Exploring the benefits of trusts in divorce

What is a trust?

There are many different types of trust that can be created; either during an individual’s lifetime or on their death i.e. a will trust. Effectively a trust warehouses acts as a ring-fence around the assets that have been placed within it. The management of the trust lies within the control of the trustees. A beneficiary is an individual or body who benefits from the trust in some way.

How can a trust protect my assets on divorce?

Trusts are created for a wide range of reasons including for wealth management and inheritance tax planning purposes. A significantly increasing reason is for the protection of assets from divorce. A divorce can be an incredibly stressful and upsetting time and this is heightened by financial concerns.

A potential option for individuals concerned about the protection of their assets is to place assets into a trust for the benefit of specified beneficiaries e.g. children or siblings, rather than all assets falling generally into the “marital pot”. The trust, therefore, places a protective barrier around these assets, which will be controlled by the chosen trustees.

Example:

Mr A and Ms B are set to marry. They both have children from previous relationships. They both hold property and savings in their individual names. In order to protect and warehouse ring-fence their individual assets for their respective children, they place certain assets into a trust. In practice then whilst they will own some assets jointly, the assets in the trust are ring-fenced.

However, it is important to note that the trust may be voidable if the sole intention of the trust was to “hide assets” and defeat a financial claim on divorce; for example, if the spouse creates the trust is created towards the end of the breakdown in a relationship or after divorce proceedings have been issued, and then attempts the spouse may then attempt to “claw-back” assets from the trust for their benefit.

Trusts and Divorce Settlements

A further key area to explore is the treatment of trust assets on divorce when only the spouse is a beneficiary.

For example, Mr CD and Mrs CB are in the process of getting divorced. Mrs CB is a beneficiary of a discretionary trust created by her parents and throughout their marriage, she regularly received income from the trust. Mr CD claims that this should be taken into consideration when the court makes an order on the re-distribution of the marital assets.

This is a complex issue as Mr CD is not an actual beneficiary of the trust and it is questionable whether he should continue to receive any financial benefit from it. In divorce cases in which trust assets are in dispute, the court does have the power to vary the terms of the trust and make orders over beneficial interest over assets.

The Court has previously shown reluctance to make orders over discretionary trusts as the beneficiary’s interest is subject to the discretion of the trustees who decide how assets are distributed. However, the Court has started to show an increased willingness to consider trust assets when making divorce orders.

In the case of Whaley v Whaley [2011] EWCA Civ 617, the Court ruled that trust assets, held in a trust created by the husband’s father, could be taken into account as part of the matrimonial assets when the husband and wife got divorced. Even though the wife was not a beneficiary of the trust and the trust was discretionary, the Court found that as the husband had the ability to direct the trustees on what distributions to make, the trust assets effectively formed part of his resources and could be taken into account. The wife was subsequently awarded a share of the trust assets.

In conclusion

Trusts can, therefore, be a very useful mechanism for the protection of assets and an individual can use the protective barrier of the trust structure to manage and control their personal wealth. The timing of the creation of these trusts and their nature should, however, be carefully considered.

The treatment of trust assets on divorce remains a somewhat hazy area and much will depend on the individual circumstances of the case. What is clear however is the importance of taking advice to ensure that the protective nature of the trust can be utilised to its full advantage.

For further support, information and guidance please get in touch with our Private Client team.

This content is correct at time of publication