Legal Case Update: Trusts and Divorce
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Legal Case Update: Trusts & Divorce


The issue of trust assets within a divorce can lead to complex litigation which could be avoided with appropriate planning.  Creating a trust does not mean that the assets within it would be excluded from consideration in the event of a divorce of one of the beneficiaries.  Anyone creating a trust as part of their tax and inheritance planning should consider other potential safe guards they wish to put in place to protect the trust assets and income in the event of the divorce of one of the beneficiaries.  This is particularly relevant to parents putting assets into trust for their children where they may have concerns about the potential for problems in their children’s marriages in the future.  There is a wealth of case law on the issue of trust assets within a divorce and the court of appeal has again recently considered this issue in the case of Whaley v Whaley with judgement having just been published on 24th May 2011. 

In this case there were nearly £7million of relevant assets in two trusts.  One trust was set up by the Husband’s father and contained a building company which he had established.  The beneficiaries were the Husband, his siblings, their children and charities.  The trustees were to hold the fund on trust to pay income and capital as they might in their discretion think fit to one or more beneficiaries.  The trustees had the power to add any person or class of persons to the beneficiaries.  They also had the power to appoint new trusts over the trust funds. The Husband worked in the building company and developed the remaining sites in its land bank post his fathers retirement.  It also seemed that the profits of the company were accumulated in the trust.  The Husband’s parents left a number of letters of wishes including in the last letter of wishes that upon their death their children should be consulted as to a distribution of the whole.  On their death this was not done and the assets remained within the trust.  By that point the funds in the trust had been allocated to three separate funds in the names of the settlors’ three sons.  Among the assets in the Husbands’ fund were shares in various companies which in turn owned hotels and land totalling in value in the region of nearly £5million.

The second trust was set up by the trustees of the first.  The beneficiaries were the Husband’s parent’s grandchildren, four of whom were children of the marriage in question and the trustees had the same powers as in the first trust.  It was found by the court that the second trust was largely set up due to the Husband’s concerns as to his tax position. The Husband was resident abroad and wanted to protect UK sited assets from exposure to the UK tax authorities.  The second trust contained the shares of a management company which owned amongst other things the freehold for a golf course which was considered to be the Husband’s project.  The Husband was not a beneficiary of the second trust.  The Husband argued that the assets in both the trusts should be ignored whereas the Wife considered that they should be taken into account as assets available to him. 

The first Judge to consider the case ordered the Husband to pay to his Wife a lump sum which he could not meet without recourse to trust assets. The Judge found that in particular in relation to the second trust there was no real intention that the grandchildren would benefit and that it was appreciated by all that it would be possible at some future date to add the Husband as a beneficiary.  That while the trusts were not shams the trustees would largely do the Husband’s bidding.  The Husband appealed that decision in part on the basis that the order would put improper pressure on the trustees and would require them to act against their stated intentions ignoring their duties to other beneficiaries and require them to realise assets at a time when it was not commercially prudent to do so.

The Court of Appeal upheld the finding that the trustees had acted in the past in accordance with the Husband’s wishes and were likely in the future to make available such resources as the Husband requested.  In those circumstances the court considered that they had no alternative but to treat the trust assets as part of the Husband’s resources.   The appeal failed.

The key considerations that the family courts take into account in relation to trust assets are:

  1. Was the trust set up by a previous generation of the family?

  2. Was the trust established before marriage?  If it was this can help to support an argument to exclude the trust capital and income.

  3. What are the powers of the trustees and how they have exercised those in the past?  If, as in this case, it can be shown that they would regularly advance capital and/or income to a beneficiary subsequently divorcing this is likely to be a significant factor in the divorce settlement terms.  It is therefore important to consider consulting with a matrimonial solicitor during the administration of the trust for advice on safeguarding the trust assets.

  4. The wishes of the settlor(s).  If there is an express letter of wishes setting out that in the event of divorce they would not want the beneficiary or his/her estranged spouse to benefit this will greatly assist an argument to exclude the trust assets/income

It is important to consider both on establishing a trust and during the currency of it the wishes of the settlor and the beneficiaries in the event of a divorce of one of the beneficiaries.  At Flint Bishop we can provide bespoke advice to trustees or settlors regarding safeguarding assets in the event of the divorce of a beneficiary.  This advice should be taken on creating a trust and at regular intervals during the administration of the trust and in particular at any point when consideration is being given to advancing large amounts of capital or income.

Of even greater assistance would be that the beneficiaries enter into a pre marital agreement or post nuptial agreements making clear that both parties agree that in the event of a divorce the trust assets would be ignored.  Whilst such agreements are not strictly binding upon the courts the lead case of Radmacher v Granatino considered by the Supreme Court in 2010 made clear that provided they are fair and executed and drafted properly with proper advice as to the terms and procedure they are increasingly likely to uphold the agreements.  The terms of such agreements once made should again be reviewed at regular intervals and in particular in the event of trustees contemplating large advancements of capital or income or any other significant change in circumstances. 





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Carl Weston
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