The new year is traditionally a time for engagements. Many of the newly betrothed will be excited. Others, particularly those with substantial pre-existing wealth, may be apprehensive about what might happen to their wealth should the marriage not work out. The flames of concern may be fanned by parents, business associates and professional advisers.
Excitement may soon turn to wondering whether to place assets on trust, perhaps offshore, so as to be outside the reach of the other spouse on divorce but, nonetheless, still available to the original owner should the need arise. The person transferring the assets to the trust (the ‘settlor’) may not be one of the future spouses but could be a well off relative keen to keep the wealth within the family.
Anybody contemplating setting up a trust needs to appreciate two basic principles. First, there must be a transfer of the assets away from the original owner. The trustee, not the settlor or the beneficiaries, owns the trust assets. Second, trustees must manage trust assets in accordance with the terms of the trust deed and the law.
If there is a divorce, trust assets can be caught and therefore taken into account if they are seen as a ‘resource’ available to one of the parties, or constitute a ‘nuptial settlement’. If a trust is ‘nuptial’, a court can change its terms on divorce. The power to do so is wide and includes replacement of trustees, payments to divorcing spouses, creation of sub-trusts, and addition or exclusion of beneficiaries.
These two categories catch many trusts (both in England and offshore), although trusts can be especially vulnerable if the trustees are in England or if the trust directly or indirectly holds assets in England.
A number of questions need to be answered in particular. Will the trust be seen as a ‘resource’ of one of the spouses? Key to this will be an examination of the terms of the trust and the history of distributions. Does one of the spouses have a fixed interest in the trust or is it largely discretionary? If there is an element of discretion, how probable is it that the trustees will exercise that discretion in favour of the party to the marriage who is the beneficiary?
Furthermore, one also needs to ask whether the trust be seen as ‘nuptial’ on a divorce, a broad and wide meaning will be given to this expression to promote the best interests of the spouses and any children on divorce. A trust will likely be caught if it makes some form of continuing provision for both or either of the parties to the marriage in their capacity as spouses, but the courts have used this interpretation imaginatively. For example, a trust created by a future spouse just before the marriage, or while it is ongoing, may be more susceptible to attack than a family trust created many years previously by a parent even if it refers to ‘spouses’ as being beneficiaries. Trusts involving the family home or assets created during the marriage invariably excite suspicion.
Who will the trustees be, and how independent of the settlor are they likely to be, even if it is a proper trust? The letter of wishes accompanying the trust must be scrutinised too for the power the settlor might retain with regards to the trust assets.
Setting up the trust offshore does not magically put the assets out of reach of the divorcing spouse but in practice is likely to make it more difficult to get at the assets. Whether a court in the offshore jurisdiction will recognise and enforce the principles set out above is less straightforward and depends in large part on the jurisdiction, but the considerations remain largely the same.
A trust may not be the best structure to use to protect assets and care needs to be given as to its purpose, form, and location. As these are certainly not matters to be dealt with in a last minute rush on the eve of the wedding, it’s best to keep that trusted tax and trust lawyer on speed dial before making further wedding plans.