When it comes to a divorce, what’s in a trust usually stays in a trust. A recent case shows just how useful they can be in a divorce situation.
The wife had set up two discretionary trusts, while the parties were married, on the instruction of her wealthy father. He then paid £17.6m into the trust. Interestingly the wife was both the person setting up the trust and the main beneficiary under the trust, although the court decided it had all been done on the instigation of her father.
In the divorce the husband made a claim saying in effect, the wife had access to the trust fund and that while he had a reasonable income, he had little or not capital and he initially sought £2.5m which was reduced by the trial to £1.5m to purchase the property.
Nothing had ever been paid out by the trust up to the time of the hearing. Also, a letter of wishes from the wife’s father made clear that the husband was to have nothing and he, in the judge’s view, had significant influence over the trustees.
The High Court applied a two stage test. The first was that the court has the power in appropriate cases to apply “judicious encouragement” to a trust to supply funds but it not able to apply undue pressure. Here the wife’s father made it perfectly clear in evidence he gave to the court he would be opposing any distribution to any beneficiary during his lifetime. Therefore to apply pressure would be excessive.
The second stage was the husband had demonstrated a justifiable need for the lump sum. The parties lived in rented accommodation and he had a good job. Again the court determined the need test had not been passed either.
The court dismissed both claims for financial support by one against the other and left them both with potential legal fees to pay together with a maintenance order against the husband for the child of the family.
There is a clear warning in the judgment to be read with care by anyone considering pursuing a claim against a discretionary trust. Mr Justice Holman said:
“I say at the outset that I perfectly understand, and indeed have some sympathy with, the frustration that one part of no, or only relatively modest means must feel when he or she is aware that there is great wealth on the other side of the family, but is unable to tap into it even for the purpose of buying a house. But this tragic and destructive case should stand as a cautionary tale to those who would embark on expensive litigation which they can ill afford in the hope of prising money from a discretionary trust. A very careful and cool appraisal needs to be made at the very outset as to how realistic a prospect that really is.”
While every case is always dependent on its own facts, anybody thinking of running such a case needs to think very carefully about this.