Legal Services Payment Orders: Equal footing for the divorcing couple?
In certain situations where a trust interest needs to be protected on behalf of the beneficiaries and the court agrees it is necessary, the trustees will be joined to the financial proceedings. This should be done at the earliest opportunity to enable the court to determine the authenticity of the claim against the trust and therefore the extent of the resources available for distribution between the spouses.
A trustee who is seeking to intervene in the proceeding, to defend the position of the trust and beneficiaries, or is ordered by the court to join existing proceedings will need to be separately represented. It is by no means automatic for trustees to be joined to the proceedings; the effect of doing so usually adds a layer of cost, delay and complexity to the proceedings and so the court will carefully consider the trustees’ position and the merits of joining them.
In many divorces, trust disputes are ultimately a matter for evidence and trustees can, and often are, called to give evidence by one party. In these circumstances, the court would not be able to bind the trustees to comply with an Order (for example an order for the provision of information or documentation) but their role as a witness would still provide the court with the opportunity to consider the nature of the trust, whether it should be considered to be a resource to one of the parties’ and whether there is a nuptial element.
The English court has wide ranging powers over trust assets if the trust is found to be nuptial i.e. it makes “some form of continuing provision for the parties...whether made before or after the marriage.”(1) It is therefore necessary for the court to find that the trust is connected to the parties in their capacity as spouses. If the trust is found to be a nuptial settlement, then the interest of the beneficiary spouse may be regarded as an available financial resource. Whether or not trust assets are to be treated as such, will depend on the specific facts including what the terms of the trust are and what the history has been in terms of the beneficiaries receiving trust distributions or other benefits from the trust.
If a trust is held to be a financial resource, then the court has powers to vary the settlement (2). In practice this means the court can transfer funds or property out of the trust, alter who benefits from the trust, change the trustees and appoint new ones. The court can also make financial orders against a beneficiary spouse on the basis that the trustees will come to their aid to enable them to meet the financial order made against them. Alternatively, the court can award the non-beneficiary spouse a greater share of non-trust assets, in the knowledge that the trustees will make provision to the beneficiary spouse from trust assets. This is known as the court giving "judicious encouragement’" to the trustees and the test for this is as follows: "Can the claimant spouse demonstrate, that if asked, the trustees would be likely, immediately or in the foreseeable future, to exercise their powers in favour of or in some way for the benefit of the other spouse". (3)
If you are dealing with an off-shore trust, it is important to fully understand the attitude of the court in that jurisdiction from the outset. Some offshore jurisdictions limit very strictly the amount of disclosure trustees can provide and so the trustees of an offshore trust are likely to seek directions from the trust’s home court before making any form of disclosure.
The English divorce court has the power to vary a trust even if the location of the assets or the trustees is off-shore. Whilst the relevant governing law will not stop the English courts from varying a trust, it will look at how straightforward enforcement may be, before making an order varying an offshore trust.
If it might appear temping for trustees to do what they can to avoid being dragged into proceedings, then a stark warning was given by Mr Justice Mostyn (4) to trustees who do not cooperate. He said, "if trustees do not voluntarily participate as witnesses and give proper disclosure they cannot complain if robust findings are made about the realities of control and the likelihood of benefit". He went on to say “if they have been served in accordance with the rules, and do nothing, then it is clear, beyond a shadow of a doubt that any variation order will be binding on them".
Alongside the need for trustees to be helpful to the court and engage with the process, they need to carefully balance their confidentiality and disclosure obligations. Whether the trustees are joined to the proceedings or not, they can still be asked to provide information about the trust within financial proceedings. The trustees’ primary duty is to act in the best interests of all of the beneficiaries. This can often conflict with what they are being asked to do by the court within the context of financial proceedings. The trustees need to consider with their legal team, how to respond in a manner which does not compromise any of the beneficiaries’ interests but also does not lead to adverse inferences being drawn by a failure to provide that information.
The role of trustees in divorce proceedings where a husband or wife are beneficiaries is not an easy one . Trustees need to obtain independent family and trust law advice at an early stage to work out the extent and direction of their role and ensure the decisions made offer the best possible protection to the beneficiaries and trust assets both in the short and long term.
If you have any questions about the issues covered in 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.
Abby Buckland is a Partner in the Family and Divorce team who undertakes matters involving all aspects of private family law and in particular complex financial issues and private children cases. Abby gives clear, sensible advice and takes great care of her clients, working strategically and creatively to achieve the best possible outcome. She has particular expertise in cases involving complex financial disputes (often involving trust assets, family wealth or inheritance), farming divorces, pre and postnuptial agreements, all issues concerning the arrangements for children, and in cases involving international elements.
Alexandra is an Associate in the Family and Divorce team with experience of all types of private family law work relating to both finances and children. Alexandra offers practical and realistic advice and provides excellent care for her clients, working through technical legal problems pro-actively to achieve the best possible result.
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