Who can you trust? The Court of Appeal decision about Family Trusts

06 November 2007

One of the interesting aspects of the recent Court of Appeal decision in the highly publicised case of Charman was the different treatment by the Court of the two family Trusts Mr Charman had set up.

Mr Charman argued that both Trusts constituted funds which were not available to him and which should, therefore, be disregarded in calculating Mrs Charman's share of the matrimonial assets.

The Court of Appeal decided that the Trust which had been set up purely for the benefit of the children, in which Mr Charman had no interest would be excluded but the Trust in which Mr Charman retained an interest, by being a potential beneficiary, would be taken into account.

There are, however, situations in which the Court cannot be so definite, particularly when the provider of the funds is a third party, such as a parent, of one of the spouses.

Until recently the courts had been adopting an increasingly robust attitude towards the availability of trust assets where one party to a marriage was a beneficiary of a trust. As long ago as 1995 the Court of Appeal was prepared to treat a husband who had the prospect of dividends from a family company as being possessed of the income which he had never received historically, but which was his for the asking.

Subsequent awards have been explicitly based upon an assumption that, with appropriate "judicial encouragement", a family trust will assist a discretionary beneficiary who would otherwise be destitute, having been deprived of all their own assets by the divorce court.

More recently, the Court of Appeal had gone so far as to suggest that a disgruntled discretionary beneficiary could compel the Trustees to exercise their discretion in his or her favour and there was a belief amongst family lawyers that on divorce, a discretionary beneficiary might be treated as already having the wealth that they could compel the Trustees to release to them.

Without going so far as to say that the tide has turned, the recent judgment in the case of A v A and St George's Trustees Ltd indicates that it may now be harder for a non-beneficiary spouse to convince the court that a trust is merely a device to keep assets away from the divorce.

In this case the Trusts had been set up by the husband's parents and brother. It was, therefore, impossible for the wife to argue that the Trusts were a sham as the assets would then have reverted to the third parties to set up the Trusts.

Despite a letter from the husband's father to the Trustees indicating that the assets should end up with the husband on his death but that in the meantime they should remain in the Trust to protect them from "greedy wives", the Court held that the Trust was valid. Furthermore, because the husband was one of a number of beneficiaries and because there was no history of distributions in the husband's favour, the Court decided that the Trustees would probably disregard any judicial encouragement which it gave.

It should also be noted that The Trusts (Jersey) Law 2006 came into force on 27 October 2006. This law provides that any question relating to the existence or extent of our power to vary a Jersey Trust is to be determined by Jersey law and no foreign judgment is enforceable to the extent that it is inconsistent. Whilst it may still be possible to enforce orders made in divorce against offshore trusts, doing so will undoubtedly be far more expensive as a result of this law.

Having said that, it is still not possible to keep family assets out of the hands of a divorcing spouse merely by putting them in trust. Anyone considering creating a trust, particularly a trust in favour of a child, where they have concerns about their offspring’s marriage, should consider the following points: -

1. The law relating to transactions entered into with the intent of defeating a spouse’s financial claims on divorce continues to apply and if the only or main reason for setting up a trust is to defeat a spouse's claims then the trust will be set aside as a sham. If the funds are provided by the other spouse then they will simply revert to him or her.
2. Similarly, even if the creation of a trust is effective, the assets can be added back to a spouse's notional assets, in deciding how to divide the remainder, if the creation of the trust was improvident in the context of the family's overall finances, even if it was not done with the intention of defeating the other spouse's claims.
3. Where the trust has been created by a third party, the Court is less likely to regard the purpose of the trust as being to defeat the other spouse's claims, even if the trust was set up during the marriage.
4. Unless there has been a history of assistance to a spouse, the Court will not infer that such assistance is likely to be forthcoming, to the detriment of other beneficiaries, simply because the divorce court would like to give the other spouse a greater share of the non-trust assets.
5. Having said that, if there are real and unmet needs resulting from an equal division of the non-trust assets, it will be much harder for the potential beneficiary of a trust to argue that they have no other means of meeting those needs and the Court is therefore likely to order an unequal division.
6. Trusts set up by third parties prior to or during the marriage can be varied by the Courts if the Court finds that the trust is an ante-nuptial or post-nuptial settlement. Any settlement created during the marriage which benefits either party to a marriage or their children is likely to constitute a post-nuptial settlement. A settlement created prior to the marriage is much less likely to be viewed as an ante-nuptial settlement if there is no power to include a future spouse as a beneficiary.
7. If the trust is an ante- or post-nuptial settlement, the provision made for each spouse can be altered by the Court and the Trustees can be replaced if the Court believes that they might not cooperate in implementing the decision of the divorce court. However, if the trust is offshore the costs associated with trying to vary the trust may be prohibitive even if a variation is possible.

For more information please contact James Muir-Little, Partner.

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