Trusts on Divorce: Varying a Trust
Once it has been established that a trust, or trusts, exist through the disclosure process, what assets are held by the trust, how much they are worth and what the beneficiary spouse’s entitlement to those assets are, the court must consider the extent to which the trust assets might be available to the parties.
In circumstances where the trust is found to be a sham trust the court will likely treat the assets of the trust as belonging to the party in question.
However, provided that the court is satisfied that the trust is legitimate, which is more often the case, it will need to consider whether varying a trust is possible. If varying a trust is not possible, but the court is satisfied that trust is a financial resource available to one of the parties, the court will need to consider offsetting, judicial encouragement or adjourning capital claims more generally.
When is varying a trust possible in divorce?
The family court has the power to vary a trust in a divorce under s.24(1)(c) of the Matrimonial Causes Act 1973 where it can be demonstrated that the trust is a “nuptial settlement”.
Where it can be demonstrated that the trust has a nuptial element, the court, in theory at least, has unfettered and unlimited powers to transfer assets out of the trust, including to a non-beneficiary, for example the other spouse. Essentially the court has the ability to transfer assets within the trust to either of the parties. The ability to vary a trust is therefore a very powerful tool. The court will only exercise its power to vary a trust where it is required to do so in order to achieve a fair outcome.
What is a nuptial trust?
Whether a trust has a nuptial element or not is case specific. The court has the power to vary any form of ‘settlement’, not just trusts. There is no strict definition of nuptial or settlement.
It was said in Prinsep v Prinsep [1929] that a trust is nuptial if it is:
“upon the husband in the character of husband or [upon] the wife in the character of wife, or upon both in the character of husband and wife…. It should provide for the financial benefit of one or other or both of the spouses as spouses and with reference to their married state”
In Brooks v Brooks [1995] UKHL 19 the House of Lords, when considering what is required in order to make a trust nuptial, set out that:
“…a settlement “made on the parties to the marriage”. So, broadly stated, the disposition must be one which makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children.”
Whether a trust is nuptial is fact specific. Examples of trusts that have have been found to have a nuptial element include:
N v N and F Trust [2005] EWHC 2908 (Fam).
Coleridge J was dealing with a case at the heart of which was a contention by the wife that the parties’ former matrimonial home was the subject of an ante-nuptial settlement such that the court’s powers under s 24(1)(c) of the 1973 Act were engaged.
The property in Southampton was purchased by a Bahamian company, all the shares in which were owned by a trust in respect of which the husband was one of the beneficiaries. The parties occupied their home under the terms of an assured shorthold tenancy which had been granted to them by the trustees.
The wife’s case was that the property had been purchased in direct contemplation of their impending marriage and, on purchase, they had acquired a licence to occupy it as a matrimonial home. That licence, she argued, was settled on them indefinitely and the grant of a tenancy by the trustees did not alter the fundamental relationship of trustee and beneficiary which pre-dated the grant of the tenancy and continued to exist afterwards.
In the circumstances of that case, Coleridge J granted the wife the declaration which she sought and found that the arrangement constituted an ante-nuptial settlement, meaning that varying the trust was possible.
AB v CB [2014] EWHC 2998 (Fam)
In 2005 the parties moved into a farmhouse owned by the husband’s parents. Four years later a trust was established which held the farmhouse, with the husband as the principle beneficiary along with the parties’ children as discretionary beneficiaries. The wife was loosely aware of the details of the trust arrangement.
The trust was found to be nuptial. It included a clause that gave the trustees specific powers to advance all of the property to the husband during his lifetime, and therefore all of the property contained within the trust was regarded as a variable nuptial settlement.
The judge ordered that half of the net equity in the farmhouse be paid to her by the trust, but that such monies were held by her as a life interest only and would be repaid to the trust upon her death.
BJ v MJ (Financial Remedy Overseas Trusts) [2011] EWHC 2708 (Fam)
In order to mitigate CGT upon the sale of his companies the husband set up two trusts. Trust No 1 had the husband, the wife and their children as the beneficiaries. The trustees had the power to provide income and capital to the husband and wife during their lifetime. Trust No 2 excluded the husband, wife and their children as beneficiaries. The beneficiaries were the parties grandchildren and remoter issue.
