Bringing value into the matrimonial pot during Covid-19 – protecting assets held in Trust
This article was co-written by Sean Hilton, Senior Associate and James Lister, Partner at Stevens & Bolton LLP
The events of this year have had wide-ranging consequences, some of which are yet to be felt and some that are likely to be felt more keenly in the year ahead. However, according to the most recent figures provided by the Office of National Statistics, one inescapable fact is that divorce rates are on the rise.
For those divorces that make it to a court room, one of the issues facing the Judiciary is how to meet the financial needs of the parties where the turmoil of this year will lead to a reduced value of assets being available for distribution. Before making an award, a Judge must first ascertain the extent of the assets in discussion, with section 25(2) (a) of the Matrimonial Causes Act 1973 (MCA 1973) requiring the court to look beyond the obvious assets to the “other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future”. The wide-ranging discretionary powers conferred to family Judge’s under ss23-25A of the MCA 1973 (as amended) allow them to include Trust assets as a financial resource available to divorcing spouses.
Whereas previously the court was more frequently able to ‘ring-fence’ Trust assets and meet needs from other matrimonial resources, it seems inevitable that, the situation will now result in a more detailed analysis and an increased willingness by the courts to invade these Trust resources. A steady stream of recent case law has supported established principles on this issue but a renewed look at these cases has given helpful guidance to practitioners operating in the family court, beneficiaries of Trusts and professional Trustees.
In relation to fixed-interest Trusts, it is likely that the court will infer that as a beneficiary, a spouse could request a distribution as an asset they have or are likely to have in the foreseeable future. Importantly, the court must still seek to value the spouse’s interest, which may not always be simple where the Trust deed does not define this in clear monetary terms. However, the Court will usually handle that by ordering the production of accounts for the Trust either by one party to the proceedings, or by the Trustees themselves, if they are parties. The court must also look at whether the interest will be received ‘in the foreseeable future’. Case law gives differing views on what this constitutes, with the current position set out in C v C and others [2009] . In this case, the court determined that an interest likely to be received in about 15 years was within the ‘foreseeable future’ (although only “dimly visible”, a term taken from the earlier case of Priest v Priest [1980] ).
The position with discretionary Trusts is more complex. To treat an interest in a discretionary Trust as an asset available as part of a divorce, the court must believe that the Trustees “would be likely to advance” some capital from the Trust if so asked by the beneficiary. Thomas v Thomas [1995] provides a useful summary of the law, specifically at paragraph 30, where Waite LJ distils the law into three principles. From these principles, it is clear that where a spouse can only raise capital or income as a result of the distribution of a discretionary Trust, the court should not put improper pressure on the Trustees to make this distribution. However, they are required to ‘look at the reality of the situation’ and not be ‘misled by appearances’. If the court then feels on balance that a distribution would be made, this does not amount to undue pressure and the court can use ‘judicial encouragement’ and assume the monies held in Trust are an available resource.
Therefore, the question that follows is how these issues are handled practically in the course of proceedings. Thomas is clear that to make a finding that an asset not held in the name of an individual is nonetheless a resource available to them, the court must first hear evidence and be satisfied that this is the case. It follows that if the court does not hear evidence, it cannot make such a finding. Trustees should therefore consider whether it may be more beneficial to resist being joined to the proceedings balanced against the risk that the court may make adverse inferences .
If it seems likely that the Trustees would make the necessary advancements and/or the other spouse insists on pursuing the issue (and provided the Trust is based in this jurisdiction) then the Trustees should be joined to proceedings to ensure the eventual enforceability of an order against the Trust .This should be done at an early juncture, most likely at the First Appointment Hearing. Wodehouse v Wodehouse [2018] , in which all parties had failed to properly identify the Trustees and indeed the correct Trust instrument holding the assets in dispute, demonstrated the risk where orders are improperly made that cannot effectively bind the Trustees. The order made was considered by the Court of Appeal to be ultra vires in that it was made against a third party not a party to the proceedings. Not only does this highlight the need for absolute clarity from the outset, but also the nuanced nature of these cases and the enhanced duties of the lawyers involved to give Judges proper guidance so as to avoid unsafe decisions.
If, however, the Trust is based overseas, then it may not wish to submit to the jurisdiction of the court. In Re H Trust , the Royal Court of Jersey indicated that it would not normally be in the interests of an offshore Trust to submit to the jurisdiction of a foreign court (including England and Wales). This is because submitting to the jurisdiction makes it more likely that the Trustees would have to put into effect any orders made by the foreign court in their domestic home court. Refusing to submit to the jurisdiction also limits the likelihood of any orders for disclosure being enforceable.
In circumstances where a Trust is joined to proceedings, the court will look to all the circumstances of the relationship between the beneficiary and the Trustees before making a finding under the Thomas principles. This may include the history of the Trust, especially if it appears to have been created with the intention of putting assets out of the reach of the other spouse and the origin of the monies in the Trust; what the Trustees say they will or will not do via a statement of intent; how much power or influence the beneficiary has over the Trustees; and whether the Trustees have previously granted funds and the circumstances of any such distributions. This may also include any separate agreements or discussions between the beneficiaries; the interests of the other beneficiaries and whether a distribution would impinge upon their rights (particularly any children or unborn beneficiaries); the liquidity of the Trust assets; as well as the long-term objectives of the Trust.
It is likely that, if so joined, the court will direct that the Trustees should file a statement setting out their case alongside disclosure orders for documents such as the Trust accounts, and that a representative of the Trust gives evidence at a trial. If the court must resolve the issues of dispute before a final determination of the matrimonial proceedings, this may be done as a preliminary issue trial. This is a significant step as there may be cost consequences and delay.
Whilst it is an obvious point, there is a definite need for the Trustees to take their own early advice where a beneficiary is entering into divorce proceedings. They must remain conscious of their duties to any other beneficiaries and seek to make their position clear to the beneficiary spouse at the very outset. If the Trustees do not intend to exercise their discretion to make any distributions, then a statement of intent confirming the same may provide significant protection. The Trustees may also need to assist the matrimonial lawyer of the beneficiary spouse in ensuring a proper interpretation of the Trust documents and in identifying the Trustees and beneficiaries. Importantly, a discretionary structure with no fixed entitlement for any beneficiary is harder for a claimant spouse to attack. Trustees should ensure that they “do the basics” from the outset, which includes managing the Trust properly, avoiding becoming a cheque book for the family, and making proper decisions about distributions, so that if the Trust is later brought in to matrimonial proceedings, the Trust will less likely be considered a cipher or resource for one spouse or the other.
Crucially, many of these issues can be mitigated or avoided by the Trustees and the beneficiary spouse having early and direct conversations. However, for Trusts based in another jurisdiction, the best course of action may simply be to stay at arm’s length and not engage.
As the family court Judges face more situations where there are insufficient matrimonial resources to meet the parties needs, they will more readily look to ‘all other resources’ that might be available, most notably, Trusts. For spouses looking to exclude these assets, and Trustees looking to protect their other beneficiaries, a firm and direct approach is needed. These are nuanced cases and whilst this may front load costs it will almost always be an effective strategy either in avoiding or settling litigation or in ensuring the best chance of success at trial.
