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27th April 2020

Henry Hood examines trusts in divorce in HNW Divorce Magazine

Henry Hood examines trusts in divorce in HNW Divorce Magazine
Henry Hood
Henry Hood
Senior Partner

This article was originally published in HNW Divorce Magazine and can be accessed here on pages 10-11.

Trusts feature in the lives of many HNW clients, whether as long-established family settlements protecting wealth through successive generations, or created by the client to hold wealth they have generated. Whilst both spouses may have been content to benefit from the arrangements during the marriage, trust interests can become contentious on divorce.

The best outcome for those wishing to attack a trust will be to show it is a nuptial settlement, enabling the court to vary the trust and thereby redistribute its assets. Otherwise, those attacking the trust will need to satisfy the court that the trustees are likely to advance funds to the beneficiary spouse. These apart, options for accessing trust funds are limited but as recent decisions show, may not be non-existent.

Dealing first with nuptial settlements: S24(1)(c) MCA 1973 empowers the court to make an order varying for the benefit of the parties to the marriage and of the children of the family or either of them any ante-nuptial or post-nuptial settlement made on the parties to the marriage. Where there is such a finding, the Court is not limited to the extent to which it can vary a trust if so minded, and so it can have a significant impact on financial proceedings and their costs.

No definition of a nuptial settlement was given in the MCA. Case authority provides us with a broad definition of a settlement capable of making continuing provision for one or both parties to the marriage in their capacity as husband or wife. However, we are able to identify some significant limits to this definition.

Dynastic settlements from which one spouse benefits will rarely be nuptial as that interest is likely substantially to predate the marriage and so not relate to their capacity as a spouse. In the same vein, a trust made by one of the parties over their own wealth will not be nuptial if made well before the marriage and not in contemplation of it. (This was the position in Joy v Joy-Marancho and Others (No 3) [2015] EWHC 2507] to which reference is made below).

Conversely, a settlement made during the marriage by one of the spouses from which they can benefit will almost certainly be nuptial, as was the case in BJ v MJ [2012] 1 FLR 667.

These are the two ends of the available spectrum. The possibilities for distinguishing features are many. Therefore, where a dynastic trust contains a clause allowing the spouse of beneficiaries to benefit, this might bring it within the nuptial net (and that can be a key enquiry). By contrast, where it is established that a trust set up during the marriage was not intended to benefit either party, and had not done so, such a trust would not be nuptial (such were the circumstances in Quan v Bray [2014] EWHC 3340 (Fam) where the substantial trust was found to be entirely charitable).

An issue potentially remains as to whether a trust can become nuptial having not been to start with. In Joy v Joy-Marancho and Others (No 3), Sir Peter Singer thought not, providing that a settlement which was not nuptial at its creation could not later become nuptial otherwise every truly dynastic settlement, bereft of nuptial character at the outset but providing benefits for an individual who subsequently becomes either a husband or a wife, would arguably become variable as soon as that individual, once married, received any benefits. Coleridge J however suggested the opposite in Quan v Bray (at paragraph 60), and on appeal the Court of Appeal declined to determine the point.

Turning to the resource argument, s25(2)(a) MCA 1973 includes other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future as a factor the court must take into account. This includes trust interests, whether nuptial or not. Whilst the court cannot order the trustees of a non-nuptial trust to provide for the non-beneficiary spouse, it can seek that outcome by ordering the beneficiary spouse to make a payment which they would only be in a position to make if the trust advanced the necessary funds.

This practice has been known as judicious encouragement; the term originated in Thomas v Thomas [1995] 2 FLR 668, where the Court of Appeal held that there will be occasions when it becomes permissible for a judge deliberately to frame his orders in a form which affords judicious encouragement to third parties to provide the maintaining spouse with the means to comply with the court’s view of the justice of the case. Amongst various cautions, it emphasised that improper or undue pressure must not be placed on trustees.

In Charman v Charman (No 4) [2007] EWCA Civ 503, Wilson LJ identified the relevant question as whether the trustee would be likely to advance the capital immediately or in the foreseeable future if so, the line into undue pressure would not be crossed. In Charman, the husband had both settled the trust and written a letter of wishes stating that he should have the fullest possible access to trust assets, and the trustee would clearly have complied with any request he made. Few cases are so clear-cut, and the Court must assess the likelihood of provision being made based on factors including the terms of the trust, its original purpose, the attitude of the trustees and their administration of the trust to date (particularly concerning advances).

The term judicious encouragement is falling out of favour. Mostyn J in Quan v Bray [2018] EWHC 3558 (Fam) and Ipekci v McConnell [2019] EWFC 19 approved the judgment in the Hong Kong case KEWS v NCHC [2013] HKCFA which recommended the term judicious encouragement no longer be used, as it suggested that Thomas introduced a new principle under which third parties could be encouraged by judges to provide financial assistance to a party. It pointed out that English courts had not interpreted the judgment in this way. Rather, the issue has always been, and remains, whether future provision was likely or not.

Finally, what of the situation where a trust is not nuptial, and the trustees are not likely to advance funds to the beneficiary spouse? Options are limited.

In AF v SF [2019] EWHC 1224 (Fam) the husband was the life tenant of a fund worth £106 million. It was not a nuptial settlement, nor was it likely the trustees would advance capital. However, as the husband received an annual income of over £1,000,000 from the trust, Moor J was able to order a lump sum payable in instalments which would be funded by trust income.

Another option is to adjourn the nonbeneficiary spouse’s capital claims. This was the approach taken in both Quan v Bray [2018] EWHC 3558, where it was considered that the husband was likely to be receive significant remuneration from the trust, and in Joy v Joy [2019] EWHC 2152 (the continuation of Joy v Joy-Morancho), where claims were left open on the basis that there remained a likelihood of the husband receiving funds from the trust.

Trusts and their capacity to keep wealth at one remove from a marriage will always excite the interest of family lawyers, but whether attacking or defending them, it is important always to be clear as to the limited ways available to bring trust assets within the range of the Court’s dispositive powers.