Trusts and Matrimonial Disputes in England

The division of a couple’s finances on divorce is rarely straightforward. This is especially true for high-net worth couples, who often use complex trust structures to hold their assets. Understanding how trusts can intersect with matrimonial disputes is important for both beneficiaries and trustees.

The Status of Trusts in Divorce Proceedings

One of the most fundamental principles of trust law is that trust assets are not legally held by the beneficiaries themselves. Parties to Family Court financial remedy proceedings may therefore think that such assets will be outside the scope of the division of assets between spouses/civil partners.  However, the Family Court has a wide discretion when exercising its powers to make financial orders.

Parties to Family Court financial remedy proceedings are under a duty to provide full and frank disclosure of their financial resources, and the Court is required to take into account the factors in Section 25 of the Matrimonial Causes Act 1973, including the income, earning capacity, property and other financial resources which each of the parties to the marriage/civil partnership has or is likely to have in the foreseeable future. These financial resources include trust interests, even if an interest is not an absolute entitlement. If a party could potentially benefit from a discretionary trust, for example, the Court will need to consider the likelihood of receipt of any benefit and the extent of that benefit. The test is whether the trustees would be likely to advance capital immediately or in the foreseeable future (Charman v Charman [2005] EWCA Civ 1606).

In order to properly assess the extent of this resource, disclosure is usually provided (and/or ordered) in relation to the trust. Such disclosure could include provision of the trust deeds, letters of wishes, trust accounts, asset valuations and information regarding historic benefit from the trust in question. If a beneficiary is unable (or unwilling) to provide information, the Court may compel such disclosure from the trustees (see below).

After quantification of the trust interest as a resource, the English Court must then determine how to treat it in the context of the overall financial claim.

What can the English Court do?

The Court has the power to make an order varying a ‘nuptial settlement’, which is typically taken to mean a settlement that is for the benefit of the parties or one of them and/or the children of the family, although whether a settlement is ‘nuptial’ is fact-specific (Charalambous v Charalambous [2004] EWCA Civ 1030). Before varying a nuptial settlement, the trustees may be joined to the proceedings. The location of the trust, the laws applicable to the trust, and the willingness of trustees to participate in English Court proceedings are all important to bear in mind when considering whether any proposed variation of a nuptial settlement is likely to be enforceable.

Methods of Varying a Nuptial Settlement

A variation of a nuptial settlement can be effected in a number of ways, including:

• Removing protectors and replacing trustees (E v E [1990] 2 FLR 233);
• Reinstating one of the parties to the class of beneficiaries to permit them to benefit from a trust and for trust assets to be distributed to that party (Charalambous v Charalambous [2004] EWCA Civ 1030); and
• Removing a beneficiary and ordering that the trustees make a payment to a non-beneficiary spouse (BJ v MJ (Financial Remedy: Overseas Trust) [2011] EWHC 2708 (Fam)).

The Court may decide to offset the value of the trust interest against other assets ordered to be retained by the spouse/civil partner who is not a beneficiary (if the other resources outside the trust are sufficient). This may particularly be the case if any order for variation is likely to be unenforceable against the trustees of the trust. The Court may also make an order against the beneficiary that could only be complied with after receiving benefit from the trust, on the assumption that the trustees will make funds available to avoid the beneficiary being in default of a court order (this is known as ‘judicious encouragement’ per Thomas v Thomas [1995] 2 FLR 668) but the court should avoid putting improper pressure on the trustees).

The Court may decide to exclude the trust resources from a division of the ‘matrimonial’ assets (for instance if the assets were inherited or pre-marital). However, if the ‘matrimonial’ resources are insufficient to meet the needs of the parties, this resource will be taken into account and it may be that the Court divides the ‘matrimonial’ assets unequally to meet a party’s needs or makes an order that serves as ‘judicious encouragement’. The Court uses its discretion with reference to the factors set out in Section 25 of the Matrimonial Causes Act 1973 to achieve an outcome which is fair. These factors include the income, earning capacity, property and other financial resources that each party has (or is likely to have in the foreseeable future), their financial needs and obligations, the standard of living during the marriage/civil partnership, the age of each person and the length of the marriage/civil partnership, any disabilities of either person, their respective contributions, and their conduct, and the potential benefits that may be lost as a result of the end of the marriage/civil partnership.

