Breakdown of Trust
Firstly, it is important to understand the family court’s treatment of damages within the context of a divorce. The family court has a wide discretion and extensive powers when determining the division of assets; it will look beyond legal ownership or entitlement and must consider all the circumstances of the case, with first consideration given to any child of the family.
The starting point is the factors set out in Matrimonial Causes Act 1973, Section 25 (“the Section 25 factors”):
the court shall in particular have regard to the following matters—
(a) the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future;
(b) the financial needs, obligations and responsibilities which each of the parties to the marriage has or is likely to have in the foreseeable future;
(c) the standard of living enjoyed by the family before the breakdown of the marriage;
(d) the age of each party to the marriage and the duration of the marriage;
(e) any physical or mental disability of either of the parties to the marriage;
(f) the contributions which each of the parties has made or is likely in the foreseeable future to make to the welfare of the family;
(g) the conduct of each of the parties, if that conduct is such that it would in the opinion of the court be inequitable to disregard it;
(h) the value to each of the parties to the marriage of any benefit ….which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring.
It can be seen that the legislation specifically directs the court to have regard to an injured party’s physical or mental disability and “needs”, both income and capital, which will include housing needs but also any needs that stem from the injury such as specialist equipment or care. Against this, the court has to also take into consideration the “needs” of the other spouse, who may end up as the primary carer of the child or children of the family. The court undertakes a balancing act when considering all the factors; a task which is made all the harder if there is insufficient capital to meet competing needs.
When looking at the resources of each of the parties to the marriage, the court will take into consideration the compensation received by the injured spouse; the legislation is clear that this will also include “resources” which a party is likely to have in the foreseeable future. Therefore the receipt of compensation after the divorce has been finalised will not automatically be excluded from the pot, although timing of the payment and indeed the injury will be a consideration when looking at whether the fund is matrimonial or non-matrimonial in nature.
Generally speaking, the family court’s starting point is that assets that are matrimonial will be shared equally between the parties on divorce. This is not the case with assets that are non-matrimonial. There is no clear definition of a matrimonial or non-matrimonial asset and there is no automatic assumption that damages are non-matrimonial in nature. For example, the part of the damages which forms the loss of earnings could be classified as matrimonial in nature, and therefore shared equally between the parties. Damages used to fund a family home, which is often considered the central asset in the case, or intermingled with assets built up during the marriage may be difficult to classify as non-matrimonial. If at all possible, the court will avoid “invading” non-matrimonial assets or assets which are earmarked for specific medical and care needs, but ultimately needs (especially where there are children) will take priority.
The Court of Appeal case of Wagstaff v Wagstaff  1 WLR 320 deals with the treatment of a large sum of damages awarded to the injured spouse. The husband was involved in a road traffic accident that left him paraplegic. The question for the appeal court was how those damages should be treated in the wife’s application for financial claims after a decree of judicial separation. This was an 8 year marriage, with 2 children from the wife’s previous marriage, whom the husband treated as children of the family. The Court of Appeal awarded the wife part of the funds. Butler Sloss LJ made clear
…the capital sum awarded is not sacrosanct nor any part of it secured against the application of the other spouse” ,
adding that each case must be determined on its own facts. The size of the damages and the heading under which the damages are awarded will be a factor, together with all the other Section 25 factors:
There may be instances where the sum awarded was small and was specifically for pain and suffering in which case it would be unsuitable to order any of it to be paid to the other spouse. In some cases the needs of the disabled spouse may absorb all the available capital, such as the requirement of residential accommodation.”
However, “needs” will always trump the other factors. If the non-injured spouse’s needs, such as housing, cannot be met without recourse to the compensation, the court will transfer part of the funds, as required. In Mansfield v Mansfield (2011), the Court of Appeal allowed a “Mesher Order” – essentially a charge to be secured on the house that the non-injured spouse would purchase using part of the compensation funds. When those funds were no longer required (when the twins of the family reached the age of 18) they would be returned to the injured spouse. This is an example of the courts reflecting the origin of the capital into the settlement.
Whilst it is not possible to exclude the compensation from the asset pot to be divided upon divorce, there are protective measures that you can consider early on with your client to minimise the impact of divorce. The success of these measures depends on the circumstances of the case, and the availability of other assets to meet the non-injured party’s reasonable needs.
Whilst they may not be considered romantic, there has been a significant increase in the uptake of prenuptial agreements over the past 10 years since the Supreme Court’s decision in Radmacher v Granatino (2010).
As the law currently stands, prenuptial agreements are not legally binding in England and Wales, but they are one of the circumstances of the case. In the case of Radmacher, the Supreme Court held that the court should give effect to a prenuptial agreement that was
freely entered into by each party will a full appreciation of its implications, unless in the circumstances prevailing, it would not be fair to hold the parties to their agreement”.
Recent case law following on from that decision means that judges are now likely to uphold or attribute significant weight to a prenuptial agreement, so long as that test is met. The burden will be on the party seeking to depart from the agreement to demonstrate why it should not be upheld by the court. The court will uphold an agreement which is fair and reasonable under the law, and meets the needs of the parties, including any children of the family. Where the prenuptial agreement is not deemed fair (i.e does not meet the needs) the court will usually not completely disregard it but will add to it as necessary in order to rectify the shortfall. Beyond the advantage of protecting the compensation, prenuptial agreements are also a mechanism for saving costs and the avoiding the risk of litigation. Consideration should also be given to entering a post-nuptial agreement, which is like a pre-nuptial agreement but is entered into during the marriage.
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.
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 even include trusts set up prior to the marriage. The family 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, it can still be considered a resource. The court will wish to know the extent to which the trust has been a resource to the injured 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 that can conclude that these distributions will continue despite indications from the trustees to the contrary. The purpose of the trust, the long-term objective and the circumstances under which the trust came about will be an important consideration for the court. 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, “needs” will trump the other factors and therefore the court will not hesitate to make an order which 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.
In some instances it may be beneficial for the injured spouse to receive ongoing periodical payments rather than a lump sum. In settlement meetings, it is helpful to think about structure as well as the heads of damages with a preference for specific items such as funds for adapting a property, or specialist equipment such as wheelchairs rather than for loss of earnings and pain and suffering which is susceptible to invasion.
Early advice from a specialist family lawyer is crucial to consider creative solutions, even in cases where the marriage appears to be built on a solid foundation. The rate of divorce is increasing every year, and unfortunately life changing events add to the possibility of relationship breakdown.
This article was first published in the April 2021 edition of PI Focus, the membership magazine of the Association of Personal Injury Lawyers, and is reproduced here with their kind permission.
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.
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.
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