Family Trusts & Divorce

Trust arrangements require careful examination during divorce because the value of the fund does not, by itself, reveal what either spouse can receive. Our approach is to identify the terms of the trust so that negotiations can proceed on a properly informed basis. Contact our family team to arrange a consultation today.

The relevance of family trusts to a financial settlement

During divorce, the court considers the financial resources each spouse has or is likely to have in the future. Therefore, a trust may become relevant because it provides income or because the evidence shows that trustees are likely to make money available when requested. A trust-owned home can also be important where the family has been allowed to live there, particularly if continued occupation after separation is uncertain.

Entitlements and discretionary interests

The terms of the trust determine the nature of a beneficiary’s interest. Under a bare trust, an adult beneficiary will usually be entitled to the assets held for them. This is quite different from being one of several people whom trustees may choose to benefit.

Although an interest in possession may give a spouse the right to receive trust income without giving them ownership of the underlying capital. For example, a person might receive rental income from a trust property during their lifetime, with the property ultimately passing to another beneficiary.

A discretionary beneficiary generally has no entitlement to a particular distribution unless and until the trustees exercise their powers in that person’s favour. Nevertheless, the court can look at whether the trustees would be likely to provide funds if the beneficiary asked them to do so.

Disclosure of trust interests

Even if their value is uncertain or unknown, a spouse must give full and frank financial disclosure of all financial assets; this includes relevant trust interests. An interest should not be left out simply because no money has yet been received or because the beneficiary cannot demand an immediate payment.

A spouse’s other roles within the trust should be identified, including being a trustee. This does not mean that the trust property belongs to that spouse, but powers over the appointment of trustees may be important when examining how the arrangement operates. Essentially, any ability to influence decisions needs to be assessed against the trustees’ independent legal duties.

Trusts established by parents or grandparents

Many trusts are created to preserve wealth down the generations, with parents or grandparents providing the original assets. This history is relevant, particularly when separating family wealth from assets generated during the marriage, however it is important to note that this does not create an automatic exemption from consideration on divorce.

A longstanding trust for a wide family group may provide only a limited prospect of support for one spouse. In another case, trustees may have regularly funded that spouse’s living costs and made substantial capital available.

The source of the wealth and the financial needs of the spouses remain separate considerations. Even where wealth has a non-matrimonial origin, available resources may be relevant to meeting needs, especially the housing needs of dependent children.

Previous payments and the reality of family support

A history of distributions can provide useful evidence of how trustees are likely to respond to future requests. Regular payments towards household expenses may suggest an established source of support, whereas a single payment many years earlier may have much less significance.

Trustees remain responsible for exercising their powers properly and considering the interests of other beneficiaries. Past generosity does not guarantee future assistance, just as a refusal expressed after separation may need to be considered alongside the trust’s earlier conduct.

Trust documents and proportionate enquiries

The trust deed and any amending deeds will usually be important in identifying legal rights, while accounts can help establish the fund’s value and whether assets can readily be converted into cash.

Records of distributions and loans may explain what support the family has received to date. If a trust owns the family home, the terms on which the couple occupies it deserve attention because informal assumptions about continued residence may not reflect enforceable rights. Relevant correspondence with trustees may also clarify whether further assistance has been requested and how the request was considered.

However, a beneficiary’s right to obtain trust documents is not unlimited, and sensitive information about other beneficiaries may require protection. 

The involvement of trustees

Trustees may initially be approached for documents or clarification without becoming parties to the divorce proceedings, and their position can be especially useful where the spouses disagree about the likelihood of a distribution or the terms of an existing loan.

Formal involvement may become necessary if an application seeks to vary a settlement or directly affects trust rights, and trustees may need to be joined to proceedings in order to be given a proper opportunity to respond to the dispute.

Overseas family trusts

An overseas trust can still be relevant to financial proceedings in the UK, and its location does not remove a spouse’s disclosure obligations. However, an English court’s assessment of available resources must be separated from the practical ability to obtain documents or enforce an order abroad.

The trust’s governing law and the location of its assets can all affect the steps available; some jurisdictions have protective legislation that restricts recognition of foreign judgments affecting trusts, which may make local proceedings or advice necessary.

A proposed settlement should therefore be tested for enforceability before either spouse relies on it.

Specialist advice on family trusts and divorce

Understanding the potential financial consequences of a family trust early can prevent an unsatisfactory settlement from creating unexpected difficulties.

As a highly rated law firm, Laurus offers clear advice on family law issues and can coordinate the specialist advice your circumstances require. Whether you are a beneficiary concerned about protecting your family’s interests or a spouse seeking a fair settlement, we can help you understand the evidence and negotiate from an informed position.

Contact us now to request a free consultation with one of our specialist family solicitors.