When love and skill work together, expect a masterpiece: Trusts
If the family is one of nature’s masterpieces, what is a family trust?
Trusts are increasingly becoming part of financial remedy cases. The mere fact that the parties’ assets might be tied up in a trust, or a complex offshore structure, is not a reason for the family court to shy away from dealing with them:
‘… these sophisticated offshore structures are very familiar nowadays to the judiciary who have to try them. They neither impress, intimidate, nor fool anyone.’1
That’s why it’s important to seek early advice if you are going through a divorce and there are family assets held in trust.
If offshore trusts are involved, make sure that you know what the attitude of the foreign courts will be, before you prepare for your case. For example, in Jersey they continue to endorse the exercise of discretion by trustees which is in accordance with an order of the High Court (where that is permitted by the terms of the trust) despite recent modifications to Jersey law. Alternatively, the court in Bermuda or Singapore has a different approach. So, what are the general principals in Family Law?
Within Section 25 of the Matrimonial Causes Act 1973 the Court must consider a trust, if either parties’ have a beneficial interest in it, as a “financial resource”.
One option, if the trust is non-nuptial is that court may (if it does not have the power to vary it) offset the interest by giving more of the non-trust capital to the other spouse or to ‘judiciously encourage’ the trustees to advance capital where it is in their power to do so.
Nuptial or non – nuptial settlement / Variation of nuptial trusts
The first key question to ask is, whether or not a trust is nuptial. The Court has (under s.24(1)(c) MCA 1973) the power to vary a “nuptial trust”. The Court can make an order for
(1) capital provision and/or
(2) income provision out of the trust;
To be nuptial, the trust must have been set up with some reference to the marriage but there is no comprehensive definition. The court has adopted a broad approach. A non-nuptial trust can become nuptial e.g. if a spouse is added. However, even where a trust can be said to be nuptial the court will be slow to deprive innocent third parties of their rights. Any order must be fair in the particular circumstances of the case.
Form A / Joining in parties / Costs
If you are the Applicant you must ensure that the trust is listed in your Form A, which should be served on the trustees.
You should also consider whether the trustees and any third-party adult beneficiaries should be joined  in as parties to the financial remedy proceedings. Any beneficiaries under the age of 18 must be joined into the proceedings unless the proceedings do not adversely affect their interest. Only if Trustees are joined in they can be bound by the outcome.
Joining in parties at the right time, also comes with a cost risk; whether or not an order will be made is based on the parties conduct and the success of the claim. Calderbank offers apply.
Non – disclosure
What should you do if the trustees and/or the beneficiaries will not provide disclosure? If this is the case, there is the possibility to seek a disclosure order under FPR 2010 r.21.2 or a witness summons under FPR 24.2 – as a cheaper alternative to joining them as a party.
Piercing through the corporate veil
Complex trusts work on the principle that no individual beneficiary has an absolute interest. The question then arises how far the court can lean on trustees to exercise their discretion in a particular way. In Thomas v Thomas6, the law was summarised as follows:
‘(a) Where a husband 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 wife.
(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 husband, 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.’
But what if a (offshore) company’s separate legal personality is being abused for the purpose of some relevant wrongdoing. This was decided in the well-known decision in Prest v Petrodel Resources . In this case, there was no settlement involved but UK assets were held by offshore companies owned by the husband alone. There, the court found in principle that the Court may be justified in piercing the corporate veil.
In some cases, it becomes clear that the trust is nothing but a sham. This is so where the documents create wholly different rights and obligations than the parties intended. A party who makes such an allegation, however, is at risk on costs. The fact alone that a settlor has the intention to manipulate the trust for his own benefit does not make it a sham; the trustees must share this intention. What do you need to show?
(a) the settlor intended the trust to be a sham;
(b) the original trustees also intended the trust to be a sham; and
(c) the current trustees (if different) also intend the trust to be a sham19.
What effect has a sham trust? The Court makes a declaration that the trust deeds for a particular settlement are invalid, so that property reverts to the original settlor. The outcome may be different though where the offshore trust is entitled to stand under the Recognition of Trusts Act 1987.
For more details on this or a family law matter, please do not hesitate to contact James or Frank. Paradigm Family Law offers a free initial consultation and our fixed fee solutions cover financial proceedings from start to finish. You can call us on 01904 217225 or email us to [email protected]. You can also follow us on twitter and LinkedIn and Facebook for the latest news and views on family law.