Trusts can be used as an effective strategy for protecting your wealth in the event of a divorce.
The English Family Court however, has a broad discretion to consider ‘all other financial resources which each of the parties to the marriage has, or, is likely to have in the near future’. This includes considering the extent to which a spouse has been assisted by resources available within a trust.
Whether a spouse’s interest in a trust is a relevant factor to be considered by the court depends on whether the spouse is entitled as of a right to receive capital and or income form the trust or is only entitled to receive at the discretion of the trustees.
As the beneficiary of a Discretionary trust there is no absolute right to the trust property, depending on the terms of the trust, the trustees may provide funds to the beneficiary as they see fit, including giving not at all.
The court may want to examine how the trustees have exercised their discretion in the past and may want to understand the relationship between the spouse and the settlor/trustees.
Often, the trustees or beneficiaries of a discretionary trust may assert during divorce proceedings that they will not exercise their discretion by advancing funds to the beneficiary. It is important therefore, to analyse the trust deeds, deeds of variation and ‘letter of wishes’ to analyse whether any distributions have been made in the past and whether it is likely that those distributions will continue in the foreseeable future.
The courts will consider beneficial interest under the trust and take into consideration the value of the trust, whether capital, loans or income have been paid out form the trust which may have assisted the couple during their marriage.
If the trust has never advanced or loaned capital or income to the beneficiary, then the court may conclude that the trust assets are not an available resource.
Whilst a trust is a non-matrimonial asset the court may still regard a beneficiary’s entitlement or ability to obtain cash or income from the trust as a relevant factor to take into consideration to meet the needs of the other spouse.
There is no presumption that a spouse is entitled to half the capital or income advanced to the other spouse who is a beneficiary of a trust, as these assets were not derived from matrimonial assets.
If a court concludes that trust assets are an available resource, they can deal with it as follows:
- It can make an order which the beneficiary could not afford to pay without seeking recourse to the trust, In this case the trustees are encouraged to exercise their discretion reasonably to assist the beneficiary where the interests of the trust or the other beneficiaries would not be damaged unduly.
- It is therefore more likely that the court might give a spouse more of the matrimonial assets to compensate him/her for the loss of benefit derived from being married to the beneficiary who can call upon assistance from the trust.
Each particular case is determined on its own facts.
24 March 2020
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