We continue our series of hot topics in family law. This week Manders Law Managing Partner Mary-Ann Wright speaks to Elspeth Talbot Rice QC. Elspeth is a specialist trust litigator who is described in the directories as “the smiling assassin” and “the human equivalent of a heat seeking missile”.
About the Interviewee:
She is Legal 500s Private Client Trust and Probate Silk of the year 2019 and 2020 and won Barrister of the Year at the Citywealth Magic Circle Awards 2021. She specialises in complex international trust disputes including spousal attacks on trust structures in financial relief proceedings on divorce.
As with so many things in family law, other areas of law can and frequently do come into play. One of those things is the thorny issue of trusts. So, if a trust is a feature in your situation read on and discover what you should be looking out for: trusts matter!
What is the most persistent myth when trust assets become an issue on divorce?
The assumption by the settlors and beneficiaries of trusts is that as trust assets are not in their name, they will not be taken into account on divorce by the English court and as such can be ring fenced from the process. They are wrong. Financial remedy claims on divorce involve the court in identifying the resources available to each spouse and performing a discretionary exercise in computing a percentage division of those available resources. The ways in which trust assets might feature in that process are:
If one or other spouse has a fixed interest in the trust
In such a case, that interest belongs to that spouse and is one of his/her assets which will be taken into account in the court’s division of assets. If it is an income interest, the asset owned by the beneficiary spouse is limited to that income stream; if it is a fixed capital interest, his/her asset extends to the capital to which he/she is entitled under that fixed interest. Such interests may be conditional (e.g. they only arise on someone else’s death). Whatever the interest is, it will need to be identified, valued and taken into account;
If the court takes the view that trust assets are a resource which is available to a spouse
Even if the trust is a wholly discretionary trust such that no beneficiary has any entitlement to any assets under the terms of the trust, the court may treat a beneficiary spouse as having the trust assets, or some part of them, at his/her disposal such that they are included in the assets, which are available for division. This is likely to happen if the Court takes the view that the trustees would be likely to distribute trust assets to the beneficiary spouse if he/she asked for a distribution;
If the trust is a nuptial settlement
In such a case the court has the power to vary the settlement by giving one spouse or the other, or both, a fixed interest in the trust assets, which has the effect of increasing the pot of assets which is split;
If there was no intention to create the trust in the first place
In such a case the court can strike the trust down as being a sham on the basis that the trust deed is no more than a pretence, and the trust assets never left the ownership of the settlor. These cases are now rare as it is necessary to prove that both the settlor and the trustee had the dishonest intention of creating a piece of paper (the trust deed) in order to pretend to third parties (often creditors, the taxman, or a spouse) that the assets do not belong to the settlor, but to the trustee who holds them on the terms of the trust.
Clients should therefore be aware that whilst assets held in a trust of which one spouse or the other is a settlor or a beneficiary or both, are not held by, or owned by, that spouse, they could be brought into account on the division of marital assets on divorce.
That said, clients should also be aware that while trust assets may be a resource of one of the spouses, they may not be considered by the court to be marital assets to which the sharing principle applies.
When does the court have the power to vary a trust so that provision can be made for a spouse?
The court has a significant power to vary the terms of a trust in order to provide a non-beneficiary spouse with money from the trust in financial remedy proceedings. The issue of the enforcement of such an order should however be at the forefront of an analysis of any potential claim, as if the trust is governed by the law of an offshore jurisdiction (such as Cayman, Bermuda, BVI, Jersey, Guernsey and others), most have legislation the object of which is to repel the enforcement of an English matrimonial order. An application to vary a trust should not therefore be made until advice about the enforcement of such an order has been taken. Otherwise there is a risk that any victory will turn out to be an expensive Pyrrhic one.
Whilst this power to vary a trust is only exercisable if the trust is a “nuptial settlement”, many settlements have been found to fall within the nuptial settlement net.
What factors demonstrate that a trust is a nuptial settlement or has a nuptial element?
