Trusts on Divorce: A Trust as a Financial Resource of the Parties
In cases where it is not possible to vary the terms of a trust, but the court is content that the trust is a financial resource, the court will need to consider other options.
Fixed Trusts
Where the trust is a fixed trust, i.e. the beneficiary spouse has a defined interest in the trust, the court will consider a) the value of the spouse’s interest and b) when it is likely to be paid. It is generally significantly easier to establish a fixed interest trust as a financial resource than a discretionary trust as there is significantly more certainty about whether the spouse will benefit from the trust and, if so, in what amount.
Discretionary Trusts
Most of the case law on trusts in divorce feature some form of discretionary trust. A discretionary trust ordinarily will set out a number of different potential beneficiaries who might be able to benefit from the income or the capital of the trust. The trustees can exercise their discretion as to how to apply the trust assets to the beneficiaries in terms of who, when and in what sums. There is often a letter of wishes created by the settlor of the trust giving some guidance to the trustees on how to exercise their discretion, although this is only guidance and is not binding upon the trustees. Given that it is often uncertain if, when and in what sums the trustees may choose to exercise their discretion to the benefit of any particular beneficiary, cases featuring discretionary trusts are often complex and establishing the trust as a financial resource of one of the parties is not straightforward.
Where the court is satisfied that the the trust is a financial resource, and monies will be made available to the beneficiary spouse by the trustees, the court will consider, in order to arrive at to a fair outcome, offsetting, judicious encouragement and adjournment of capital claims.
Offsetting
It might be the case that there are sufficient other assets outside of the trust which can be transferred to the party who is not a beneficiary to the trust. This is referred to as offsetting and leaves one party with the bulk of the non-trust assets and the other with their interest in the trust and potentially a lesser amount of the non-trust assets. In order to offset non-trust assets against trust assets the court needs to be satisfied that, on the balance of probabilities, the trust assets will be made available to the other spouse by the trustees i.e. the trust is a financial resource to that party. Offsetting trust assets is often see as preferable to varying the terms of the trust or applying judicious encouragement (as detailed below) as it does not have the same potential enforcement issues.
Judicious Encouragement
Where the bulk of the family’s assets are held in trust, and the court is satisfied that the trust is a financial resource, the court will likely consider the extent to which they can judicially encourage the trustees to make a distribution to the beneficiary spouse.
The leading case is Thomas v Thomas [1995] 2 FLR 668. The case confirms that the discretionary powers conferred on the court to redistribute the assets of spouses are almost limitless. This represents an acknowledgement by Parliament that if justice is to be achieved between spouses in a divorce the court must be equipped to look at the reality of parties’ financial situations. For their part, the judges who administer this jurisdiction have traditionally accepted the Shakespearean principle that ‘it is excellent to have a giant’s strength but tyrannous to use it like a giant’. The precise boundaries of that judicial self-restraint have never been rigidly defined — nor could they be, if the jurisdiction is to retain its flexibility.
In relations to trusts as a financial resource, the court in Thomas said:
“… where a spouse enjoys access to wealth but no absolute entitlement to it (as in the case, for example, of a beneficiary under a discretionary trust or someone who is dependent on the generosity of a relative), the court will not act in direct invasion of the rights of, or usurp the discretion exercisable by, a third party. Nor will it put upon a third party undue pressure to act in a way which will enhance the means of the maintaining spouse. This does not, however, mean that the court acts in total disregard of the potential availability of wealth from sources owned or administered by others. There will be occasions when it becomes permissible for a judge deliberately to frame his orders in a form which affords judicious encouragement to third parties to provide the maintaining spouse with the means to comply with the court’s view of the justice of the case. There are bound to be instances where the boundary between improper pressure and judicious encouragement proves to be a fine one, and it will require attention to the particular circumstances of each case to see whether it has been crossed.”
The following principles were set out in the case:
(a) Where a beneficiary can only raise further capital, or additional income, as the result of a decision made at the discretion of trustees, the court should not put improper pressure on the trustees to exercise that discretion for the benefit of the other spouse.
(b) The court should not, however, be ‘misled by appearances’; it should ‘look at the reality of the situation’.
(c) If on the balance of probability the evidence shows that, if trustees exercised their discretion to release more capital or income to a beneficiary, the interests of the trust or of other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response. In that situation if the court decides that it would be reasonable for a husband to seek to persuade trustees to release more capital or income to him to enable him to make proper financial provision for his children and his former wife, the court would not in so deciding be putting improper pressure on the trustees.
Essentially, where there is reason to believe that the trustees may make trust assets available to the beneficiary spouse, the court can make an order against that spouse which can only realistically be fulfilled if the trustees distribute funds. The same principles are often applied to cases where there is no formal trust but an external source of income or capital against which they are not absolutely entitled, such as gifts or other financial support from wealthy family members. The court might, for example, order that all of the non-trust assets be awarded to the non-beneficiary spouse leaving the beneficiary spouse with no assets on the basis that they believe the trust will, in such circumstances, make a distribution. Alternatively, the court might make an order against the spouse that can only be fulfilled if the trust makes a distribution to them. Such cases are rare but occasionally it is found to be the only fair outcome.
However, when such orders are made enforcement can be difficult if the trustees refuse to make a distribution. For this reason, it is unlikely that a court will make an order providing judicious encouragement where it is satisfied that a distribution will not be made.
Adjournment of Capital Claims
As a last resort the court may be prepared to adjourn the non-beneficiary spouse’s capital claims, that is to say, leave them open until an unspecified future date. The court will generally do this where the court believes that it probable that at some stage in the foreseeable future the trust will make significant distributions to the beneficiary spouse. By adjourning the other spouse’s capital claims, it allows them to return to court at such time as there is a distribution in order to seek a capital award which can, at that stage, be enforced.
Such cases are uncommon. In recent years there have been two prominent cases in which the outcome has been an adjournment of the wives’ capital claims:
-
Quan v Bray & Ors [2018] EWHC 3558 (Fam)
In a high profile and long running dispute the wife sought adjournment of her capital claims in circumstances where all of the parties’ wealth, amounting to tens of millions of pounds, had been transferred into a trust for the benefit of Chinese tigers. The judge, agreeing with the wife, found that it was likely that the husband would in the future come into significant funds and therefore adjourned her financial claims, allowing her to return to court in the future.
2. Joy v Joy-Morancho and Others (No 3) [2015] EWHC 2507 (Fam)
The judge found in this case that the husband had been blatantly dishonest. A trust had been established to hold the parties’ assets in the sum of in excess of £50m. The husband had been excluded as a potential beneficiary but was found likely to benefit from the trust following the conclusion of the divorce proceedings. As such the wife’s capital claims were adjourned.
The husband in this case subsequently applied to have the wife’s claims dismissed but they were further adjourned and would be dismissed in 2022 until the wife made a further application to extend the dismissal.
What constitutes the foreseeable future is not defined and will depend on the facts of the case. It does not mean the immediate future and there have been cases where a distribution only likely in several years’ time has constituted the foreseeable future.
Bortoft Bell Guide to Trusts on Divorce Index
-
Trusts as a Financial Resource