In simple terms a spouse can’t use a trust vehicle for the sole purpose of reducing the amount he or she pays in a financial settlement. Any attempt to do so can be challenged and the courts have powers to change – or vary – the nature of the trust. That said, trusts take so many forms and can involve such extensive layers of complexity that they are regularly questioned in divorce proceedings. The Akhmedova divorce in 2020 in an exmaple, dubbed Britain’s ‘most expensive’.
Challenging a trust might involve alleging that the trust is actually being used to put certain assets beyond the reach of the financially weaker spouse (a ‘sham trust’). Or it might be claimed that the trust is a so-called ‘nuptial trust’, that the court can legitimately vary in favour of a spouse to ensure his or her needs are met, in the financial settlement.
Here we explain what is meant by a trust and examine some of the key issues that arise when considering trusts in the course of financial settlements in divorce.
What is a Trust?
A trust is a way of managing and protecting assets like money and property. Trusts have multiple purposes, including safeguarding assets when someone is too young to manage their own property, to pass on property during your lifetime, or to pass property in a certain way when you die under a ‘will trust’.
The legal structure is made up of:
- A ‘settlor’ who gives assets to a trust
- A trustee who manages the trust (usually in accordance with the terms of a trust deed)
- A beneficiary who benefits from the trust in some way
Here we are interested in the beneficiary and whether the trust assets he or she benefits from should form part of a divorce financial settlement.
Why Do Trusts Matter In A Divorce?
Parties to financial remedy proceedings have an obligation to give full and frank details of their financial position. A failure to disclose assets is a serious matter that could result in fraud charges and any settlement reached on the basis of inaccurate information being set aside. If a spouse is a beneficiary under any kind of trust full details of the interest must be provided as part of the financial disclosure process.
Disclosure of a trust interest is important because under section 25 of the Matrimonial Causes Act the courts are empowered to look at other financial resources each of the parties to the marriage has or is likely to have in the foreseeable future. And this could lead to the value of the trust interest being brought into the reckoning when the financial settlement is finalised.
When Will Courts Use Trust Assets As Part Of A Divorce Settlement?
Cases that have been decided in this area demonstrate that courts can sometimes look beyond the technical legal structures behind a trust and examine what the practical effect on the beneficiary’s finances is. If appropriate, it’s open to the court to take trust assets into account. Examples of when the value of trust assets might be offset against other assets or their value realised to ensure a fair settlement include:
- Nuptial trusts – This type of arrangement is one that’s intended to benefit either spouse or the children of the marriage and can be made before or after marriage. If a trust is found to have a nuptial element then the court has broad powers to vary it to achieve fairness. It can use the income or capital within the trust when dividing assets between the parties. Sometimes opening up a nuptial trust will unlock assets that would not otherwise be available for immediate distribution to either party so there are potential benefits for both sides.
- Sham and invalid trusts – A trust might be invalid legally because it has not been set up in accordance with the formal requirements for the creation of a trust. It’s open to a spouse to challenge a trust arrangement on this basis. Alternatively a spouse can seek to prove that the disputed trust is not a trust vehicle in reality – that the spouse who is a beneficiary actually controls and owns the assets. It will be necessary to show that the vehicle described as a trust is actually the result of a deliberate attempt by the settlor and the trustees to pretend they were establishing a trust. In our experience it’s extremely difficult to prove that a trust is a sham and if you are considering a claim on this basis you should seek specialist advice.
Can Valid Trusts Be Varied During Divorce?
What is the situation if a trust is set up in accordance with all the formal requirements and the motivation behind it has nothing to do with trying to keep assets out of reach of an estranged spouse? Judges can still look at the value of the benefit to a spouse under a trust when deciding on a financial settlement.
If non-trust assets are sufficient to meet the needs of the parties then it’s unlikely that an application to vary the terms of a valid trust will succeed. However if needs can’t be met without recourse to a proportion of the trust assets it is open to a spouse to make a claim against the trust assets. Again this is a complex area. It involves attaching a value to a benefit under a trust that may only materialise at some future point. This exercise will often require some kind of expert determination so specialist advice is essential.