Trusts deeds, structures and assets tend to be complex. Whether it is you or your partner who has an interest in one, you ought to know that they can be included in a prenuptial agreement and they can be considered as part of a financial settlement after divorce or dissolution. This is especially important where you want to ensure that any assets are managed in line with intentions and protected from unnecessary risk.
Samantha Hulse, Partner and Head of Family Law with QualitySolicitors Parkinson Wright, says ‘It is of utmost importance that you seek specialist advice as soon as you know that a trust is relevant to your nuptial agreement or divorce. They can be complex structures to navigate and you really need to be armed with the right knowledge and advice from the outset.’
Identifying a relevant trust
It is important to recognise if there is a trust which is relevant to your relationship, where you or your partner are likely to be a beneficiary. This is especially true where this might be unclear, which is not uncommon with trusts.
A trust is a legal arrangement in which a ‘settlor’ transfers assets to ‘trustees’ to manage on behalf of ‘beneficiaries’. For example, one parent of your partner might have married again and then set up a trust in their will allowing their second spouse to live in the family home until their death, at which point the home would pass to your partner and any siblings.
There are many types of trusts, but discretionary trusts are often relevant because they tend to be flexible when it comes to distributing assets.
Can I protect trust assets via a prenup?
What you include in your prenuptial agreement about any trusts or trust assets will likely dictate how those assets will be divided up if you get divorced. Happily, a prenup can help to protect your interest in a trust from falling into a future divorce pot for division, but there are important factors to bear in mind.
When your prenup is being prepared you will be advised that it has to meet certain criteria to be deemed a qualifying agreement; within those criteria is the requirement for full financial disclosure from both you and your partner, and ensuring your prenup is fair and reasonable. Therefore, you will have to disclose details of any trust you are a beneficiary of, as well as perhaps any trust deed setting out the nature of the trust and your exact interest in it. This is important, as your partner must enter into the prenup knowing all of the relevant facts and figures, otherwise there is room for them to deviate from the terms later by claiming the agreement is invalid, as you failed to make full disclosure of your trust, and so it should not be ringfenced from a divorce.
Whilst it is perfectly possible to protect your trust interests in the prenup, as mentioned above, the terms of the agreement must still be fair. Thus, if your trust interest is the only, or one of the only, assets at the time of any divorce or dissolution, it is unlikely that the court will be able to completely ringfence it from division. However, this will all depend on your interest in the trust and how the trust operates at the time.
How are trusts dealt with in a financial settlement?
During divorce proceedings, the court has broad powers to achieve a fair outcome for you, which can include examining trust assets. The treatment of trust assets depends on several factors:
- Nuptial agreements: the court will consider whether you have a qualifying pre- or postnuptial agreement in place which specifies whether any trusts should form part of your financial settlement and how. As long as the terms are still relevant and fair at the time of your divorce, and the agreement meets all of the criteria, the court is likely to uphold it.
- Matrimonial assets: the court has to determine whether or not a relevant trust is an asset of the marriage, or whether it falls outside of the matrimonial pot. This will depend on factors such as when the trust was created, when you or your partner became a beneficiary, and whether trust assets have been mingled with the marital finances.
- Access to assets: courts may treat trust assets as a financial resource for one of you, potentially reducing the share of the matrimonial assets for the beneficial party as a result.
- Genuineness: courts will look at whether any trust has been created to hide or shield assets from your claims against each other, and may scrutinise them in great detail. This could be time-consuming and expensive if experts are required to advise the court. The court has the power to decide a trust is a ‘sham’ and can ‘break’ it; essentially undoing the ties to expose the assets and include them in your divorce settlement.
What if the court cannot determine who owns trust assets?
Sometimes the court finds that it cannot divide trust assets, perhaps because it has proven impossible to get to the bottom of who actually owns the assets. If so, and one of you receives an income from the trust then that income stream can be used to award maintenance to the other. Therefore, even if the court cannot help with splitting the actual trust assets, it may still be able to achieve fairness by ordering that money coming in from the trust is to be divided up as part of your divorce.
How we can help
If there is a trust which is relevant to your relationship and you are either entering into a prenuptial agreement, or have decided that your marriage is at an end, we can help you to understand how trusts are factored in. Once we understand your goals, we can outline your options and advise you on the best way forward in your circumstances.
For further information, please contact Samantha Hulse or a member of the family law team on 01905 721600 or email worcester@parkinsonwright.co.uk
This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.