Divorce can be a deeply emotional and challenging process, not just for the parties involved, but also in terms of the legal and financial arrangements that need unravelling. One area of family law that can present significant complications is the treatment and management of trusts. Within the jurisdiction of England and Wales, the division of assets in financial remedy proceedings requires transparency, fairness, and legal rigour. When trusts form part of the matrimonial landscape, particularly those created prior to or during the marriage, the situation can become particularly complex.
While trusts are often perceived as a way to preserve wealth and protect assets across generations, they become a focal point of scrutiny during divorce proceedings. The key legal question often asked is whether a trust forms part of the matrimonial pot — the total assets available for division. This article explores the legal considerations that parties, trustees, and legal practitioners must navigate when trusts are involved in the context of divorce, with an emphasis on the law as it applies in England and Wales.
The Nature of Trusts and Their Role in Matrimonial Finance
A trust is a legal relationship whereby trustees hold assets on behalf of beneficiaries, according to the terms of a trust deed. Trusts can be set up for a number of legitimate reasons — including estate planning, tax mitigation, or to protect assets. In the family law context, trusts are often seen in cases involving high net worth individuals, where family wealth is managed through long-standing family or offshore trusts.
In financial remedy proceedings, the court is tasked with achieving fairness between the parties. The key statutory guidance comes from the Matrimonial Causes Act 1973, particularly section 25, which sets out the factors the court must consider when dividing matrimonial assets. Where a trust is involved, the court must determine whether the trust is a resource of one party, and if so, how it should be treated in the financial settlement.
Is the Trust a Financial Resource?
The central issue for the courts is whether the trust should be treated as a financial resource available to either spouse. In England and Wales, the courts have developed a sophisticated approach in this area. The leading case of Thomas v Thomas [1995] established that a trust does not need to be under the direct control of one of the spouses for the court to take it into account. If a spouse has access to the trust, even on a discretionary basis, or if there is a pattern of benefits or distributions received, the trust may be considered part of the asset pool.
The landmark case of Charman v Charman (No.4) [2007] reinforced this, highlighting that the court may consider discretionary trusts if there is evidence that the trustees are likely to act in accordance with one spouse’s wishes. This so-called ‘judicious encouragement’ principle empowers the courts to make findings about whether it is reasonable to anticipate further payments from the trust.
The court typically classifies trusts into three categories:
1. Nuptial settlements
2. Non-nuptial discretionary trusts
3. Fully revocable trusts or sham trusts
Each presents unique legal issues, with nuptial settlements in particular being susceptible to variation under the Matrimonial Causes Act.
Nuptial Settlements and the Court’s Power to Vary
A trust is regarded as a nuptial settlement if it makes some form of provision for the couple during the marriage or is linked to the marriage relationship. Importantly, it need not have been created by one of the spouses, nor must it only benefit the spouses. The key is whether, in substance, the trust benefits the couple during their marriage.
If a trust falls into this category, the court has statutory power under section 24(1)(c) of the Matrimonial Causes Act 1973 to vary the trust as part of the financial remedy proceedings. This may include adding or removing beneficiaries, altering trustees, or adjusting the trust terms. However, the court must exercise this power cautiously, respecting the principles underpinning trust law, particularly the role and autonomy of trustees.
The case of Brooks v Brooks [1996] serves as a leading authority for determining whether a trust qualifies as a nuptial settlement. The court in that case emphasised substance over form and was prepared to look beyond the legal façade of the trust to assess its real function and intention.
Sham Trusts and Piercing the Veil
In some situations, one party may allege that a trust is merely a sham, intended to shelter assets from the reach of the court. A sham trust is one that is ostensibly legitimate on paper but created with the intention of misleading third parties, including the courts. Courts in England and Wales are highly reluctant to declare a trust a sham unless there is compelling evidence of deceit or collusion.
The Barclays Bank v Quistclose Investments [1970] line of case law shows that the courts will only unpick what appears to be a valid trust where there is misunderstanding or misrepresentation at the time of creation. In family law, the case of Prest v Petrodel Resources Ltd [2013] is illustrative of the court’s willingness to ‘pierce the corporate veil’ in certain limited circumstances, particularly to prevent injustice or concealment of assets — though such intervention remains exceptional.
Disclosure and Transparency from Trustees and Beneficiaries
In divorce proceedings, full financial disclosure is a foundational requirement. This poses particular concerns where a party is a discretionary beneficiary of a trust, especially if the trust is located offshore or administered in a jurisdiction with strong confidentiality protections.