Important Considerations for Trustees

Trustees can be drawn into proceedings, either by being joined as parties to the proceedings or if third party disclosure orders are made for them to provide information regarding a trust.

Trustees have fiduciary duties to all of the beneficiaries of a trust. They need to balance the interests of the divorcing beneficiary (and their rights to understand their position and supervise the trustees) against the interests of any other beneficiaries (who have their own rights to confidentiality). One beneficiary should not be unfairly treated to the benefit of another beneficiary. If disclosure might benefit the divorcing party, but prejudice the other beneficiaries, trustees will have a difficult choice. Trustees are also generally entitled to withhold any information relating to their reasons for an exercise of discretion. While beneficiaries are generally entitled to see the trust deed and annual accounts, depending on the circumstances documents such as letters of wishes may not be so easy to obtain on confidentiality grounds, and requests for them may be reasonably refused by trustees.

If the trustees are ‘joined’ to proceedings, the Court can make orders against them. However, if the trustees are not based in England and Wales, unless the trustees submit to the jurisdiction of the English court, the court’s powers to force them into disclosure or giving evidence may be of limited effect.

Offshore Trustees and Jurisdiction Challenges

Whether to submit to the jurisdiction of the English Court and engage in the proceedings is not a straightforward decision. There can be instances where joining proceedings is in the best interests of the beneficiaries of the trust. For example, where non-disclosure is being alleged, the English Court might draw adverse inferences against the relevant party that are incorrect – in this situation, it may well be in the best interests of the beneficiary for the trustees to engage with the proceedings and to provide evidence to disprove an adverse finding that could lead to an order that would place the beneficiary party in difficulty and/or prejudice the other beneficiaries.

In the case of Re H Trust [2006] JLR 280, the Royal Court of Jersey indicated that it is normally not in the interests of an offshore trust to submit to the jurisdiction of a foreign court. In offshore jurisdictions there is often domestic legislation which creates a ‘firewall’ and prevents local courts from giving effect to an order of a foreign court. While the English Court may make adverse inferences against the beneficiary-party if the trustees are uncooperative, offshore trustees may still decide that declining to submit is in the best interests of all the beneficiaries of the trust.

In such a situation, it may be advisable for the trustees to make an application for directions in their local court as to whether they should submit to the jurisdiction of a foreign court, as took place in the Cayman case of Re A Trust [2016] 2 CILR 416. The Cayman trustee in that case was requested to disclose certain Trust documents for use in English divorce proceedings between the settlor and his spouse. The Trustee did not believe it was in the best interests of the beneficiaries to submit to the English High Court’s jurisdiction, however they were also concerned that the English Court could make orders to the detriment of the beneficiaries of the trust. The Trustee therefore applied to the Cayman Court under s48 of the Cayman Trusts Act for directions, in order to discharge their duty as trustee to act in the best interests of all beneficiaries. The Cayman Court directed the Trustee not to submit to the jurisdiction of the English Court nor to participate in the matrimonial proceedings. The Court held that submitting to the jurisdiction was unlikely to be in the best interests of the beneficiaries since it could place the trustee in a conflict between its duty to observe the terms of the trust and its obligation to comply with an order of the English High Court.

