Sadly, the start of this year is likely to be a busy time for solicitors handling marital disputes. As readers know, divorce can be a significant wealth management concern, given the sums that can be involved.

With Divorce Day today, solicitors across the country expect to be fielding record enquiries from couples unhappy in their marriage, Abby Buckland (partner) and Alexandra Bishop (associate) in the Family and Divorce team at Kingsley Napley consider the role of trusts and trustees in the divorce process. The editors of this news service are pleased to share these views, and invite responses. As ever, the usual editorial disclaimers apply to views from guest contributors. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com 

Where there are disputes about the nature of a trust or the ownership of trust assets by either a husband or wife within divorce and financial proceedings, the trustees are likely to be thrust into the spotlight.  

In certain situations where a trust interest needs to be protected on behalf of the beneficiaries and the court agrees that it is necessary, the trustees will be joined to the financial proceedings. This should be done at the earliest opportunity to enable the court to determine the authenticity of the claim against the trust and therefore the extent of the resources available for distribution between the spouses.  

A trustee who is seeking to intervene in the proceeding, to defend the position of the trust and beneficiaries, or is ordered by the court to join existing proceedings will need to be separately represented.  It is by no means automatic for trustees to be joined to the proceedings; the effect of doing so usually adds a layer of cost, delay and complexity to the proceedings and so the court will carefully consider the trustees’ position and the merits of joining them.  

In many divorces, trust disputes are ultimately a matter for evidence and trustees can, and often are, called to give evidence by one party. In these circumstances, the court would not be able to bind the trustees to comply with an order (for example an order for the provision of information or documentation) but their role as a witness would still provide the court with the opportunity to consider the nature of the trust, whether it should be considered to be a resource to one of the parties’ and whether there is a nuptial element.  

The English court has wide ranging powers over trust assets if the trust is found to be nuptial i.e. it makes “some form of continuing provision for the parties……..whether made before or after the marriage.” (1)

It is therefore necessary for the court to find that the trust is connected to the parties in their capacity as spouses. If the trust is found to be a nuptial settlement, then the interest of the beneficiary spouse may be regarded as an available financial resource. Whether or not trust assets are to be treated as such, will depend on the specific facts, including what the terms of the trust are and what the history has been in terms of the beneficiaries receiving trust distributions or other benefits from the trust.  

If a trust is held to be a financial resource, then the court has powers to vary the settlement. (2) In practice this means that the court can transfer funds or property out of the trust, alter who benefits from the trust, change the trustees and appoint new ones. The court can also make financial orders against a beneficiary spouse on the basis that the trustees will come to their aid to enable them to meet the financial order made against them. Alternatively, the court can award the non-beneficiary spouse a greater share of non-trust assets, in the knowledge that the trustees will make provision to the beneficiary spouse from trust assets. This is known as the court giving ‘judicious encouragement’ to the trustees and the test for this is as follows: 'Can the claimant spouse demonstrate that, if asked, the trustees would be likely, immediately or in the foreseeable future, to exercise their powers in favour of or in some way for the benefit of the other spouse.' (3) 

If you are dealing with an offshore trust, it is important to fully understand the attitude of the court in that jurisdiction from the outset. Some offshore jurisdictions limit very strictly the amount of disclosure trustees can provide and so the trustees of an offshore trust are likely to seek directions from the trust’s home court before making any form of disclosure. 

The English divorce court has the power to vary a trust even if the location of the assets or the trustees is off-shore. Whilst the relevant governing law will not stop the English courts from varying a trust, it will look at how straightforward enforcement may be, before making an order varying an offshore trust. 

If it might appear temping for trustees to do what they can to avoid being dragged into proceedings; however, a stark warning was given by Mr Justice Mostyn (4) to trustees who do not cooperate. He said that "if trustees do not voluntarily participate as witnesses and give proper disclosure, they cannot complain if robust findings are made about the realities of control and the likelihood of benefit." He went on to say that “if they have been served in accordance with the rules, and do nothing, then it is clear, beyond a shadow of a doubt, that any variation order will be binding on them."

Alongside the need for trustees to be helpful to the court and engage with the process, they need to carefully balance their confidentiality and disclosure obligations. Whether the trustees are joined to the proceedings or not, they can still be asked to provide information about the trust within financial proceedings. The trustees’ primary duty is to act in the best interests of all of the beneficiaries. This can often conflict with what they are being asked to do by the court within the context of financial proceedings. The trustees need to consider with their legal team how to respond in a manner which does not compromise any of the beneficiaries’ interests but also does not lead to adverse inferences being drawn by a failure to provide that information. 

The role of trustees in divorce proceedings where a husband or wife are beneficiaries is not an easy one. Trustees need to obtain independent family and trust law advice at an early stage to work out the extent and direction of their role and ensure that the decisions made offer the best possible protection to the beneficiaries and trust assets both in the short and long term. 

The authors are Abby Buckland (partner) and Alexandra Bishop (associate) in the Family and Divorce team at Kingsley Napley LLP

Footnotes
1, Lord Nicholls in Brooks v Brooks AC 375; 
2, Section 24(1)(c) of the Matrimonial Causes Act 1973; 
3, Lord Justice Wilson Charman [2007] EWCA Civ 503; and 
4, DR v GR [2013] EWHC 1196 (Fam).