Following the Budget on Wednesday many people will be reviewing their ‘wealth protection’ measures, including the use of trusts. Exeter Divorce Lawyer Kate Longhurst explains family trusts on divorce…
A trust is created when assets are placed under the control of a trustee for the benefit of a beneficiary (or a number of beneficiaries). The trustee must manage the assets according to the terms of the trust, which are set out in a “trust deed”.
The benefits of a trust include the following:
1. It ensures that family assets are retained within the family;
2. It is a flexible way of managing and maintaining wealth;
3. It can protect assets against claims of creditors;
4. It can assist in legitimately minimising tax; and
5. It can protect against the financial consequences of divorce.
The type of family trust most commonly dealt with by divorce lawyers is the ‘discretionary’ trust. The person creating the discretionary trust (the “settlor”) usually gives the trustees a “letter of wishes” to guide the trustees on how they should deal with the trust capital and income. The trustees will take account of the settlor’s wishes but are not bound by them. On the other hand, the trustees’ duty is to act in the best interests of the beneficiaries (which can include the “settlor”) so it is very common for trustees to release funds from a trust if requested by the beneficiaries.
A common argument in divorce cases concerning a family discretionary trust is when the beneficiary spouse (for example the husband who has created the trust) argues that he has no control over how the trustees deal with the trust and the other spouse (in this example the wife) argues that, in reality, the trustees always follow the wishes of the husband and so if he requests money from the trust it is released for him. The court then needs to look in more detail at the trust and how it has been run in the past to decide if it is a ‘financial resource’ to be included in the divorce.
In the recent case of Whaley the court decided that two family trusts set up by the husband’s father should be included as marital assets, increasing the size of the divorce ‘pot’ from £4 million to £10 million.
Following a 21 year marriage, Mrs Whaley received two properties in Kent and a lump sum of £3 million. Mr Whaley, a millionaire hotel tycoon, claimed he faces homelessness and would have to sell his Spanish hotel complex to fund the pay-out to his ex-wife.
Mr Whaley’s barrister argued that the trusts were set up to safeguard family money for future generations and that Mr Whaley had no control over them. He also argued that the trustees would not release any money to Mrs Whaley as she was not a beneficiary under the trust. Following the hearing Mr Whaley said “This is the end of a perfectly legitimate trust for the grandchildren and possibly the next generation. Money earmarked for the children of the family has just been thrown in the kitty”.
In any divorce concerning a trust the beneficiary spouse has an obligation to provide full information about the trust including the amount held in the trust, the “letter of wishes” and details of previous payouts. In the case of Re W in 2000 the judge said that “the court will not allow itself to be bamboozled by husbands who put their property in the names of close relations… where, taking a realistic and fair view …it remains the husband’s property”.
Including a trust as a divorce asset is not, however, the end of the matter. Enforcement problems can arise where the trustees do not agree to make a payout from the trust despite the beneficiary husband being ordered to pay a lump sum to the wife.
Andy Barton is a divorce lawyer in the Stephens Scown Exeter Family Team. The firm has offices in Exeter, Truro and St Austell. Its family team advises clients on a wide range of family law including matrimonial and partner issues including divorce, finance and children matters and are top ranked in Devon and Cornwall.