The judge found in that case that trust No 1 was clearly nuptial and, even though the parties are there children were excluded as beneficiaries to Trust No 2, it was part of the overall tax mitigation scheme which was intended to benefit the whole family and as such was nuptial and therefore varying the trust was possible.
Can a non-nuptial trust become nuptial?
What about trusts which cannot under any assessment be said to have had a nuptial element at the outset but subsequently appear to? Can a non nuptial trust become nuptialised?
This question has come before the court on a number of occasions but has not been satisfactory answered. Coleridge J stated in Quan v Bray that:
“In my judgment on the authorities, a settlement which is non nuptial at its creation could itself later become “nuptialised” if there was, in fact, a flow of benefit to the parties during the marriage from the trust. Alternatively a later disposition from the trust can itself constitute a post nuptial settlement without the main or superior trust necessarily becoming nuptial.”
However, more recently Singer J stated in Joy v Joy-Morancho & Others (No 3) [2015] EWHC 2507 (Fam) that he did not believe that a non nuptial trust could become nuptialised, a view which he pointed out was also the conclusion in K v K [2007] EWHC 3485 (Fam). In doing so he said:
“Were it to be otherwise every truly dynastic settlement, bereft of nuptial character at the outset but providing benefits for an individual who subsequently becomes either a husband or a wife, would arguably become variable under section 24(1)(c) as soon as that individual, once married, received any benefits. I am satisfied that that is not the law, notwithstanding the breadth of attribution historically afforded to settlements treated as nuptial.”
In K v K it was found that, while the trust was settled for the benefit of the husband, his siblings and their spouses, as it was not settled in contemplation of any marriage, it was not a nuptial settlement. Having concluded this, and in light of the above, it was decided that the trust could not have subsequently have become nuptial. As such, the court were unable to vary the trust.
Until the higher courts give guidance on whether a non nuptial trust can become nuptialised, the question remains unsettled.
How will the court use its powers?
Having established that there is a nuptial element, the court has jurisdiction to vary a trust. But how far will the court go in doing so? In Ben Hashem v Ali Shayif [2008] EWHC 2380, Munby J surveyed the relevant authorities, then summarised the principles as follows:
“Surveying all this learning, identifying what is of enduring significance whilst ruthlessly jettisoning what has become more or less irrelevant in modern conditions, I can perhaps summarise matters as follows:
i) The court’s discretion under section 24(1)(c) is both unfettered and, in theory, unlimited. As Miss Parker put it, no limit on the extent of the power to vary or on the form any variation can take is specified, so it is within the court’s powers to vary (at one end of the scale) by wholly excluding a beneficiary from a settlement, to (at the other end) transferring some asset or other to a non-beneficiary free from all trusts. She points to E v E (Financial Provision) [1990] 2 FLR 233 and C v C (Variation of Post-Nuptial Settlement: Company Shares) [2003] EWHC 1222 (Fam), [2003] 2 FLR 493, as illustrations of property held on trust being transferred free from any trusts to the applicant, in E v E a sum of £50,000 and in C v C shares in a Cayman company.
ii) That said, the starting point is section 25 of the 1973 Act, so the court must, in the usual way, have regard to all the circumstances of the case and, in particular, to the matters listed in section 25(2)(a)-(h).
iii) The objective to be achieved is a result which, as far as it is possible to make it, is one fair to both sides, looking to the effect of the order considered as a whole.
iv) The settlement ought not to be interfered with further than is necessary to achieve that purpose, in other words to do justice between the parties.
v) Specifically, the court ought to be very slow to deprive innocent third parties of their rights under the settlement. If their interests are to be adversely affected then the court, looking at the wider picture, will normally seek to ensure that they receive some benefit which, even if not pecuniary, is approximately equivalent, so that they do not suffer substantial injury. As Sheldon J put it in the passage in Cartwright which I have already quoted: “if and in so far as [the variation] would affect the interests of the child, it should be permitted only if, after taking into account all the terms of the intended order, all monetary considerations and any other relevant factors, however intangible, it can be said, on the while, to be for their benefit or, at least, not to their disadvantage.”
It is crucial, before embarking on litigation centered on varying a trust in a divorce on the basis that it is nuptial, to think about whether, if the court were to make an order, it would be enforceable. If the trust and the trust assets are based overseas this can be difficult, making obtaining an order varying the trust potentially pointless.
Bortoft Bell Guide to Trusts on Divorce Index
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Varying a Trust