Offshore Trusts and Divorce

The fact that assets are held by trustees outside the UK does not necessarily prevent the court from considering the financial benefit available to either spouse. Laurus advises individuals and families on the treatment of offshore trusts within divorce settlements and the practical enforcement of any resulting order. Speak to our specialist family solicitors to arrange an initial consultation and understand how an offshore trust may affect your position.

The nature of an offshore trust

A trust is a legal arrangement under which assets are held and managed by trustees for the benefit of one or more beneficiaries. The person establishing the trust is usually known as the settlor. Depending upon the terms of the trust, the beneficiaries may have a fixed entitlement, or the trustees may have discretion over whether any money or property is distributed to them.

An offshore trust is generally one administered under the law of the particular country or territory where it is created. The trustees and administrative records may also be based overseas, although the settlor, beneficiaries or underlying assets could retain a strong connection with the UK.

Offshore structures are established for many legitimate reasons. For example, a family may use a trust to preserve wealth between generations, provide for relatives living in different countries, or maintain continuity in the ownership of a family business. Trusts may also form part of estate planning or arrangements created to protect a beneficiary who cannot manage substantial assets personally because of health concerns, both physical and mental.

Offshore trusts in higher-value divorce cases

Offshore trusts are encountered more frequently in higher value divorces because affluent families often hold wealth through several structures rather than in the personal names of the spouses. A trust might own an investment portfolio, shares in a trading company, or the home occupied by the family. In other cases, it may fund school fees, holidays, or other expenses without transferring a large capital sum directly to the beneficiary.

The trust may have been created many years before the marriage by a parent or grandparent, or one spouse may have established it during the marriage and transferred assets into the structure. The timing, source of the property, and purpose of the arrangement can all be important when the court considers its relevance.

The inclusion of trust assets in financial proceedings

Trust property is not automatically treated as belonging to a spouse simply because that person is a beneficiary. The assets are legally held by the trustees and may be intended to benefit several people over a long period. An individual who is one of a wide class of discretionary beneficiaries might have no right to insist upon receiving a payment.

The court is not required to choose between completely excluding the trust and treating the entire fund as the spouse’s personal property, and its assessment is often more measured. For example, the evidence might show that the trustees are likely to provide housing or meet recurring expenditure, but would not transfer the whole trust fund to the beneficiary. The settlement can then be structured around the benefit that is realistically available.

The court’s assessment of an available resource

The central issue is often whether the trustees would be likely to provide funds if the beneficiary made a reasonable request. The court will examine the trust documents, the history of the arrangement and the relationships between the people involved.

Past distributions can be particularly revealing; a beneficiary who has regularly received substantial payments may find it difficult to argue that future support is merely theoretical. The position may be similar where trustees have purchased homes for the beneficiary, paid personal bills, or provided interest-free loans that have never been repaid.

The court may also consider how trustees have responded to previous requests. A pattern of approving whatever the beneficiary asks for can suggest that the trust is a dependable resource, even where every payment is formally described as discretionary. On the other hand, trustees who have consistently exercised independent judgment and refused unsuitable requests may support the conclusion that access is uncertain.

Control and influence over offshore trust assets

The level of control exercised by a spouse is not determined solely by whether they are named as a trustee. Control may arise through appointment powers, voting rights, or an ability to remove and replace the trustees. A spouse might also act as protector, giving them authority to approve important decisions or changes to the trust.

The identity and independence of the trustees will be relevant. Professional trustees who keep detailed records and make decisions through a properly constituted board may be more difficult to influence than close relatives or long-standing personal advisers. Even professional trustees can come under scrutiny if the evidence shows that they have routinely followed the beneficiary’s instructions without meaningful consideration.

Disclosure relating to an offshore trust

A spouse involved in financial proceedings must provide full and frank disclosure of their financial circumstances. Where an offshore trust may be relevant, disclosure can extend beyond confirmation that the spouse is included within a class of beneficiaries.

The necessary material will depend upon the issues in the case, and may include the trust deed and later amendments, letters of wishes, trustee accounts and financial statements. Details of distributions, loans, and benefits provided to the spouse may also be required. Documents recording the appointment or removal of trustees, protectors and beneficiaries can also help explain where control lies.

Trustees and beneficiaries within the proceedings

Trustees are not automatically parties to a divorce merely because the trust is discussed. In many cases, useful information can be obtained through correspondence or voluntary disclosure without formally involving them in the proceedings.

There are circumstances in which trustees may need to participate more directly. For example, they may wish to explain the nature of the trust, correct an inaccurate description of the beneficiary’s position, or protect the interests of other beneficiaries. Formal participation may also be considered where a spouse seeks an order that could affect trust property.

Other beneficiaries can become relevant because a trust may have been designed to support several generations of a family. A settlement that assumes the entire fund is available to one divorcing beneficiary could unfairly overlook the interests of siblings, children, or future beneficiaries. The court will distinguish genuine competing interests from arrangements that have been altered to make assets appear unavailable after the marriage has broken down.

Difficulties created by foreign jurisdictions

Some offshore jurisdictions have legislation intended to protect domestic trusts against foreign matrimonial orders. This means that a trustee may be unable to comply unless the order is recognised by the local court.

Obtaining information can also be more difficult because local confidentiality rules may restrict the release of trust documents, while court orders made in the UK may not operate directly against trustees based abroad. Local legal advice may be required to establish what evidence can be obtained and whether the trustees can be compelled to provide it.

Contact us now to request a free consultation with one of our specialist family solicitors about offshore trusts and divorce.