Divorce often brings out the defensive instinct.
“It’s mine, hands off!” is a common retort amongst parting spouse. For the most part, it will be obvious that a particular asset belongs to one of the spouses: for example, the family home (in either party’s or in joint names) will invariably form part of the family assets which a court may then be asked to divide between the parties.
But in the less public world of trust law, whether the monies held in a trust “belong” to a spouse can be the subject of fierce debate. Divorcing parties may hold entirely different views about how to treat trust funds: one party saying that the trust monies should be poured into the matrimonial pot for division, the other saying that the trust as a separate entity should remain untouched.
Many trusts contain considerable sums of money and so the way in which they are treated by the family courts and divorcing parties can significantly impact the level of resources potentially deemed available for division upon divorce.
So should trust funds be included?
It depends. This article explores some of the circumstances where trust monies could be taken into account by a divorce court (or when dealing with a dissolution of a civil partnership). The court has a wide discretion and each case will turn on its own individual facts. In cases where the trust holds a significant amount of money, the availability of that money to one of the spouses is likely to impact greatly on the way in which financial proceedings are conducted, as well as their potential outcome.
Are funds readily accessible and have they been throughout the marriage?
This is often a crucial factor. Where the trustees have a discretion to release funds to one of the parties, how is that discretion exercised?
At one end of the discretionary spectrum, some trustees act as little more than financial administrators, releasing monies to the beneficiary spouse whenever a request for an advance is made. At the other end of the spectrum, the beneficiary faces a rigorous procedure where the trustees scrutinise every request for funds and have no qualms about refusing requests.
Each trust is a different creature with unique characteristics. Perhaps the trustees are professionals who have the expertise to project the financial impact of any ad hoc advances of funds on the trust’s longevity. Perhaps the trustees are family members who feel the tide of familial obligation wash over their ability to objectively assess what is in the trust’s best interests.
Whatever the trust, the easier it is for a beneficiary spouse to pull the strings of the trustees, the more likely a court will take those trust assets into consideration. Courts therefore look at whether funds are in reality readily accessible by a spouse, and where there is a pattern of requests for advances met with little (or no) scrutiny or objection by the trustees, the more likely a court will decide that the trust monies are ultimately a resource to which that spouse has access.
What is the trust’s purpose?
Another important consideration is the purpose of the trust. What did the person creating the trust want to achieve when it was set up? If the settlor is still alive, what are his or her current intentions?
There are a number of factors which may mean that a spouse’s interest in or access to trust funds is limited: perhaps there are other beneficiaries whose interests would be prejudiced if a divorce court dug too deeply into the trust. Perhaps the trust is intended to provide for reversionary beneficiaries such as a spouse’s children and therefore the funds need to be preserved for the long term.
Letters of wishes (as well as the trust Deed itself) citing the settlor’s intentions can be helpful for clarifying the purpose of the trust, and ultimately, how much (if any) of its funds may be considered as a resource available to a beneficiary spouse.
And a word of caution: any trust that is set up in order to defeat the other spouse’s claims may be “clawed back” into the matrimonial pot (with other consequences such as orders for costs against the party who prepared the trust Deed. It is generally addressed where the Court or another party considers the settlor would or should have known the marriage was already in difficulties. There is also a risk that a court may use that conduct as a justification to reduce that party’s share of the assets generally).
Many family lawyers often refer to “needs” in financial settlement cases as being a “trump” card. But what does this mean?
When deciding what constitutes a fair division of the matrimonial assets, a court looks at all and any of the respective parties assets in which they have any beneficial interest or control in the round. In many cases, financial needs based on standard of living during the marriage will be the main consideration (the “trump” card), so that the end result may entail one spouse having to dig deeper into their pockets to fund a settlement than they would otherwise have to do. (A simple example would be where one party receives more than 50% of the overall assets on the basis that their needs are greater, perhaps because they will continue being the children’s primary carer).
In such cases, needs may well be the determining factor puncturing a trust’s protective layer. If a court considers that a spouse’s financial needs can only be met by the other spouse receiving monies from their trust fund, it may be more likely that a court will treat that trust (or a certain portion of the funds held in that trust) as a resource available to the beneficiary spouse.
Marital or non-marital?
Another crucial consideration is when a trust is set up and how any trust funds are used during the course of the marriage. Determining whether an asset is marital or non-marital is beyond the scope of this article, but in broad terms, the more ‘distant’ the trust funds are from the marriage, the more likely a court will conclude that those funds are non-marital (and therefore not subject to sharing between the spouses). A prenuptial or postnuptial agreement may also help in clarifying how the parties intended to categorise and treat a trust fund.
For example, having a trust set up for a spouse’s benefit which is a long time after separation may be an argument in favour of treating the trust funds as a non-marital asset. Alternatively, if funds were withdrawn from a trust throughout a marriage and which were then intermingled with marital assets (such as being used towards the purchase of a family home or other joint property without any charge or loan agreement in favour of the trust), a court may be more likely to treat the trust funds as a resource of the beneficiary spouse.
Proceedings between spouses are private and so the trust remains outside of any proceedings for financial settlement. However, the trust may be made a party to the proceedings and can therefore play an active role. Even where the court cannot compel a trust to act (such as to release a certain amount of funds to a beneficiary spouse), they can use “judicious encouragement”, in other words, the court can use all its powers of persuasion to try and get the trust to pay up!
There is no fixed formula for ascertaining whether a trust fund should be considered a resource of a spouse or the extent to which trust funds should be considered to be readily accessible by that spouse. This area of law is highly discretionary and legal advice should be sought, ideally early on (and even at the point the creation of a trust is being contemplated) in order to lessen the chances later on of that trust being inadvertently drawn into a beneficiary’s divorce.
For further information about the treatment of trusts upon family breakdown and how trust assets can be protected, please contact Lucy Greenwood (email@example.com) or Richard Kwan (firstname.lastname@example.org) of The International Family Law Group LLP.
By Lucy Greenwood & Richard Kwan of The International Family Law Group LLP