Each case turns on its own facts, but broadly speaking if the trust makes some form of continuing provision for one or other or both of the spouses in his/her capacity as such, the trust could be found to be a nuptial settlement by the court, and varied. A classic example is a trust which owns the matrimonial home in which the spouses live together: the trust may be for the benefit of only the husband, and not the wife (or vice versa) but may still be a nuptial settlement which the court has the power to vary.
Furthermore, the trust which it is sought to vary does not have to be a settlement in the strict sense: the court has in the past taken an expansive view of what a trust is, and applied its powers of variation to a company which owned the matrimonial home even though the trust which owned the company was not a nuptial settlement. In an extreme case, the court found that property held in a settlement from which the spouses were excluded from benefit was part of a set-up which, when viewed as a whole, was a nuptial settlement capable of variation.
The court can make any variation it thinks fit to a nuptial settlement. It might vary the settlement so that capital is held for the benefit of a spouse (which enables that spouse to call for a transfer of that capital to him/her), or it might provide for a spouse to have an income interest under the trust or for a sub trust to be created, with different trustees, for the benefit of a spouse or a spouse and the children.
Often children and grandchildren and more remote issue are also beneficiaries of trusts, which might be found to be nuptial settlements. The interests of those children and descendants should be taken into account on any variation of the trust by the court. There is an obvious common interest in a variation which enables a spouse to purchase suitable accommodation to house themselves and the children.
Where a spouse wishes to make a claim over trust assets, and cannot show that the trust amounts to a settlement capable of variation by the court, how can they demonstrate that the trust assets are a resource available to the other spouse?
To answer this question, it is vital to ascertain to what extent all, or part, of the trust assets would be made available to the beneficiary spouse if they asked for it: the question is not one of control of the trust assets, but access to them. Where requests in the past have always been met by the trustees, that history strongly suggests that if a request was made now or in the future, it too would be met.
If a trust fund has been set up by your spouse’s parents, but generally pays them a monthly sum and you are worried that the funds will dry up now you are divorcing – can or should you do anything?
The first thing to do is to try and find out as much information about the trust as you can. Do you know who the trustee is? Is the monthly payment paid into a joint bank account? If so, the joint bank account statements should identify where the funds are coming from and you may be able to work out who the trustee is from that.
Ask the trustee whether you are a beneficiary of the trust: many trusts are created for the benefit of X, his/her spouse or widow(er), children and remoter issue, so you might be a beneficiary too even though the trust was set up by your spouse’s parents, ostensibly for your spouse’s benefit.
If you are a beneficiary, you can and should ask the trustee for a copy of the trust deed and for information about the trust: a trustee’s fundamental duty is to account to his beneficiaries. That means the trustee must explain what he has done with the money which has been entrusted to his care. Ask the trustee how and where the capital assets of the trust fund have been invested and how the income is dealt with.
If the trustee is obstructive about this, an application to court can be made, but it will probably have to be made in the jurisdiction in which the trust is based (which may well not be England or Wales, but somewhere offshore) and it may well not render a quick result, particularly given the delays at some courts occasioned by the backlogs attributable to global lockdown.
What about investments?
The trustee is obliged to take good care of the assets entrusted to his care – to look after them as though they belonged to his own child, and therefore not speculate with them or venture them on risky businesses or investments. Not only should the capital funds not be risked on speculative investments, the investments should be diversified (i.e. not all eggs should be put in the same basket), with low risk investments forming a stable base for a pyramid which has the riskier investments only at its peak (and therefore in the minority), like this:
Many funds which are invested in securities suffered losses in value and income in the pandemic, but things are changing as we emerge from the crisis. There is nothing to be gained by panicking. But if there has been a drop in the value of regular payments made by the trustees, check that any such drop is not due to the fact that trustees have invested unwisely. The performance of investments can be checked against yardsticks such as the private client indices produced by Asset Risk Consultants https://bit.ly/2RPfdJd, or the Suggestus App https://bit.ly/3yQxfM3 powered by ARC Research – a free information resource for the public.
