Trusts for children less vulnerable on divorce - Everyday Law Spring 2008

13 March 2008

The recent Court of Appeal decision in the case of Charman resulted in the different treatment by the Court of two family Trusts that Mr Charman had set up.

The Court decided that the Trust which had been set up purely for the benefit of the children, would be excluded from the matrimonial assets but the Trust in which Mr Charman retained an interest, by being a potential beneficiary, would be taken into account.

Previously, even when the provider of the funds was a third party, such as a parent of one of the spouses, the courts had been adopting a robust attitude towards the availability of trust assets where one party was a beneficiary.

Awards had been explicitly based upon an assumption that, with appropriate "judicial encouragement", a family trust would assist a discretionary beneficiary who has been deprived of all their own assets by the divorce court.

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.

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.

Anyone considering creating a trust where they have concerns about their own or their offspring’s marriage, should consider the following points: -

1. 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. Alternatively, if the creation of the trust was improvident in the context of the family's overall finances, the assets can be added back to a spouse's notional assets, when    deciding how to divide the remainder.
3. Trusts set up by third parties prior to or during the marriage can be varied 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.
4. 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.
5. 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.
6. 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 more likely to order an unequal division.

For more information please email James Muir-Little

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