Can you keep it in the family?
At Paradigm Family Law we have seen a rise in the number of enquiries by family members wanting to set up trusts in order to make provision for their loved ones. They are hoping to ensure that they can keep the money in the family if there was ever a divorce down the line. Coincidentally, there has also been some activity in the family courts recently on just this topic. We thought it might be time to review the position on trusts and divorce.
The law
The Matrimonial Causes Act 1973, s 24(1) provides that on granting a decree of divorce, a decree of nullity of marriage or a decree of judicial separation, or at any time thereafter (whether, in the case of a decree of divorce or of nullity of marriage, before or after the decree is made absolute) the court may make any one or more of certain orders, and these orders include:
“(c) an order varying for the benefit of the parties to the marriage and of the children of the family or either or any of them any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage;
(d) an order extinguishing or reducing the interest of either of the parties to the marriage under any such settlement; and the court may make an order under paragraph (c) above notwithstanding that there are no children of the family.”
What is covered?
Section 24 of the MCA 1973 covers ante-nuptial or post-nuptial settlements only, i.e. settlements made either in contemplation of, or during, the marriage of the husband and wife whose marriage is in question. Post nuptial settlements are defined by reference to the following (found in Prinsep v Prinsep [1929] P 225, per Hill J, at 232):
‘Is it 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 order to determine what is an ante-nuptial or a post-nuptial settlement the court is entitled to take into consideration the relevant facts to ascertain what was the substance of the transaction, but the motive in entering into a settlement is irrelevant.
The fact that a settlement is made on the parties during the marriage or civil partnership is not conclusive that it is a nuptial settlement.
What about a Will?
Within the terms of the section the court may also vary a settlement made by will or codicil made on the parties to the marriage.
A gift?
An absolute assignment of property or gift, is not a ‘settlement’ and the court has no jurisdiction to vary its provisions
What can the court do to the ‘Settlement’?
Once the Court decides that there is a nuptial settlement then any assets in the Settlement can be attacked. The court can vary the terms and provisions of the settlement in many seemingly fundamental ways.
If a trustee is acting in an inappropriate way then they can be removed
It can exclude a beneficiary
It can transfer an asset of the trust to a non-beneficiary
The court has to consider whether any proposed variation might adversely affect a minor child of the marriage, in which case the child, or children, should have the protection of separate representation
It is perhaps worth noting that as a matter of practice these powers will only be deployed in cases where the Settlement assets are required to meet a party’s real needs.
How does the court approach a Settlement in divorce cases?
The leading case in this area, and which remains an essential reference point is that of Hashem v Shayif [2008] EWHC 2380 (Fam). In that case, Munby J extensively reviewed the relevant authorities and summarised his conclusions 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”’.
Since then, the court has followed this in the cases of BJ v MJ and Others [2011] EWHC 2708 (Fam), and most recently P v P [2015] EWCA Civ 447.
In BJ v MJ, Mostyn J varied the settlements to extract cash lump sum for the wife, removed the wife from the list of beneficiaries, further settled funds on the wife for her lifetime and imposed a charge on the former matrimonial home in favour of the trustees of the new settlement.
Interestingly, the position of the original trustees not being known at final hearing, Mostyn J. invited them to confirm their view saying that if uncooperative he planned to make alternative provision for the wife from the other non settled assets, offsetting her claims by doing so.
In P v P, the trustees of a post nuptial settlement had appealed the decision of (again) Mr Justice Mostyn, to vary the settlement in a divorce case. Endorsing the line of previous cases, Lady Justice Black in the Court of Appeal held:
“The breadth of the discretion to vary a nuptial settlement is considerable, including the power to exclude a beneficiary entirely from the settlement and to transfer an asset to a non-beneficiary free from all trusts (Ben Hashem §290(i)). In theory, therefore, it is wide enough to encompass the order that Mostyn J made. The appeal can only succeed if the exercise of the discretion in this case was flawed.”
She went further to say:
“To my mind, these points show that the detriment to third parties from the variation of the trust should not be overstated, and nor should the weight to be given to the settlor’s intentions in setting up the trust. I do not think it can be said that innocent third parties have been inappropriately deprived of their rights under the settlement, nor do I consider that the settlement has been varied with an inappropriate disregard for the intentions of the settler or further than was necessary to make provision for the wife and the child (also a beneficiary) when with her. The route chosen by Mostyn J was the least intrusive available. The trust had no assets other than the farmhouse and, having no income, had no way in which to raise money against the property … His order was to be met from the assets of the trust and the trustees’ complaint is, in reality, about the fact that there was no alternative way to satisfy the order here than a sale of the trust property.”
Trust in me
What the law and cases show is that where the court is satisfied there is a nuptial element to the settlement or trust (or even a Will), then it is fair game in the divorce proceedings. The courts have very wide ranging powers. The judiciary are not shy in changing the settlement to meet the needs of a party, but only where there is little alternative available and no harm would be done to the interests of minor children of the marriage or other innocent third parties.
But don’t leave it to chance. If you have any queries about your entitlement or have plans yourself to set up a trust for your loved ones, take advice from a specialist family lawyer at the same time as the trust lawyer – the two are not mutually exclusive.
