Trust is a word that matrimonial solicitors hear a lot. “I don’t trust him” and “I don’t trust her” are commonplace following a separation and that we suppose is to be expected. However, when separating, are spouses right to place their trust in trusts? How safe are they and can the Court make orders in relation to assets which are held in trust?
The short answer is yes. The Court can make orders relating to assets held in trust which could therefore form part of a financial settlement. This may lead you to the conclusion that trusts cannot be trusted because they are not as safe and secure as you may have thought. They may, for example, be capable of variation, or the assets held in trust may be taken into account by the Court when considering a financial settlement between spouses.
The starting point is to look at the trust in detail. We would need to look at the type of trust, when it was established, who the beneficiaries and trustees are, and most importantly, whether it has a nuptial element.
A trust is likely to be considered to have a nuptial element if there is a connection between the trust and the marriage. For example, if the trust was established for the benefit of either party to the marriage, them both, or any of the children of the family, it is highly likely that it will be considered a nuptial trust. As with all situations, it will be necessary to look at the specific facts. The question of whether a trust is nuptial or not is hugely important because if a trust is deemed as being nuptial, the Court has the power to vary it. That could therefore see the assets of the trust lose all the protection that you intended when establishing the trust.
The Court cannot vary trusts that do not have a nuptial element so it is hugely important that the drafting of a trust is considered carefully and that consideration is given to the creation and operation of a trust and whether it is likely to be considered nuptial or not.
When dealing with trusts without a nuptial element, the Court’s powers are more restricted. That is however, not to say that such powers are non-existent. The options available to a Court will, when it comes to trusts deemed to have no nuptial element, depend on the type of trust.
As one would expect, if the spouse’s interest in the trust is fixed or defined then it is likely to be necessary for the value of the interest to be determined. Consideration will then need to be given to when the spouse will be able to access the assets in the trust or income deriving from those assets.
In circumstances where a spouse’s interest in a trust can be defined and there is evidence to show that the spouse can already, or will soon be able to access either the assets held in trust, or the income deriving from those assets, the Court can and in my experience, is likely to make orders which take those assets and/or income into account. That could be by way of a spouse being ordered to transfer income and/or assets from the trust to the other or by awarding the other spouse a greater share of other assets and/or income on the basis that the spouse with an interest in the trust has, or will soon have access to the contents of the trust.
However, the situation is far less clear when the trust in question is discretionary. By definition, a discretionary trust involves trustees having discretion in relation to how the assets and/or income of the trust are to be used. In order for the Court to take a discretionary trust into account, it would need to be satisfied that the spouse is likely to receive a benefit from either the assets or income of the trust, now or in the foreseeable future. The Court is likely to look at the history of the trust as an indication of what is likely to happen in the future. For example, if there is a history of requests for capital and/or income from the spouse and such requests are always granted by the trustees, the Court is likely to conclude that despite the trust being discretionary, the spouse has access to the contents of the trust. Caution should therefore be exercised when considering how you utilise trust assets both before and during a marriage. If there is evidence that requests have been rejected, it is less likely that the Court will find that the trust is an asset to which a spouse has access and as a consequence, it is more difficult for the Court to take the assets held in trust into account.
Once satisfied that the contents of the trust are a resource that is currently or soon to be available to a spouse, the Court is likely to take the trust assets into account in the same way as fixed or defined trusts as explained above. Alternatively, the Court could make an order to encourage the trustees to make the assets or income available to the spouse.
The Court cannot, however, force the trustees to distribute assets or income. As such, where a trust is deemed to have no nuptial element and the beneficiary spouse is deemed not to have currently or foreseeable access to the contents of the trust, the assets held in trust are less likely to be taken into account. They will therefore, and to a certain degree have been ‘protected’ as was the likely intention at the time the trust was created.
The devil as they say is in the detail. Trusts can be trusted but only if they are created and operated carefully. Only if the trust is deemed to be nuptial can the Court vary the trust but there are many other circumstances when trust assets can be taken into account when the Court determines a financial settlement between spouses.
For further advice from a client focused, approachable, friendly and experienced Family Law Team please contact us. We have offices in Derby, Nottingham, Cardiff and London.
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