Section 25 of the Matrimonial Causes Act lists the factors the courts need to consider when making orders in financial remedy cases. It’s well-established that if a spouse is – or is entitled to – receive income or capital from a trust then this is a financial resource that the court can use to find a fair financial settlement between the parties.

You can find a bit more detail on the nature of trusts here. Below we look at some of the ways courts approach trust assets during divorce.

When Will The Court Use Trust Assets As Part Of A Financial Order?

If the courts decide that the trust is a ‘nuptial trust’ or ‘settlement’ (it’s designed to benefit a spouse or children) then the courts have wide powers to vary the trust and apply it in a way that enables a fair overall financial settlement. Note that a nuptial trust can be in existence before marriage.

Even where a trust is non-nuptial – for example it was set up by the family of one spouse independently of the marriage – the assets of the trust may nevertheless be relevant in reaching a financial settlement. This might occur where it can be established that the beneficiary spouse has, over the course of the marriage, received income or capital from the trust. In such a scenario that income or capital can be viewed as a financial resource of that spouse that should be taken into account in the financial settlement.

The courts of England and Wales can make orders in respect of offshore trusts although their powers to do so vary depending on the jurisdiction in which the trust is located.

Limitation Of Court Powers In Relation To Trust Assets

In exercising powers in relation to trusts the courts are to some extent hampered by the fact that often there will be a whole class of beneficiaries of the trust – apart from those involved in the divorce. The position of the spouses getting divorced will not necessarily be a priority for the trustees when it comes to exercising their powers. In general, the family courts don’t have the power to undermine the trustees or to interfere with the rights of other trust beneficiaries.

What judges can do however is provide ‘judicious encouragement’ to trustees – by suggesting that the trustees provide the spouse who is a beneficiary under the trust with the means to comply with the financial order the court has made. The practice of judges framing financial orders like this (effectively asking trustees to act in a certain way) is not without controversy. Many trust lawyers believe it undermines the fundamentals of trust law and the discretionary powers of trustees.

Nevertheless, the use of judicious encouragement is common in practice, and is often the only way to address the reality of a complex legal situation. This would tend to suggest that family court judges don’t think the approach conflicts with trust law principles.

A Pragmatic Approach To Trusts

The 2023 case of ES v SS shows the flexibility available to the courts when dealing with trust assets. It is also a reminder of the danger of incurring excessive costs in dealing with trust assets.

This was a hotly contested divorce case where most financial aspects had been settled with a matrimonial pot of around £40 million already divided.

The outstanding question was what to do with a trust find valued at circa £2million. Both parties agreed that the assets of the trust were entirely matrimonial and that they each had an equal entitlement to them. However, there were problems in valuing the net assets. In particular, there was a significant difficulty in assessing the tax liabilities attached to the trust. The calculations involved applying tax law in several different jurisdictions, and the tax experts appointed during proceedings disagreed.

After weighing up various options, including the creation of a bare trust that would give the children automatic entitlement to the finds when they reached 18, the court made an order winding up the trust and splitting the funds between the spouses. This decision was reached against a backdrop of almost £300,000 having spent in legal fees arguing about what to do with the trust.

Form E and Trusts

As with all assets, any benefit you receive under a trust should be disclosed in the normal way on Form E. Often the details you provide in relation to trusts will be a starting point only. Your spouse is likely to request further details and the production of the trust instruments. There may also be some involvement with the trustees.

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