Breakdown of Trust

This article was originally published by STEP

14 April 2021

Sital Fontenelle, Partner and Stacey Nevin, Senior Associate from our Family and Divorce team, explore the status of trusts during the divorce process in England and Wales.


Key points

What is the issue?

The intersection of trusts with the divorce process in England and Wales can be complex.

 

What does it mean for me?

Practitioners should be aware of the factors that courts take into consideration in divorce cases and the relevance of the purpose and use of the trust.

 

What can I take away?

A review of the powers of the Family Courts in England and Wales to make orders against trustees and beneficiaries for disclosure/information, when it is beneficial to intervene, the risk of participating at all and the jurisdiction of the courts over foreign trustees.

The family courts in England and Wales (hereafter referred to as the Court) has wide powers when considering financial claims on divorce. The Court looks beyond proprietary interest, is required to look at the ‘resources’ of the parties and will wish to ascertain the reality of the situation. Such resources can include trusts; and placing family assets, inheritance or damages from an injury claim into a trust will not necessarily keep them out of reach upon a divorce. As a result, trustees can find themselves facing enquiries and possibly orders in the event a beneficiary is a party to divorce proceedings.

 

Trusts as a ‘resource’

If a trust is a nuptial settlement (i.e., it has some connection to the marriage) it will be considered on divorce. The definition is wide and can take into consideration trusts set up prior to the marriage. The Court has the power to vary a nuptial settlement so that assets can be deployed for the benefit of the non-beneficiary spouse and the children of the family.

Where a trust is not considered a nuptial settlement (for example, a dynastic trust) it can still be considered a resource. If a divorcing spouse is a beneficiary, the Court will wish to know the extent to which the trust has been a resource to the spouse in the past (keeping a close eye on income and capital distributions, loans, life interests in property and any other benefits enjoyed by the beneficiary). A history of regular distributions to a divorcing beneficiary will paint a picture for the Court, which can conclude that these distributions will continue despite indications from the trustees to the contrary. Similarly, past distributions to other beneficiaries could lead the Court to conclude that a similar request from the divorcing spouse will be met.

The purpose of the trust, the long-term objective and the circumstances under which the trust came about will be important considerations for the Court. The letter of wishes and all past correspondences are open to examination. Trusts set up to hold damages received by a claimant in a personal injury or medical negligence case can still be taken into account when determining the division of assets upon divorce. The Court will wish to examine the breakdown of the damages; for example, it will be easier to argue that the Court should not invade the trust assets if they were allocated for cost of care, which forms a part of the beneficiary spouse’s needs as opposed to the funds received for general damages. Ultimately, in divorce cases, ‘needs’ will trump and the Court will therefore not hesitate to make an order that will force part of the funds held in a trust to be paid to the beneficiary spouse in order to make payment to the non-beneficiary spouse, if it has the power to do so.

Offshore trusts

The Court’s powers can extend to offshore trusts. As with English and Welsh trusts,[1] the Court can order the joinder of trustees or non-party beneficiaries, seek disclosure from the trustees and, if the trust is considered nuptial, make orders against the foreign trust, including variation powers, which can extend to making outright provision to the applicant. The jurisdiction within which the trust and its assets are situated, however, will be of relevance.

If both the trust and its assets are overseas, the Court is unlikely to make a variation order unless it is satisfied that the order would be implemented by the Court exercising effective control over the trust. Many offshore jurisdictions have asset protection/firewall legislation, the aim of which is to protect trust assets from orders by foreign courts. Where this is the case, the Court may not exercise variation powers, recognising that any order is unlikely to be enforced.

Requests for information

Trustees, both onshore and offshore, can find themselves facing enquiries from beneficiaries to assist them in complying with divorce-related court orders made against them, which need to be weighed against the duties owed to all beneficiaries. Foreign trustees should check carefully that they will not fall foul of any domestic legislation in the country within which the trust has been established when considering any voluntary requests for information or assistance.

If the Court considers it necessary, trustees can be joined to divorce proceedings as parties, so orders can be made against the trustees directly. This may occur, for example, where trustees are not cooperating with enquiries and the Court needs further information that can be provided by the trustees. With offshore trusts, an order for joinder does not bind a foreign trustee unless the trustee submits to the English jurisdiction or the Court has jurisdiction over the trustee.

