We regularly consult with clients on various matters relating to asset protection within the family law context. There are various ways in which family wealth can be protected against future separation including pre-nuptial agreements, post-nuptial agreements, cohabitation agreements, and trusts. This article will focus upon family trusts; in particular, when may setting up a family trust be appropriate as young people begin to contemplate marriage, and how are trusts treated in the context of separation and divorce?
A family trust can be established as a device to safeguard family wealth against forming part of a claim by the other spouse for financial provision on divorce.
Rather than gifting money to a family member which may then be absorbed in to the marital coffers by way of being converted in to another form during the marriage, establishing a family Trust where the adults regain control can help to safeguard wealth which the older generation would wish to keep in the family.
There are other means of protecting family wealth, including pre – and post – nuptial agreements. The general advice is to take advice at the earliest possible opportunity if a proposal seems likely. It may sound cynical and unromantic, but all too often we experience the complexity and cost that can flow from disentangling family arrangements when people separate. It is far easier to rely on the terms of a carefully drafted agreement than it is to try to disentangle what is and is not matrimonial property once a relationship has ended and spouses have different recollections of what was gifted, to whom, and when.
How is Trust property treated on separation or divorce?
The capital value of a Trust is generally left out of account in determining the net value of the matrimonial property for division between spouses. Income derived from a Trust can however form a resource in the hands of the spouse who receives it, and can be factored in as income when determining spouses’ “respective needs and resources” in valuing claims for spousal maintenance or child maintenance. It is important to consider the construction of the Trust and the extent to which a spouse has any input in to when and how much he or she receives. In the vast majority of cases the family law team deal with, family Trusts are entirely discretionary and the beneficiary has no control over the income received. Is it fair, then, that such income be factored in during negotiations regarding a matrimonial settlement?
We were recently instructed in a case in which our client’s wife sought to argue that her husband’s interest in a family trust formed part of the matrimonial property and as such his “share” of the capital value (which was well in excess of £1m) fell to be included in the valuation of the matrimonial property. Upon close inspection of the trust deed it was apparent that the trust was a discretionary trust. Our client and his brother received capital payments from the trust from time to time, but only when the trustees considered it prudent to do so. The capital value of the trust did not fall to be included in the assessment of the matrimonial property nor the settlement negotiations. No capital had been received by him during the period of the marriage, either. There was no basis on which wife could make a claim on any of the money which had emanated from our client’s side of the family. This came as a significant disappointment to the wife, but as a huge relief to our client and his parents. This is type of forward planning can prove invaluable.
Despite the high divorce rate and the fact that trusts are relatively commonplace there is little by way of case law on trusts and family law. The leading case in Scotland is that of Morrison v Morrison and Wards Estate Trustees Ltd., a case decided in the Court of Session in 2009. The facts are complex. The full judgment is available on the Scottish Courts website. There are many newspaper reports about the more salacious aspects of this case available on the internet. To summarise, Mrs Morrison sought an award of £10m against her husband in a divorce action. The Judge awarded her £1.6m. Mrs Morrison appealed. Her argument was that a trust should be set aside and the trustees prevented from engaging with the trust assets. The legal arguments on both sides were lengthy and complicated, taking in to account both the law of succession and the terms of family law legislation. The appeal was unsuccessful.
The basic point is that again we see the efficacy of a trust in protecting family wealth when it comes to divorce.
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It is always worth seeking specialist advice if contemplating marriage or if you are concerned about protecting family wealth, as there is much that solicitors can do to help you identify what your aims are and how best to apply the legal tools at our disposal in order to achieve them.
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