While trustees are not parties to the divorce proceedings, they may be called upon to provide information or documentation about the trust. The courts of England and Wales can issue letters of request to foreign jurisdictions in pursuit of full disclosure. Nevertheless, if trustees refuse to cooperate or assert jurisdictional limitations, it can become very difficult for the opposing spouse to determine the value or relevance of the trust.
Litigants must make a full and frank disclosure of all financial resources, including interests in trusts. Failure to do so can result in adverse inferences being drawn by the court, as seen in cases such as Al-Khatib v Masry [2004]. In extreme cases, such as material non-disclosure of significant trust assets, the original financial settlement may be varied or set aside altogether.
Role and Obligations of Trustees During Divorce Proceedings
Trustees whose settlements are involved in divorce proceedings face a delicate balance. They must act in accordance with the trust deed and their fiduciary duties, while also responding appropriately to court orders and the needs of affected beneficiaries.
One key consideration is the neutrality of the trustees. Where possible, they are expected to act as neutral parties, providing truthful information and restraining from aligning with one of the divorcing spouses. However, this can become particularly difficult if the trustees are family members or long-time advisors closely affiliated with one party.
Trustees may also need to consider whether to submit to the jurisdiction of the English court. Refusing to do so could put them in conflict with domestic court orders. However, submitting could lead to difficult ethical choices, especially if they are bound by other legal obligations in foreign jurisdictions.
It is generally advisable for trustees to seek their own independent legal advice once they become aware that trust assets may be scrutinised in the context of divorce proceedings. Moreover, practical steps such as reviewing trustee policies, understanding the powers granted under the trust deed, and potentially setting out formal distributions policies can mitigate confusion or conflict down the line.
Protecting Trust Assets in Anticipation of Divorce
Given the scrutiny that trust assets are now subject to, sophisticated estate and family wealth planning often includes proactive trust management designed to safeguard assets in the event of divorce. While this must be done legally and transparently — and cannot be based on an intention to defeat marital obligations — there are still legitimate strategies that can provide some protection.
One such strategy is to ensure that the settlor relinquishes control from the outset, particularly when establishing a discretionary offshore trust. Additionally, keeping trust assets separate and distinct from matrimonial use can prevent the assets from being categorised as matrimonial property.
Pre-nuptial and post-nuptial agreements can also provide a critical line of defence. Though not legally binding in the traditional sense, such agreements now carry significant weight following the Supreme Court’s judgment in Radmacher v Granatino [2010]. Where properly executed and fair at the time of enforcement, such agreements can be persuasive in limiting claims over trust assets.
International and Offshore Trusts in Divorce Proceedings
In high value divorces, trust assets are often held in offshore jurisdictions renowned for robust trust law protections and confidentiality. Common locations include Jersey, Guernsey, the Isle of Man, the Cayman Islands, and Switzerland. When these trusts are scrutinised in the English courts, complex questions about cross-border enforcement arise.
The English court cannot directly vary a foreign trust, but where it has jurisdiction over one of the parties or where the trust assets are intended for one spouse, the court may still make orders based on those assets being practical resources. The court may, for example, place pressure on the beneficiary spouse to request a distribution, or make financial provision contingent upon the continued access to trust funds.
Letters rogatory or letters of request can be a vital tool in extracting information or persuading foreign trustees to comply with English proceedings. Nevertheless, cooperation cannot always be guaranteed — making early legal planning and cooperation vital if a trust with an international dimension is likely to come under the spotlight during a divorce.
Conclusion
Trusts pose some of the most intellectually and legally challenging issues in family law, particularly during divorce proceedings in England and Wales. The interplay between matrimonial law and trust law invites both strategic foresight and legal precision. It is imperative that spouses, trustees, and legal advisers understand how trusts are likely to be assessed and treated by the courts.
Full and frank disclosure, careful classification of the trust in question, scrutiny of settlor control, and clear governance among trustees all play significant roles in ensuring trust assets are managed lawfully and fairly during divorce. While trusts can serve as legitimate and enduring vehicles for family wealth, when marriage falters, their structure and purpose can be tested in powerful ways.
Legal advice, particularly from experienced family and private client lawyers, is indispensable for all parties involved. Whether you’re a beneficiary, settlor, trustee, or divorcing spouse, clarity, honesty and a well-planned legal strategy are crucial to navigate the delicate intersection of divorce and trusts in the jurisdiction of England and Wales.