Divorce:- the end of an error?

Update prepared by Mary Humphreys

The first working Monday of any New Year is said to be the busiest of the year for any divorce lawyer. However, going through a divorce can be an emotional upheaval at any time of the year. So here we consider what you can do in relation to your offshore wealth plan. 

As John Lennon sang, “Life is what happens while you are busy making other plans”. Life is unpredictable and sometimes we can be thrown off course by something we were least expecting. This is often the case with divorce as one minute you’re happily married, the next you are going your separate ways. The end of a marriage can evoke many conflicting emotions that make it difficult to look ahead.

• Grief – at the loss of a relationship and your familiar way of life
• Guilt – over a perceived failure to make it work
• Anger – at a partner’s betrayal
• Fear – of the unknown, coping with changed circumstances and being alone

There is no quick way off the emotional rollercoaster. The coping process can start by allowing the freedom to grieve while taking the necessary steps to move on. At such a distressing time, you are faced with unravelling all the aspects of your shared life together. In addition to legal advice, it is recommended that both parties seek professional financial advice at the start of the process.

Settlors and beneficiaries often mistakenly believe that assets held in trust are fully protected in the event of divorce. This is not in fact correct as a number of recent cases have shown. There are practical steps that trustees, settlors and beneficiaries can take to protect the trust assets in such circumstances.

When determining financial claims on divorce, the court looks at all the resources available to the parties and seek to achieve a settlement that is fair in all the circumstances. If one or both parties have a beneficial interest in a trust, the beneficial interests will be considered by the court. The weight given to the interest, and the impact on the outcome, will depend on several factors.

There are two main ways in which the courts will treat trust assets on divorce. The court will either:

• find the trust assets as a financial resource of one or both parties, or
• (less commonly) find that the trust is a nuptial settlement which gives the court a wide range of powers in relation to the trust.

The decision to treat the trust assets as a financial resource will depend on several factors, including the terms of the trust, and the track record of the beneficiary receiving benefits from the trust. For example, if a beneficiary has a life interest in a trust which makes quarterly distributions of income to the beneficiary, this is much more likely to be viewed as a financial resource than in the situation where a beneficiary is one of a class of beneficiaries of a discretionary trust and has never received any benefit.

If a trust is held to be a financial resource, the court may make financial orders against a beneficiary which are enforceable on the basis that the trustees will come to the beneficiary’s rescue to enable him or her to meet the financial orders. This is often referred to as the court giving ‘judicious encouragement’ to the trustees.

Lord Justice Wilson in Charman [2007] EWCA Civ 503 set out the test the court should apply 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”.

In addition to making awards against a party on the basis that the trustees will come to the aid of the beneficiary, the court may, additionally or alternatively award the non-beneficiary party a greater share of non-trust assets on the basis that the trustees will make provision to the beneficiary from trust assets. 

For Nuptial Settlements, if the court determines it to be such, the court has wider and far-reaching powers. In determining whether a trust is a nuptial settlement, the court will have to consider whether the trust was settled by one or both, or for the benefit of one or both, of the parties to the marriage, and makes some form of continuing provision for one or both of the parties to the marriage. If the court finds this is the case, then the court’s powers are broad, it can: add or exclude beneficiaries; change the terms of the trust; remove or replace trustees and protectors; and order the trustees to make a payment from trust assets to a spouse, whether or not they are a beneficiary.

There is judicial debate as to whether a trust which is not regarded as a nuptial settlement at the outset can become a nuptial settlement later. In Quan v Bray [2014] EWHC 3340 the court was of the view that a trust can become a nuptial settlement, whereas in Joy v Joy-Marancho [2015] EWHC 2507 the court found that a trust cannot become nuptial if it wasn’t nuptial from the outset. This was on the basis that, otherwise, any family or dynastic trust which was not nuptial at the outset, but which provided benefits to an individual, would become nuptial upon the individual marrying and benefits continuing to be given. Clarity on this point will need to be provided by further case law from a superior court.

However, the courts are more consistent in the view that a transaction, or one aspect of a trust, can be nuptial in isolation. The obvious example is where a trust purchases a property for the benefit of the parties as their family home. Having found that a transaction, or aspect of a trust, is nuptial, the court can then use its powers of variation in relation to that transaction or aspect.

The courts are mindful of not simply ignoring the fact that assets are held in trust and are reluctant to interfere more than is necessary. Further, the courts recognise that they should be slow to deprive other beneficiaries of their rights under trust. In other words, the impact on other beneficiaries is a factor the court will consider.

As can be seen the treatment of trusts on divorce is fact specific and each case will be dealt with on its own merits. Careful consideration needs to be given to the drafting and structuring of a trust, the letter of wishes and the narrative used in the trust accounts as a court is likely to wish to see those documents in deciding whether to treat the trust as a financial resource or nuptial settlement.

In addition, it is beneficial for a trust to be administered by offshore trustees, perhaps in a jurisdiction with robust ‘firewall legislation’ such as Guernsey. These factors may offer an additional line of protection against an attack of a trust in divorce proceedings, and against the enforceability of a court order.

In terms of drafting, if one party to the marriage has certain powers under the trust deed, such as the power to add and exclude beneficiaries, change trustees, or consent to distributions (which is common in offshore jurisdictions), this could make the trust more susceptible to attack in the event of a divorce.

Untangling finances during divorce is always complex. Decisions made in the heat of the moment can have significant and long-lasting consequences. Having a financial plan can help restore your faith in the future and create a new beginning. 

We would welcome the opportunity to discuss your plans and considerations should you find yourself in this situation.