Trusts on divorce
Trusts play an important role in many families’ financial planning strategies. In the event of divorce, trust interests can rapidly become contentious.
The approach a court will take to a party’s trust interests, including whether the court will be able to make orders directly against trust assets, depends on a number of factors.
Nuptial settlements – court has direct powers
The court can only make orders dealing with trust assets if the trust can be characterised as a “nuptial settlement”. If it can, the court has the power to redistribute trust assets to make provision for the non-beneficiary spouse.
A trust will be nuptial if it makes continuing provision for both or either of the parties to the marriage in their capacity as husband or wife. Dynastic trusts protecting the beneficiary spouse’s family wealth will not usually be nuptial; a trust set up by one party during the marriage of which they are a beneficiary usually will be. However, the position is not always clear-cut and specialist advice should be taken at an early stage.
Even where a trust is nuptial, it does not follow that its assets will be shared between the parties. The court will consider whether the trust assets are matrimonial – meaning they are the product of the parties’ endeavours during the marriage, or the matrimonial home. If so, then it is likely that the court will consider that the assets should be shared. If not, for example if the trust assets represent the beneficiary party’s inherited family wealth, then they are likely to be shared only to the extent necessary to meet the other party’s needs. The court will also take into account the trust’s other beneficiaries and other surrounding circumstances.
Non-nuptial settlements – court has indirect powers
If a trust is not nuptial, then the court cannot make orders directly against the trust’s assets. It can however take the beneficiary’s trust interest into account as a resource available to them. Whether a trust interest will be considered a resource will depend on a number of factors, including the terms of the trust, any letters of wishes, the past practice of the trustees, and any evidence of their future intentions.
If it is held that the trust interest is a resource of the beneficiary spouse, the court may adjust the orders made in respect of the parties’ other assets accordingly. As assets in a non-nuptial settlement are unlikely to be matrimonial, this is only likely to happen where necessary to meet the non-beneficiary spouse’s needs.
One option the court has is to give the other party a greater share of the non-trust assets. Alternatively, the court could make an order based on the assumption that the trustees will make certain funds available to the beneficiary party, for example to enable them to rehouse, or to pay a lump sum to the other party. This is sometimes termed “judicious encouragement”, although in recent judgments the court has been keen to emphasise that judges do not “encourage” trustees to make provision, but assess the likelihood that they will do so.
If you need advice on the treatment of trust interests on divorce, contact Richard Kershaw or any member of our Family Team on 020 7412 0050.