Submitting to the Court’s jurisdiction

It is essential for any trustee to consider carefully whether they should submit to the English jurisdiction. If it is clear that the trust is not a financial resource available to either or both parties, the advantages of joining may outweigh any risks. If joined, the trustee will be better able to have their views heard through separate representation. A key disadvantage of being joined for trustees is that the Court has wider powers to order disclosure against a non-party in the divorce.

In some instances, trustees may seek to participate in divorce proceedings in order to assist the Court with its enquiries, but expressly state that they are not submitting to the jurisdiction. For example, a trustee may state they will participate in a first dispute resolution hearing (a ‘without prejudice’ Court hearing aimed at achieving financial settlement), but expressly state that in doing so they are not submitting to the jurisdiction. Such reservations remain untested, so there is a danger to trustees that they could inadvertently submit to the jurisdiction in doing so. Careful advice needs to be taken before the trustees appear to actively engage. It can be sensible for trustees to have involvement in ‘without prejudice’ aspects of financial remedy proceedings, but the trustee must be conscious of any risk of submission and tailor their involvement to the circumstances of the case.

Offshore trustees also need to take steps not to fall foul of any domestic law and may need to seek directions or guidance from the supervisory court in the jurisdiction of the trust, before taking active steps in the English proceedings.

‘Judicious encouragement’

Where the Court cannot make orders directly against the trust, it may still form a view on whether funds will be advanced to satisfy an order made against a beneficiary spouse. The trustees’ intentions will be taken into consideration, but it will be only one factor. If a trustee protests and clearly states that they will not advance funds to a beneficiary, either to meet their needs or the needs of the non-beneficiary spouse, this will not prevent a court from making a finding that, on the balance of probability, the funds will be advanced. The concept of ‘judicious encouragement’ allows the Court to frame a financial order that encourages the trustees to provide the beneficiary spouse with the means to comply with the Court’s order.

However, with this comes the warning that ‘improper pressure’ must not be exerted such that the interests of the third party or other beneficiaries are invaded or damaged.

It is not undue pressure if the interests of other beneficiaries would not be appreciably damaged and the Court decides that it would be reasonable for the beneficiary spouse to seek to persuade trustees to release more capital to enable that spouse to make proper financial provision for the non-beneficiary spouse.

Constructive communication

The assistance of trustees in divorce proceedings cannot be underestimated. In some circumstances, it is the trustees’ assistance that enables the Court to conclude that the trust is not in fact a financial resource or a nuptial settlement, which can avoid later costly and often fruitless enforcement attempts. Constructive communication can often be the best way forward, providing the trustees do not overstep what they are permitted to do in the jurisdiction of the trust. This could also be in the interest of the other beneficiaries, by avoiding the trust from becoming embroiled in future enforcement attempts.

It is important for trustees to take early advice, both in the jurisdiction of the trust and in the jurisdiction of the divorce proceedings, from both family law specialists and trust advisors, before engaging with the proceedings.

This article was first published in STEP JOURNAL issue 2, 2021

And is available to view online at https://www.step.org/step-journal/step-journal-issue-2-2021/breakdown-trust 

It is reproduced here with kind permission of the editor

 

Further information

If you have any questions about the topic of this blog,  please contact a member of our team of family and divorce lawyers or click here to get started online and find out where you stand.

 

About the authors

Sital Fontenelle is a partner in Kingsley Napley’s family team, where she specialises in complex financial matters within a divorce, including international jurisdictional cases, negotiating and drafting  prenuptial and postnuptial agreements as well as every aspect of private children law cases.

Sital’s areas of practice include all aspects of private family work, with particular expertise in financial remedy proceedings often involving an international dimension, with a particular expertise in advising families of an Indian background. Sital has extensive experience in complex cases involving off-shore trusts, family businesses, tracing assets and inherited wealth.

Stacey Nevin is a Senior Associate in Kingsley Napley’s family and divorce team.  She advises UK and international clients on matters involving all aspects of family law, in particular complex financial issues and private children cases. 

 

FOOTNOTES


[1] In this article, instances of ‘English and Welsh’ will be shortened to ‘English’.

 

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