Trusts and Divorce

A trust is a legal instrument used to protect and preserve assets for certain beneficiaries. When a settlor (the person who makes the trust) transfers assets into a trust, the legal ownership is transferred to named trustees who have legal responsibilities to hold and manage them for the beneficiaries.

There are many kinds of trust, including:

• Bare trusts - the simplest type of trust. The assets are held by the trustee but the beneficiary has the right to the assets at any time after they turn 18. They are usually used to hold money for children until they are old enough
• Discretionary trusts (occasionally referred to as family trusts) - the trustees can pay out income and sometimes capital to anyone in a class of beneficiaries. This gives them more power than a simple bare trust although usually the settlor will leave a "letter of wishes" explaining how they want the trust assets and income to be distributed
• Interest in possession trusts - the trustees must pay out any income to the beneficiary as and when it arises

Trusts are not automatically protected from divorce. When deciding how your assets should be divided and arranged upon divorce, you must be completely open and honest about your income, property, and financial resources. This includes declaring if you are the beneficiary of any trusts. If you are not open about your finances, any financial settlement you agree with your spouse could later be invalidated, even after the divorce is finalised.

Similarly, you may be tempted to put your money and assets into trusts to prevent any chance of your spouse getting it or to avoid spousal maintenance. However, if your spouse suspects the reason and the court agrees, the trust could be invalidated and the assets will revert back to your ownership.

Trusts are set up for a variety of reasons, such as to avoid or manage tax, protect wealth, provide discretionary income, or to invest inherited assets. Although you are not technically the owner of trust assets, if you are the beneficiary of a trust, your interest may be taken into account during divorce proceedings. To establish whether this is the case, there are a few questions to consider:

• Is the trust a financial resource?
• Is the trust a sham (set up purely to avoid divorce proceedings)?
• Is the trust a "nuptial trust"?

Whether your financial settlement is agreed between you and your spouse or made by a family judge in court, the division of assets must be fair. That is why all the financial resources of both parties must be taken into account.

The court will consider various factors to decide whether a trust is a financial resource. If the trust is fixed, it means your beneficial interest is defined and can be valued. A court will also consider whether and when you will have access to the trust funds. For example, if you have been receiving regular income from the trust, it is very likely to be taken into account. If there is no indication when the trust assets will become available, the court is much more likely to disregard them.

Discretionary trusts and divorce

With a discretionary trust, there will be a class of beneficiaries who could inherit and the trustees will have control over when and whether the beneficiaries receive proceeds from the trust. They are often used as family trusts as they provide trustees with flexibility (for example, to leave money to grandchildren who may not have been born at the point they made their Will).

If you are one of a class of beneficiaries under a discretionary trust, then the court can treat your interest as a financial resource in the divorce proceedings if you are likely to receive trust assets immediately or in the foreseeable future. Any evidence could assist the court in this, for example, statements of intent from the trustees.

Where the court has decided a discretionary trust should form part of divorce financial proceedings, it has various powers, including:

• Providing "judicial encouragement" to the trustees to make payments to the beneficiary spouse
• Offsetting the value the beneficiary spouse may receive by allowing the other spouse a greater share of the non-trust assets
• If the trust is also a "nuptial trust", it may order a variation so that the non-beneficiary spouse benefits

A sham trust is a trust set up by someone specifically to deny their spouse certain assets upon divorce. If a trust is found to be a sham, the court is likely to disregard it and the assets considered to legally belong to the settlor. This means the assets will be taken into account during divorce proceedings.

A nuptial trust, or nuptial settlement, can be established if there is a connection between the settlement and your marriage. Trusts which were set up in preparation for marriage will fall within this category, as will trusts created to hold the family home.

To decide whether a connection exists, the court will take into account factors such as:

• The identities of the settlor and beneficiaries
• The time the trust was set up
• The expressed intentions of the trust in any letter of wishes

Trusts with broad classes of beneficiaries are less likely to be considered nuptial trusts, unless the other beneficiaries are your children.

The courts have wide powers in relation to nuptial trusts, including to:

• Change the trustees and appoint new ones
• Change the beneficiaries
• Transfer monies from the trust

The courts can also vary a nuptial trust to provide relief after an overseas divorce.

Trusts cannot be set up for the sole purpose of depriving your spouse of assets but there are still ways you can take steps to protect your financial interests in case of divorce or civil partnership dissolution.

Offshore trusts

By setting up your trusts in certain offshore jurisdictions such as the Isle of Man, Jersey, and the British Virgin Islands you could prevent the effect of nuptial trusts. As issues relating to offshore trusts must be addressed according to that jurisdiction’s laws, the judgment of a divorce court in England and Wales that is inconsistent with those laws will take no effect. Bear in mind, these trusts should still not be set up for the sole purpose of depriving your spouse of assets.

Pre-nuptial agreements and post-nuptial agreements

The most effective way to protect your financial position is likely to be to entered into a pre-nuptial or post-nuptial agreement.

These are agreements entered into with your spouse just before or after you get married which set out how your assets are owned and how they should be divided upon separation. Although not legally binding, the courts are increasingly giving weight to pre-nups and post-nups in divorce proceedings and are likely to uphold it if the document is fair.