Are trusts protected from divorce?16 Mar 2023 | Joanne Wescott
Can trusts protect an inheritance from your spouse?
A trust is a separate legal entity. Neither spouse owns its assets. However, trusts are not ring-fenced from being included in the matrimonial assets considered for division.
The court will examine the trust deed in order to seek to ensure a fair division is achieved between spouses. Sometimes sizeable assets can be held in trust that will inevitably eventually benefit one spouse. To ignore that would be inequitable. It is necessary to examine the nature of the trust. This is usually done by looking at the trust deed, and the history of how beneficiaries have received from the trust. The type of trust will influence how the court can deal with the trust, but the court has wide-ranging powers, including:
- The power to vary a trust;
- To transfer trust assets to the other spouse; or
- To offset an amount that it believes the beneficiary spouse will receive from the trust.
How are different types of trusts dealt with in a divorce?
If a trust is ‘nuptial’ then the court can consider it as part of the matrimonial pot that is to be divided between spouses.
While there is no legal definition of a nuptial trust, a court is likely to determine it is ‘nuptial’ if the trust settlement is connected to the marriage and the spouses are beneficiaries. For example, a married couple that set up a trust for the benefit of themselves and their children would be considered a nuptial trust. Depending on the circumstances, it may also be possible to argue that a trust benefiting a business of a spouse (rather than the spouse) would satisfy this test.
An intergenerational trust is used to benefit the current and future generations of a family and is commonly set up by wealthy families to ensure heritage assets remain within the family. For example, one spouse may benefit from a trust set up by their grandparents.
Courts do not usually interfere with intergenerational trusts when it comes to divorce, which means that the trust will not be considered an asset in the marital pot.
However, it is important to note that sometimes trust monies provided to a beneficiary may have been substantial and contributed towards the lifestyle of the couple. If there are insufficient monies elsewhere to meet one spouse’s needs, then the court may make an order against the trust beneficiary on the assumption the trustees will fulfil that order.
If a trust is held offshore, it is important that you speak with one of our specialist international divorce lawyers to help determine if it will be considered in the matrimonial pot or not.
Many foreign jurisdictions, such as Jersey, the Isle of Man, the Cayman Islands and the Bahamas insist that trusts set up in their jurisdiction must be determined in accordance with their laws. This means that any order made by a UK court may not be upheld if it is incompatible with that jurisdiction’s law.
Our lawyers have vast experience in dealing with assets held in foreign jurisdictions, as well as having a network of specialists abroad, so we can advise you on the implications for your divorce if you or your spouse are beneficiaries of an offshore trust and how to enforce an order in the trust jurisdiction,
Sometimes, it may appear that a spouse has set up a trust with the intention of devaluing their assets in order to reduce the size of the matrimonial pot and to reduce the amount that they pay out in a divorce settlement. If this has been done deliberately, this is known as a sham trust.
What is a court’s power for dealing with trusts?
If the trust is a nuptial trust, then the court has a wide range of powers and discretion to deal with the trust and its assets in a financial settlement. In deciding if a trust is a nuptial trust, a court will look at the realities of each case, not just the legalities of what is contained within a trust deed. It will be necessary to examine the trust deed and also:
- any letter of wishes made by the settlor;
- when the trust was created;
- how the trust has previously operated and what distributions from trust assets have been made; and
- who are the beneficiaries and how have they previously benefited from the trust?
If the court is satisfied that the trust is nuptial, then it can:
- change the beneficiaries, which allows the court to make provision via the trust to both spouses;
- change the trustees and appoint new ones, which helps ensure both spouses are treated fairly; or
- transfer assets out of the trust, to allow the non-beneficiary spouse to receive assets directly as part of their divorce settlement rather than have any continued involvement with the trust.
If a trust is not a nuptial trust the court’s powers will be more limited. It is unlikely that the trust will be taken into account unless the needs of the non-beneficiary spouse cannot be met via other matrimonial assets.
Can a trust be challenged?
A trust can be challenged if you believe it has not been created properly, or if it is a sham trust.
Legislation states a number of formalities that are required for a trust to be valid. If these have not been met, then the trust may be deemed invalid, for example, if the settlor has not signed the trust deed.
To challenge a sham trust in court, you would need to prove that this has been set up with the intention of reducing the divorce settlement. It can be difficult to prove that a trust is a sham, and you should speak to a lawyer as soon as you have any suspicions in order you can build the best possible case, and to minimise your costs and save time.
How Osbornes can help?
When negotiating a financial settlement, the first thing to do is to contact us. Our expert divorce lawyers in London have experience in representing and advising clients on complex trust matters. We deal with both UK and overseas trusts. One of our expert lawyers will take your detailed instructions on the nature of the trust, how it operates, and your individual circumstances. We will discuss your desired outcome before explaining your options, likely timescales, and costs. If you are overseas or outside London, we have high-speed video conferencing facilities and a full online service to ensure you are kept up-to-date and fully appraised of your case and legal options. Find out more about:
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Joanne Wescott Partner
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