Trusts on Divorce: Top Tips for Trustees

1. How do the courts treat trusts on divorce?

Broadly speaking, there are two main ways the court might treat trusts on divorce. The first is to find that the trust assets are a financial resource available to one or both parties.

If a trust is held to be a financial resource, the court may make financial orders against a beneficiary which are enforceable, on the basis that the trustees will come to the beneficiary’s rescue to enable him or her to meet the financial orders. This is often referred to as the court giving ‘judicious encouragement’ to the trustees. Additionally or alternatively, the court may award the non-beneficiary party a greater share of non-trust assets on the basis that the trustees will make provision to the beneficiary from trust assets.

The second way the court might treat trusts is to make a finding that it is a nuptial settlement, (a settlement for the benefit of one or both of the parties or their children, created because of the marriage, or referring to the marriage). If it does, it has broad powers and can directly alter the trust.

More detail on how the court deals with trust assets on divorce can be found within our previous article on this – https://www.burges-salmon.com/our-thinking/protecting-trusts-on-divorce/.

2. What responsibilities do trustees have if a beneficiary is going through a divorce?

As part of financial remedy proceedings, each party has a duty to the court and to one another to give “full, frank and clear” disclosure of all material facts. In the case of a trust, this means information as to the likely value of the interest and when it may be realisable.

As trustees are not parties to the marriage, they are not involved in the proceedings and so are not bound by the duty to make full, frank and clear disclosure to the court as the spouses are. The trustees’ duties are ‘fiduciary duties’ owed to all the beneficiaries of the trust and their best interests. This does not however mean the trustees should simply refuse any and all disclosure requests. Indeed, in some cases, the trustees may wish to provide disclosure.

3. How trustees should respond to a spouse’s request for trust documents

Despite the fact that the trustees will not have a duty to disclose details of the trust, a court may still draw inferences from the actions of the trustees following a request for disclosure.

Generally, trustees should respond positively to a reasonable request for disclosure where a spouse has a significant link or interest in a trust. Whilst trustees will need to act in the interests of the beneficiaries to protect the trust as a whole, they should balance this against not being secretive or difficult regarding disclosure, as they may be perceived as acting on the instruction of the beneficiary or party attempting to protect that party.

The court will likely be suspicious of unreasonably secretive trustees who appear to be protecting a party’s interest in the trust without justification, and will be more likely to intervene (see point 7 below). Advice should be sought before any disclosure is given as each case will have specific facts which will need to be carefully considered.

4. What information and documentation might be sought from trustees?

Whilst the parties will usually seek the trust deeds, accounts, and any letters of wishes as a starting point, the trust disclosure a party seeks will depend on how they are arguing it should be treated:

• Variation of a nuptial settlement – the likely focus will be on the nuptial character of the settlement and the nature and value of the assets contained in the trust, so that it is clear what is there to be shared.
• Seeking that a trust be treated as a resource available to the parties – the purpose of the disclosure is to indicate the extent to which the beneficiary party has, and will, receive benefit from the trust in the future. Much of the focus will therefore be on the purpose and intention as stated in the documentation, as well as the history of distributions.

5. How can trustees demonstrate independence and robust decision making?

Trustees can take a number of steps to demonstrate that their decision making has been informed by the interests of all beneficiaries, not just the one who is divorcing:

• Holding properly convened meetings with appropriate notice, quorum and attendance recorded.
• Taking and keeping meeting minutes evidencing the decision making process.
• Following the trust’s governance documents.
• Seeking independent professional advice where appropriate (legal/tax/investment/valuation).
• Ensuring a proposed appointment/loan is consistent with past practice and the trust’s objectives, and recording the rationale if not.
• Avoiding taking instructions from one spouse’s lawyers and communicating via the trustees’ own lawyers.
• Keeping an audit trail so the trustees can explain their process if challenged or if joinder is sought.

6. When and how might trustees be joined into divorce proceedings?

If the court decides that a trustee is being unnecessarily difficult or secretive, or is not complying with a reasonable request for disclosure, it can add the trustee(s) as a party to the proceedings through a procedure known as ‘joinder’.

The implication of joinder is that the party will then be under the jurisdiction of the court and its orders and will be in contempt of court if it does not comply. This may not be particularly effective in the case of offshore trusts however.

If an application is made, it is vital that trustees take advice before responding. Simply acknowledging the application or responding to correspondence could be seen as a submission to the jurisdiction. That then impacts on how a court in the trusts home jurisdiction (for example Cayman) would treat the order of the English court.

7. Do trustees need independent legal advice and what should that advice cover?

Trustees should obtain independent legal advice where a beneficiary or settlor is divorcing, especially if they are being asked to provide documentation and information. They should avoid taking advice from the divorcing spouse’s lawyers, so that they can remain neutral.

As the trustees’ duties are owed to all beneficiaries and their best interests, there can often be a conflict between what they are being asked to do on behalf of the divorcing beneficiary, and what is in the interests of the other beneficiaries. The trustees will therefore need to take advice on the level of disclosure that should be provided and how this should be communicated, and how to tread the sometimes fine line between avoiding adverse inferences being drawn due to insufficient disclosure, whilst also protecting the interests of all beneficiaries equally.

8. How do English courts view offshore trusts and companies

Even if the court makes an order relating to a trust, the actual enforcement of the order can be problematic, especially in the context of offshore trusts. Often legislation in offshore jurisdictions prohibit the enforcement of foreign divorce orders against trusts, or the trustees of an offshore trust may also decide not to submit to the English jurisdiction. Where offshore trustees do not submit to the English jurisdiction, the offshore court usually has the ability to consider matters afresh even if a decision has been made in England, although the approach varies in different jurisdictions. Some are more cooperative, such as Jersey, whilst others are not.

Even where enforcement is possible, foreign proceedings may need to be issued and foreign lawyers instructed which may disproportionately increase costs. The likelihood of successful enforcement needs to be balanced against the time and expense involved and it needs to be considered whether there are sufficient liquid assets onshore to meet the potential award as an alternative.

9. Aside from a trust, what else could a beneficiary do to protect their wealth?

Putting in place a prenuptial agreement to ring-fence trust assets may offer the best protection as it should seek to limit claims on divorce. The parties’ needs must still be met, which could involve the use of some trust assets if there are insufficient non-trust assets, although needs can be defined in an agreement and limited to some extent thus reducing claims. Trustees (or settlors) could also insist on pre-nuptial or post-nuptial agreements being entered into before distributions or loans are made.