Breakdown of Trust
Sital Fontenelle
by Sital Fontenelle
The family courts in England and Wales have wide powers on divorce to realise their goal of meeting financial needs and achieving fairness. The first step is to investigate the assets available for division. The Court looks beyond proprietary interests to ascertain the true ‘resources’ of the parties. This may include attributing trust assets to the beneficiaries. As a result, trustees can find themselves facing enquiries (and orders) when a beneficiary divorces.
The trust’s purpose, objective and the circumstances in which it came about will be considered. Trust documents will be open to examination. Trustees can find themselves facing detailed enquiries from beneficiaries who want them to help with disclosure. Requests need to be weighed against the duties owed to all beneficiaries and any relevant foreign legislation.
If a trust has a connection to the marriage it will likely be considered a “nuptial settlement”. The concept is wide and can include trusts set up prior to marriage. Such a classification is key as the Court has the power to vary any nuptial settlement, including deploying assets for the benefit of a non-beneficiary spouse and their children.
Where a trust is not a nuptial settlement it can nevertheless be considered a resource if the trust has been used as such. A history of regular distributions to a divorcing beneficiary (or past distributions to other beneficiaries) may enable the Court to conclude that these will continue (or be made) despite contrary indications from a trustee.
Where the Court cannot make orders directly against the trust, it may still form a view that funds will likely be advanced to satisfy an order and therefore use ‘judicious encouragement’ - framing a financial order to encourage the trustees to provide the beneficiary with the means to comply with the Court’s order.
The Court’s powers can extend to offshore trusts. However, if both trust and assets are overseas, the Court is unlikely to make a variation order unless it is satisfied the order would be implemented. Firewall legislation which aims to protect trust assets from foreign orders can therefore deter the Court from exercising variation powers.
If the Court considers it necessary, trustees can be joined to proceedings as parties so orders can be made against them directly. With offshore trusts, an order for joinder will not bind unless the trustees submit to the English jurisdiction or the Court otherwise has jurisdiction over them. If joined, the trustee will be better able to have their views heard through separate representation and so if it is clear the trust is not a ‘resource’, the advantages may outweigh the risks (e.g. wider disclosure). Instead, trustees may seek to participate informally to assist the Court with its enquiries, but state they are not submitting to the jurisdiction. Such reservations remain untested so trustees must take advice before they engage to avoid inadvertent submission.
Sital Fontenelle is a partner in Kingsley Napley’s family team, where she specialises in complex financial matters within a divorce, including international jurisdictional cases, negotiating and drafting pre-nuptial and post-nuptial agreements as well as every aspect of private children law cases. Contact Sital.
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