Divorce, Trusts and Judicial ‘Encouragement’

It is not uncommon on separation for issues to arise with regard to family or off-shore trusts. Such trusts can have the effect (if not deliberate intent) to mask true ownership and beneficial entitlement. On divorce, consideration is given to all of the assets which are held by both the husband and the wife and to which they are or may become entitled. The status of trusts can consequently lead to significant disputes.

Where a trust is based off-shore, the usual advice to trustees, who should be advised independently from a beneficiary who is party to a divorce, is to avoid submitting to an English court's jurisdiction. Furthermore, where a letter of wishes relating to a trust has been prepared, case law has made it clear that such letters should be regarded as confidential and not disclosable. It can therefore be very difficult to establish the intention behind the trust, the financial gain which the beneficiary of the trust may ultimately receive, and the impact which this will have upon financial settlement on divorce.

The recent case of B -v- B has confirmed the way in which a court will deal with trusts in a divorce environment. The courts will consider the reality of the situation and, in particular, historical evidence which demonstrates whether the beneficiary of the trust had relied on trust funds. Consideration must also be given as to whether these resources were likely to continue to be available in the future, balancing against the interests of other beneficiaries of the trust. Whilst the court will not usurp the discretion of the trustees, nor put undue pressure on them, by the same token it will not act in total disregard of the potential availability of wealth from trust funds.

Particularly in such cases where trust funds are required to ensure the needs of the husband and/or wife are met, the court is likely to make an order which will "judicially encourage" the trustees to exercise their discretion in favour of the divorcing beneficiary. The result of this may well be that the other party will benefit from other matrimonial assets, or that it will be assumed income will be provided by the trust to the beneficiary from which he will then be able to support either himself or the other party.

The law and practice referred to in this article or webinar has been paraphrased or summarised. It might not be up-to-date with changes in the law and we do not guarantee the accuracy of any information provided at the time of reading. It should not be construed or relied upon as legal advice in relation to a specific set of circumstances.

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