Firewall legislation is, however, not an absolute form of protection for offshore trustees. In the Cayman case of HSBC International Trustee Ltd v Tan Poh Lee (2019) FSD 175 of 2019 (IKJ) (16 October 2019), the judge held (applying Cayman firewall provisions) that all questions concerning the trust should be determined by Cayman law, and the Cayman court therefore had exclusive jurisdiction to determine questions relating to the administration of the trust. However, only a year later, the same judge held in the case of Geneva Trust Company (GTC) SA v IDF (Re Stingray Trust) (2020) FSD 248 OF 2017 (IKJ) (21 December 2020), that not all matters of Cayman law must be determined exclusively by the Cayman court. The fact that there were Italian and Swiss proceedings ongoing, among other forum non conveniens grounds against Cayman as the appropriate forum, led to the court finding that the Cayman proceedings should be stayed, and Cayman law be applied by the Italian court. While this is an area of the law which varies and continues to develop between the different offshore jurisdictions in which trusts are commonly established, offshore firewall legislation should not be viewed as a silver bullet providing offshore trusts with blanket immunity against the judgments of courts in other jurisdictions, and each case should be considered on its own facts.

Protection of Trust Assets

A spouse's interest in a trust brings an additional layer of complexity when dealing with financial settlements – both in terms of the nature of the case itself and when considering other factors such as costs and timescales. Avoiding claims against trust assets, or trustees being drawn into Family Court proceedings, is usually desirable (particularly for the party who would benefit under the trust). Consequently, it is prudent when estate planning to consider pre-emptive steps to minimise the vulnerability of the trust, and the risk of attack. One of the most effective measures of seeking to limit claims against trust interests, and the consequent disclosure obligations, is for the beneficiary to enter into a pre- or post-nuptial agreement.  

Claims of this nature should also be considered when settling a trust or varying a trust in existence.

FAQ

Can trust assets be divided in a divorce?

Yes, if the trust assets are ‘matrimonial’ the ‘sharing’ principle may be applied to these assets.

What is a nuptial settlement in divorce cases?

A settlement (which includes trusts but could also be another structure, such as a company) that is for the benefit of the parties or one of them and/or the children of the family with a nuptial element. There is no clear categorisation and whether a settlement is ‘nuptial’ is fact-specific.

How does the Family Court assess trust interests during divorce proceedings?

First, the value of such interest/resource is quantified. Then, if the trust is deemed to be a ‘matrimonial’ asset, the trust assets could be divided (the starting point is an equal division) or offset against the value of other assets being divided. If the trust is not deemed to be a ‘matrimonial’ asset, the Family Court will still take this interest/resource into account when considering the ‘needs’ of the parties and overall fairness.

Are offshore trusts protected from divorce claims in the UK?

No, depending on the nature of the divorcing parties’ interest(s) in an offshore trust, an English Family Court may have regard to assets held in that trust when determining which orders to make. However, enforcing any order of the English Court against an offshore trust will depend on the laws of the jurisdiction of the trust. Many offshore jurisdictions in which trusts are commonly settled have specific firewall legislation applicable to the enforcement of foreign Court orders against trustees.

What is firewall legislation, and how does it affect trust disputes?

Legislation which governs the enforcement of foreign systems of law and orders of foreign Courts against trusts administered in / governed by the laws of the local jurisdiction. It is relevant in family and trust disputes where a party is seeking to enforce an interest pursuant to a foreign system of law (such as rights under forced heirship or matrimonial property regimes) or an order of a foreign Court against trustees in that jurisdiction. The firewall legislation of many offshore jurisdictions provides that a local Court shall only enforce an order of the local Court against a trust administered in / governed by the laws of that jurisdiction.

Can trustees be forced to provide trust information in divorce cases?

If trustees submit to the jurisdiction of the Court hearing a divorce case, they may be joined as parties and ordered by the Court to make disclosure. If trustees do not submit to the jurisdiction, they may exercise their discretion as to whether or not to disclose the information that has been requested by the parties to a divorce case or by the Court hearing the case.

What is “judicious encouragement” in the context of trusts and divorce?

An order made against a party personally which assumes that trustees (or third parties) will make funds available to that party in order to comply with that order.

How can pre-nuptial or post-nuptial agreements protect trust assets?

Nuptial agreements can exclude claims against trust assets (or other specified assets) and/or limit financial claims such that trust assets would not be required to meet a financial order (subject to fairness).