Despite no longer living full-time in the UK, it is often the case that expats are still subject to the English court system in the event they divorce, says Stacey Nevin.
Even if the parties did not live in England for some or all of their marriage, a divorcing spouse can "attach" themselves to this jurisdiction with relative ease, depending on where one or both parties are habitually resident or domiciled at the time of a divorce.
England is considered a very generous jurisdiction to the financially weaker party on divorce and for this and other reasons, London is frequently dubbed the divorce capital of the world. Even if expat couples have assets overseas, they will be considered part of any financial pot to be split on divorce. Furthermore, trusts, even those offshore, are not necessarily beyond the reach of the English divorce courts.
Trusts are a valid form of estate planning, widely utilised by many high-net worth individuals. They may be used to acquire properties or to hold financial investments.
However, it is a misnomer that a trust structure (even one that is overseas) offers absolute protection from the English divorce courts. The English courts look at all financial resources and are not limited to assets legally owned by the parties.
If a trust offers a financial resource to one or both parties, the court will look at it closely on divorce, and may even join trustees to court proceedings to compel disclosure of trust documentation and ensure compliance with a divorce court order.
So what can be done to mitigate against an attack on trust assets in English divorce proceedings?
- Divorce protection starts at the outset of the trust. Take advice about the effect of a future divorce of beneficiaries at the point the trust is settled, and draft the trust documentation (the deed and letters of wishes) accordingly. The court has the power to vary a nuptial settlement so that assets can be deployed for the benefit of the non-beneficiary spouse and the children of the family. A nuptial settlement is a settlement for the benefit of one or both of the parties or their children, created in contemplation of the marriage. The trust documentation, including any letters of wishes, offers an opportunity to provide future clarity if the question of whether or not the trust is nuptial arises.
- Have beneficiaries enter into a prenuptial agreement. Such agreements can seek to ring fence any trust assets on divorce, as an additional layer of protection. Consider if letters of wishes or trust deeds should specify that any future support of beneficiaries, in the event they marry, is conditional on there being a prenuptial agreement, as a further indicator that the trust was not intended to be nuptial.
- Be wary of the risk of "nuptialising" a trust. A grey area in the English courts is whether or not a trust, that was not nuptial when it was settled, can become nuptial at a later date. At present, there is no clear answer either way. If a trust is to be used to support the family, for example by paying school fees, consider whether a sub trust, just for school fees, should be created. This limits the risk of nuptialising the trust to the assets held within the sub trust.
- Keep careful records of requests from beneficiaries. Even where the court has no power to vary a trust (because it is not a nuptial settlement), the court can still consider it a resource to the beneficiary party. If the court has confidence that the trustees will step in to meet the needs of the beneficiary party, the court will be more inclined to award any non-trust assets between the parties to the non-beneficiary. If the records show that requests for support have not always been granted, this will be relevant to the court's assessment as to the extent to which the trust can be considered a reliable resource to the beneficiary party.
- Consider within which jurisdiction the trust and its assets are situated. The English court can make orders against an overseas trust. If both the trust and its assets are overseas, the Court is unlikely to make a variation order unless it is satisfied that the order would be implemented by the court exercising effective control over the trust/its assets. If trust assets are in this jurisdiction, they are more vulnerable. Many offshore jurisdictions have asset protection/firewall legislation, the aim of which is to protect trust assets from orders by foreign courts. Where this is the case, the English court may not exercise variation powers, recognising that any order is unlikely to be enforced.
- Trustees should check the domestic legislation in the country within which the trust is established, before engaging with any English divorce proceedings. Trustees, both onshore and offshore, can find themselves facing enquiries from beneficiaries to assist them in complying with divorce-related court orders made against them. Foreign trustees should check that they will not fall foul of any domestic legislation in the country within which the trust has been established when considering any voluntary requests for information or assistance, particularly if this could lead to the loss of any protection offered by firewall legislation. Offshore trustees may need to seek directions or guidance from the supervisory court in the jurisdiction of the trust, before taking active steps in the English proceedings.