Trusts and Divorce - Considerations for advisors to HNW and UHNW individuals

The family trust is a common vehicle set up to ensure the retention and growth of family wealth through future generations. Many of the cases we see involve assets held in trust, which often have been set up with the guidance of a family’s advisor with the intention of protecting wealth. However, there is a common misconception that, upon divorce, assets held in trust are protected from being invaded by the non-familial spouse. Clients are often surprised by the robust approach which the Court is prepared to take to assets held in trust. In this first article of our series on Trusts, we’ll give a brief overview of the Court’s approach to trust assets and considerations for advisors to HNW/UHNW individuals,

Sophisticated offshore structures are no longer the trojan horse they once were; as the judiciary reminded advisors in J v V (disclosure: offshore corporations) [2004], they are very familiar to the Court and do not intimidate; the Courts are prepared to view such structures with scepticism as a means to hide or obscure financial realities. This is not to say that such trusts do not have a place, but clients should be aware when entering into them that if their purpose is to obscure financial reality upon divorce, this is unlikely to succeed. To avoid skulduggery being instantly presumed, fuller and franker disclosure of the trust assets will be required, with all of the additional obligations upon trustees and beneficiaries this can bring.

The court may treat assets held in trust as a financial resource of a party, which they have or are likely to have in the foreseeable future. A deciding factor in the approach the Court will take to whether trust assets should be taken into account is whether the trustees, if asked, would be likely to advance all or part of the capital to the beneficiary in the immediate or foreseeable future. This, of course, makes it easier for a Court to find trust assets are a resource available where the beneficiary has an absolute right to trust income or capital, which should be borne in mind on inception and management of the trust.

The position is more complex where the trust is discretionary. The Court will consider:

• the pattern of previous distributions;
• the content of any letter of wishes dealing with the trustees’ exercise of discretion as to capital;
• the interest of other beneficiaries;
• whether the party to the proceedings was the settlor; and
• the drafting and terms of settlement of the deed itself.

Advisors who are assisting in decisions on distributions would do well to remember these principles; in a situation where a beneficiary has always been provided with funds upon request, they shall find it challenging to persuade a Court that this bounty shall not continue. The question is not one of control of resources, it is one of access to them.

If the Court finds that trust assets are a resource, they cannot make a lump sum order against the trustees themselves (as the Court can’t make orders against third parties). Rather, the Court may make an order against the beneficiary where it considers that the trustees will make trust assets available. Effectively the order would be against the beneficiary, for example for a payment of £2 million to his ex-wife. The expectation from the Court would then be that the trustees would replenish the beneficiary’s personal assets. The Court would judiciously encourage the trustees to provide the beneficiary with the means to comply with their order or replenish assets transferred in compliance. An order which the beneficiary could not meet without a fresh distribution from the Trust is unusual, but not unheard of.

Clients are often surprised that the Court can direct that Trustees and other beneficiaries can be added as a party to financial remedy proceedings – three parties in a marriage is rarely a positive thing. In our next article, we’ll explore specific considerations for Trustees in disclosure into financial remedy proceedings, and engagement as a joined party which can sometimes mean active participation in the proceedings.

At Irwin Mitchell LLP, our complex finance team specialises in providing early effective advice to families in wealth protection and assisting those with trust interests in reaching a financial settlement on divorce. We work closely with family offices and client’s advisors to secure positive outcomes in a proactive manner.