Trust assets in divorce proceedings are an increasingly common issue in family law cases. In divorce proceedings, if you or your spouse are beneficiaries of a trust and are entitled to capital or income from the trust, this is likely to be considered a financial resource. As a result, it will be financially considered by the court in remedial proceedings.
If you or your spouse have a beneficial interest in the trust, you need to disclose it in your divorce proceedings even if you are not technically the owner of the trust assets. Courts have power over trust assets, so it is important from the outset of divorce proceedings to determine how the court might deal with related trust issues, and what steps you might take to protect or challenge the trust.
Keep reading to learn more about how trusts assets can be protected in the event of a divorce.
What is a trust?
When dealing with trusts, it is important to understand the nature of the trust, the status of the settlor, the responsibilities of the trustee and the rights of the beneficiaries. In a nutshell, a trust is a fiduciary relationship in which the trust is usually an asset provided by the settlor, which can be money, real estate, or a property.
These assets are legally owned by a “trustee”. A trustee is a person who holds the assets for the purposes of those beneficiaries who are specified in the trust. These beneficiaries are often children.
In the UK, there are many types of trusts. Some are relatively self-explanatory, while others are more complex in nature. Common types of trusts include the following:
1. Declarations of Trust, which provide that a third party other than the legal owner of the property has an interest in the property
2. Life Interest Trusts, which specify that a specific person will live in a property throughout their lifetime
3. Discretionary Trusts, which allow the trustee to make certain decisions about how to distribute trust income and sometimes capital
4. Other trusts, such as offshore trusts are created abroad and allow individuals to avoid UK tax on assets
Why should you establish a trust?
There are many reasons why a couple may establish a trust jointly or separately during their marriage, including:
1. To avoid or manage taxes
2. To invest in inherited assets
3. To protect the wealth of future generations
4. Beneficial interest in third party property; or
5. Provide discretionary income or capital for one or more classes of beneficiaries
Solicitor Xinlei Zhang explains:
The most common scenario in the cases we deal with is that couples set up a trust to protect their assets from falling into the marriage pool. They may put assets (money or property) into a trust in order to benefit specific beneficiaries (such as children or siblings).
For example, Mr. A and Ms. B are about to get married, and they both have children with their ex-husbands or ex-wife. They hold property and savings in their own names in order to protect and keep their respective assets. They also put certain assets into a trust with their respective children as beneficiaries.
That said, setting up a trust is certainly an effective way to manage and control their personal wealth through the peculiarities of the trust structure. However, the timing and nature of the creation of these trusts should be considered between husband and wife, otherwise the court has the power to change the original trust deed.
How do courts deal with trust assets when it comes to divorce proceedings?
In line with section 25 of the Matrimonial Causes Act, the court has a duty to take into account all available assets and resources of the parties and has broad and varied powers to make orders to achieve a fair outcome in each case. That is, regardless of your situation, the court will have the power to order changes to the settlement if necessary to safeguard the interests of your spouse or civil partner, including orders to provide funds or income for your spouse or family children, removals of a Trustee’s order, etc.
Generally, when courts are faced with disputes involving trusts, they are aware of the complexities of trusts. This includes reviewing the trust deed and the history of how the beneficiaries benefited from the trust.
In summary, courts need to ensure that a fair distribution of finances is achieved between spouses to determine which assets are available to each party. This allows the Court the power to vary nuptial settlements in line with property/trust law to demonstrate whether a trust is a sham trust. This is a trust which is set up to prevent one of the spouses from claiming the right to assets.
What issues will the court consider?
In general, in a divorce, if a spouse has a fiduciary interest, the court may be asked to consider several issues. For example:
- Is a trust a financial resource for a spouse?
- Is the trust a matrimonial trust that can be varied by the court?
- Finally, is the trust valid, false and/or should the funds put into the trust be revoked?
While the majority of trusts are genuine, sham trusts are set up for the purpose of protecting assets which would otherwise be considered matrimonial. While it can be difficult to prove whether a trust is a sham, proving so means that these assets will be taken into account.
If the court decides that the trust is matrimonial, the court has very broad powers. The court can order:
- A change of beneficiaries to allow the court to provide reserves to each spouse through a trust;
- Change of the trustee and appointing of a new trustee, which helps ensure that both spouses are treated fairly; or
- The transfer of assets out of the trust to allow the non-beneficiary spouse to receive the assets directly as part of the divorce settlement rather than continuing to participate in the trust.
If your ex-partner is the beneficiary of a trust, what happens after divorce?
Most often in a marriage, your ex-husband or ex-wife is the beneficiary of a trust set up by their parents or someone else. At the time of their marriage, the couple may have benefitted from the trust for many years. Following a divorce, you and your ex-partner’s trust would no longer be relevant because you legally no longer have any direct relationship with the beneficiaries.
However, that doesn’t mean you can’t benefit from the trust at all. In such a case, the court will use its power to review from a fairness perspective what the trust has done to the family before the divorce. For example, if a couple benefits from trust assets every month and are living the high life, after divorce, the court may also believe that one of them should be able to maintain such a lifestyle to avoid a change of lifestyle.
The case of Whaley v Whaley [2011] is a typical case. The judge in the case ruled that trust assets held in a trust created by the husband’s father could be considered as part of the marital assets in a divorce. Even though the wife is not a beneficiary of the trust, the court held that because the husband has the ability to direct the trustee which distributions to make, the trust assets are actually part of his resources and can be taken into account. The wife then gets a portion of the trust assets.
How can assets be protected following a divorce?
If the trust was created before your marriage, the court’s treatment will depend on the history of the trust. Even if the trust was created before you got married, it may include your spouse in the beneficiary category. This would make it a “marriage settlement” that can vary.
If not, the court’s approach will depend on the course of the transaction, and it will be necessary to look at who has benefited from the trust in the past, to what extent, and how it is enforced.
The judge will need to conduct a detailed analysis of the trust documents, assess your availability to the trust assets and treat the trust assets as a financial resource if it believes you are trying to stay away from your true wealth so your spouse/civil partner can assets to file a claim.
Whether you are the beneficiary or the settlor, the most important thing is to separate it from the marital property. This means that absolutely no marital property is involved, including funds and property. It is affected by the parties involved as the court will have to take into account the financial stability of both parties as well as other factors such as –
- The financial responsibility of each party, for example, children
- Age of parties
- Any form of disability, physical or mental
- Contribution to the family, financial or otherwise
- Length of marriage.
Solicitor Xinlei Zhang: “the legal process for divorce is complicated, and either spouse in the broken marriage should seek legal advice. Divorce cases can become more complicated when assets in a marriage involve trusts. Given the complex nature of trusts, getting legal advice is even more important.”
If you want to protect your property by setting up a trust, or you have a trust involved in the division of your divorce property, please consult Lisa Lawyers immediately. We can provide you with advice and assistance to help you solve the problem.
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