Trusts have been used for many years as a way to protect a family’s wealth, nowhere more so than in the field of marriage where they can be used to try to shield the assets from a divorce claim. Whether the parties were engaged or married at the time the trust was set up may affect how the trust assets are treated upon separation and if they are seen to be part of the matrimonial resources.
So whilst trusts generally give the trustees control over the distribution of trust assets to the beneficiaries, for matrimonial law purposes trust assets may not be protected in two situations in particular.
Firstly an application to vary the terms of a trust can be made. For example a court can make orders:
- To transfer trust assets to which husband or wife is entitled;
- To vary an agreement entered into by the parties to the marriage ; and
- To vary the benefits provided to a spouse in a Will.
The second situation is where the court uses so called “judicial encouragement” to encourage the trustees to provide a benefit to the spouse who is a beneficiary of that trust even if only at the trustees’ discretion which can then be apportioned as part of the divorce settlement.
In a recent matrimonial case the court did just that. The facts were that the parties were married for a relatively short period and did not have any capital resources of their own. However the husband was a beneficiary of a trust in which a farm was tied up and which was of capital value even if it produced limited income.
The couple’s debts were about £500,000 with some £245,000 of these being in the wife’s name.
She was awarded £475,000 by the court and this was to be paid from the trust assets to form part of the matrimonial resources even though those assets were not in the husband’s name.
As we always say, however unromantic, the very best time to protect your assets is as early as possible using for example ‘livingtogether agreements’ or a ‘pre or post- nuptial agreements’. History and case law have shown that such agreements are powerful tools for controlling how those assets are treated at a later date.