor of the Trust (i.e. the person who has transferred assets to the trustees for the Trust assets)?
3. Who are the beneficiaries and what interests do they have?
4. The pattern of previous distribution of assets, including capital or income.
5. The existence or contents of any letter of wishes dealing with the way the trustees exercise their duties and discretion under a discretionary Trust.

If the Court can establish that the Trust assets are available to the spouse who is a beneficiary, the Court may make orders that assume that the Trust assets could be used to meet payments due under a Court order or that the beneficiary spouse will have their assets replenished by the assets of the Trust if the order is made.

The “sham” Trust

The majority of Trusts that we come across in divorce proceedings are genuine. However, Trusts can be set up as a vehicle to protect assets that might otherwise be considered matrimonial. In some circumstances, parents might wish to protect assets given to their children on marriage. In other situations, one spouse might try to prevent the claims that their husband or wife might otherwise have by settling assets into Trusts in an attempt to intentionally defeat their spouse’s claims against those assets.

Challenging a Trust

One way to challenge a Trust in divorce proceedings, or to bring the assets of a Trust into account, is to use Trust or property law to attack the Trust assets.

A Trust may be invalid as a result of not having been created properly. Other courses of action, such as proprietary estoppel may be available to a spouse attempting to claim an interest in Trust assets. Alternatively, it may be argued that a Trust is a “sham” Trust. In other words, that the Trust is fake, i.e. that the settlor had no intention of creating a Trust in accordance with the deed and the trustees knew this and joined the settlor in creating misleading documentation for example.

There are many ways in which it could be shown that a Trust is a sham. Perhaps the trustees do not act in accordance with their duties. Perhaps the beneficiary or settlor treats the assets as if they were their own, acting independently of the Trust.  The timing of the formation of the Trust asset, trustees, beneficiaries, settlor and powers of distribution, including any letters of wishes in connection with the Trust, may all give us an idea as to whether the purpose of the Trust is genuine or not but consideration would also have to be given to many other factors.

It is difficult to prove that a Trust is, in fact, a sham. In most cases, the onus to prove that the Trust is a sham is on the spouse making the allegation and this can be a costly and time-consuming exercise.

It should always be remembered that there is a duty of transparency when it comes to financial remedy proceedings relating to divorce. Offshore accounts attempting to hide assets with the purpose of misleading your spouse and the Court, as to the extent of your true financial position will attract criticism and could result in hefty penalties in the Court arena, such as orders for costs being made against you.

Ultimately every couple’s financial circumstances are different and, whether you are pursuing or defending claims against a Trust in matrimonial proceedings, it is important that you obtain specialist advice.