If something needs to be done to safeguard the trust assets, and the trustee refuses to do it, the court is likely to be sympathetic to an application by a beneficiary requiring the trustee to take steps to preserve the trust assets (a mandatory injunction) and/or an application to remove the trustee for his failure to perform his fundamental duty as trustee. If something needs to be done urgently, it should be possible to get a hearing before the court depending on the jurisdiction where the trustee is based or the jurisdiction of the governing law of the trust, where any such application will probably have to be brought.
What should you do if the “tap” is turned off?
A drop in income due to currently poorly performing investments is one thing, a drop or cessation of income due to the trustee turning the trust tap off is another. If your spouse is entitled under the trust deed to the income for his or her life, the trustee is not entitled to turn the income tap off. There is an entitlement which the trustee is obliged to fulfil. What is more, that entitlement is a piece of property which the court in financial remedy proceedings can direct be transferred to you. Enforcement of such an order needs to be considered carefully, but if the assets are held in England, it may be possible to enforce such an order in England without having to go to the trust’s home jurisdiction, where enforcement will probably be blocked by local legislation, known as firewall legislation, which is designed to repel foreign matrimonial orders against trusts.
If neither spouse has any fixed entitlement under the trust because, for example, the trust is a wholly discretionary trust (so the trustee has the right to decide who gets what, and when (if at all), and no-one is entitled to anything until the trustee makes such a decision, if it does) then the trustee should be asked why he is changing a long standing pattern of regular monthly payments. If the reason for the change is to try and avoid the trust being treated as a resource of the spouse in the financial remedy proceedings, or to try to prevent it being varied by the matrimonial court as a nuptial settlement,
- it is unlikely to avoid the court treating the trust as a resource of the spouse, because the availability of the trust as a resource will have been established by the previous pattern of payments;
- if the change has been brought about by the removal of the spouse beneficiary as a beneficiary of the trust, the removal may not de-nuptialise the settlement if there is power to add the spouse back in as a beneficiary and/or he or she has other powers under the trust deed, and
- the change might be capable of attack as a disposition by the spouse intended to prevent or reduce financial relief which can be set aside by the court under s.37 of the Matrimonial Causes Act 1973.
What should you do if urgent relief is needed, is it possible to have an application heard at the moment?
If urgent action needs to be taken to preserve trust assets, for example to require the trustee to take steps to preserve the trust assets, or to prevent the trustee from dealing with the trust fund in such a way as to make it unavailable to either spouse (if there is evidence that the trustee has threatened or is likely so to act) then it should be possible to get an order from the court to protect the status quo and to preserve the trust assets.
There may be delays in some jurisdictions because the courts of different jurisdictions are dealing with and continuing to hear cases in different ways. From the start of the pandemic, England and Wales adopted a “business as usual” approach with hearings of most civil cases being attended remotely by video and streamed on the internet. Most of the main British Overseas Territories and Crown Dependencies, where many trusts are based, have also put in place systems for video or telephone hearings, albeit that some were slower than others to do so and some are still only dealing with urgent applications. The backlogs in some jurisdictions are therefore significant.
Remember that the starting point is that trust assets do not belong to a spouse who is a settlor or beneficiary or both, of the trust. However, there are several ways in which they could be brought into account in the division of marital assets on divorce. The court is not afraid to assess the substance of the arrangement and to give effect to the reality of the situation, whether that reality is the availability of trust assets to a beneficiary spouse or the provision of nuptial benefit.
Information is pivotal. Enforcement of any order made by the English court in the trust’s home jurisdiction is key. Asking the right questions and obtaining underlying documents relating to the trust is also fundamental: a spouse needs to know whether he/she is a beneficiary of the trust, what assets the trust holds, and where they are, and how the trust has been administered historically.
Finally, there will be couples emerging from lockdown whose matrimonial wealth has grown significantly, for example those involved in online retail businesses. Those couples should be looking at future proofing their wealth by considering trusts, estate planning and post nuptial agreements.
For an initial FREE consultation on any aspect of family law, call Manders Law on 01245 895 105 or email us here.
Note: this blog is intended to give an overview (rather than comprehensive guidance and advice) on your legal or financial position and is provided for information only. It is not an endorsement of any product or service provider.