Preserving family wealth is uppermost in many families’ minds. Therefore, knowing how structures created to hold family wealth will perform in the event of a family member divorcing is crucial.
Unfortunately, the treatment of trusts on a beneficiary divorcing is to some extent uncertain. The legislation is clear enough: anyone with an irrevocable, fixed interest in a trust (e.g. life tenant/capital remainderman) can have their interest transferred to their spouse or child in the event of a divorce or separation. The terms of ‘nuptial settlements’, be they discretionary or fixed interest, can also be varied to permit a spouse and/or children to benefit. Therefore, trusts that want to remain outside the divorce courts will take care not to be regarded as nuptial settlements. However, this can be difficult to achieve as, if there is some connection between the trust and a spouse to the marriage, in that capacity, the court has shown itself to be capable of some creative thinking if it decides that it needs to find that a trust is a nuptial settlement. There is no statutory definition of a nuptial settlement for these purposes – the matter is entirely caselaw driven, so the boundaries of what constitutes a nuptial settlement are still being explored.
Trusts can also run into trouble if they act as a financial resource for the family, which is often the case, of course, as that is what trusts are meant to do. However, the way in which the trust has been administered can prove decisive. The 2011 case of Whaley v Whaley makes the point. Two trusts were involved, containing funds originally settled by the husband’s father. The wife had never been a beneficiary of either of them and the trustees had no power to add her as a beneficiary. However, the husband was a beneficiary of one and could be added to the second. The husband appealed against being ordered by the court to hand over £3 million to his former wife as he would need a handout from the trusts to meet this demand, yet the trustees would be reluctant to hand over the money to him if they thought it would be passed straight over to a non beneficiary, the wife.
The court was not moved by this argument. It looked back over the trust administration and noted that:
- the father’s letter of wishes was explicit in expecting the trustees to treat the trust assets as though they were under the husband’s control;
- not surprisingly therefore, the trustees had a habit of following the husband's instructions without question; and
- the protectors, whose consent was needed for distributions, had been put into that role because they were ‘wholly supportive of the husband’ and could be relied upon to do his bidding.
The legislative test is essentially whether the trust is likely to carry on acting as a financial resource for the family in the foreseeable future. In this case, past performance was definitely treated as a guide to future returns! The court found both trusts were to be regarded as financial resources.
In the 2013 case of Prest v Petrodel, the Supreme Court declined to find that a company that held family wealth could be regarded as a nuptial settlement. Companies can also be used to hold family wealth in appropriate circumstances (see my 28.8.14 blog: Fed up with trusts? Try a FIC!). If you want to protect family wealth from divorce, the Prest case suggests that FICs have the edge over trusts. Trusts can be vulnerable on two counts (nuptial settlements/financial resource) but FICs are only vulnerable on one (financial resource).