Many professional advisors see trust arrangements as an effective way of protecting against claims on divorce. The extent to which this is true largely depends on when the trust was set up, and how it has operated in practice.

Using extreme examples, if the trustees release funds at the request of beneficiaries with no expectation of repayment and there is a loose operation of the trustees’ responsibilities, the Court is more likely to consider the trust assets to be a resource in divorce proceedings.

Should the evidence show that the trusts are strictly operated by the trustees, that they do not release funds on request and that the overall trust arrangement is heavily policed, then the Court will be less inclined to regard them as a resource; this is even more likely to be the case if ‘needs’ are not a concern.

This is no better illustrated by the High Court case of Daga and Bangur.


A failed application for trust funds

The case involved two discretionary trust funds with a combined value of US$23 million. The wife was the settlor and beneficiary, although the funds had derived from her father. She had drafted a letter of wishes to the trustees making it extremely clear that the trustees were to act on her father’s advice to the exclusion of all other persons, herself included.

Although no distribution had been made from the trusts, the husband argued that the Court should make a lump sum order, effectively encouraging the trustees to release funds to him.

The couple were aged 36 and 34 and been married for 9 and a half years. They never owned a home in England, instead choosing to rent. Although the wife had considerable sums in her bank account, her father was adamant that the payments were all loans and that he wanted the money back. He gave evidence to the Court to say that he would insist they were secured by charge as soon as the wife purchased herself a property.

Crucially, the father was vehement when giving evidence about the trust. He told the court that there had never been a distribution from the trust and didn’t foresee there ever being a distribution in the foreseeable future to anyone. He added “To no one. Not my daughter. Not my grandson. No one.” He said that he had given his daughter a good education and she must now fend for herself. Mr Justice Holman commented that the father’s position could not be more clear.

The second crucial component was the judge’s view on the husband’s needs. The husband worked in the financial sector earning a total net income of £130,000 per annum. Even on the husband’s case, this was surplus to what he required on an income basis. He argued that he should receive a lump sum to enable him to enjoy a standard of living comparable to the wife’s access to trust funds, however the parties had lived a fairly frugal marriage and it was only after their separation that the wife had borrowed funds from her father.

Mr Justice Holman said that to award any lump sum to the husband would be tantamount to refunding the costs he had incurred in running the case, which would be unfair, especially given that he had not succeeded. The judge ultimately made no award to the husband.


Key takeaways for divorcing couples

Andrew Barton commented on this case:

“The two key facts here are just how insulated the trust funds were from the beneficiaries, and the modest lifestyle of the parties before they separated. To try to rely on a standard of living that didn’t exist during the marriage was an extremely ambitious approach – even had that worked, the husband’s income levels meant that he was able to mortgage to fund a relatively expensive purchase, so that argument was going nowhere.”

“Our divorce clients are often either looking to rely on the protection a trust can provide, or seeking to do what they can to penetrate it. So much depends on identifying the make up of the trusts and devising a strategy at an early stage of the case. Experienced advisors are essential to ensure the case is handled competently.”