It often comes as a surprise how much discretion a family judge has to redistribute the resources on divorce.
These resources can include a whole raft of assets including company shares, pensions and interests in trusts.
In recent times judges have taken a more bullish approach to trusts. Judges will find what they think are the right solutions for a divorcing couple, and will find an appropriate interpretation of the law to achieve this. It is fair to say that more and more applications are being made to join trustees as parties to financial litigation on divorce.
How the courts will deal with a trust will depend on whether the trust in question can be considered to be an ante or post nuptial settlement.
Ante (before) and post (after) nuptial settlements
Under The Matrimonial Causes Act 1973 the family court has power to vary the terms of ante and post nuptial settlements.
Thus the court can make orders directly against trustees requiring them to vary the settlement in some way for example:
- By ordering payment of capital to either spouse or child (even if not a beneficiary)
- By ordering a transfer of property to either spouse or child (even if not a beneficiary)
- By ordering a change of trustees
Many trusts are ante or post nuptial settlements even if the settlor, the trustees and the beneficiaries are unaware of the fact. Parties entering into a pre or post nuptial settlement will be fully advised on the courts powers.
Such settlements are not restricted to old fashioned marriage settlements but they must have a “nuptial” element.
Judges have defined “nuptial” very widely. So much so that a court might have great difficulty in saying that any deed which settles property after marriage is not nuptial. If a settlement is made before marriage then there should be some kind of connection to the marriage or spouse. However, in one case, the Judge’s discretion meant that where a couple had been removed as beneficiaries of a trust during the marriage, the court still held it to be a nuptial settlement and went on to vary the terms of it.
Trusts which are NOT ante/post nuptial settlements
Although the court cannot make orders varying these trusts, judges will not ignore them. The court has a duty to consider all the resources which a party has, or is likely to have, in the foreseeable future, even discretionary benefits under a trust. A common example is where one party is the beneficiary to a longstanding family trust.
In such circumstances the court will look at the history of discretionary distributions (or lack of them) throughout the life of the trust to consider whether there is evidence available to indicate that a trustee would be likely to advance sums to a party. The court can then make orders against that party knowing that individual does not personally have the means to comply. The court will assume that the individual will take steps to acquire the means by asking the trustees for an advancement of capital.
The court can also order a party to pay a lump sum to a spouse deferred to when his or her trust interest falls due.
Furthermore, the court can order a greater share of the non-trust assets to, say the wife, on the basis that trust assets are available to the husband.
The Supreme Court has also found that companies controlled by a spouse can, in some circumstances, be held to own company assets in trust for that spouse. The company assets were therefore capable of being transferred in matrimonial proceedings to the other spouse.
General
It is not unusual for third party interests to be affected. Each case is looked at on its own merits and it would not be uncommon for trustees and third party beneficiaries to be represented.
If the trust is offshore then the court can still make the provisions described above even if the offshore trustees haven’t been made a party to the proceedings thereby submitting to the English courts. However the English courts will look to the enforceability of varying the trust (i.e. binding the trustees) in the jurisdiction where the trust is. If it appears that it would be difficult to enforce in that jurisdiction then the court will take that it into account when considering the division of other assets on shore.
Some jurisdictions have followed the English courts’ orders. However this is not always the case and will often depend on the precise wording of the trust. In particular, providing the trustees with the power to release funds may be a crucial factor in whether funds are released to a spouse or not.
Cases involving pre/ante or post nuptial settlements are complex and often turn on their specific facts. It is therefore advisable for the separating party to take early legal advice.
Nicola Harries