Rights to trusts on divorce
What rights and responsibilities do you have to trusts on divorce?
Settlors must be aware that their own divorce or that of a beneficiary of a trust can have important implications for a trust.
If a settlor divorces, the other spouse may argue that the settlor’s placement of any assets into a trust should be reversed. This type of application can only be made where the placement has been made to defeat the other spouse’s financial claim on divorce and, if the placement of assets were set aside, the financial award made on that claim would be different.
A spouse can be both the settlor and beneficiary of a trust. On divorce, the other spouse may argue that the trust should be taken into account as a financial resource. If the trust possesses a nuptial element, the other spouse could also request that the court vary the terms of the trust to create a fair resolution of any financial claims.
A spouse can be the beneficiary of a trust. On divorce, the court may either take the trust interest into account as a resource that can be distributed between the parties or order a variation of the trust if it is deemed to have a nuptial element so as to reach a fair resolution to any financial claims.
A beneficiary of a trust can potentially be adversely affected if another beneficiary divorces. Such a beneficiary can apply to be joined as a party to the financial remedy proceedings of another beneficiary, so as to best protect their own interests.
Trustees must understand the potential implications of the divorce of a beneficiary or settlor of a trust.
On divorce, the court may either take the trust interest into account as a resource that can be distributed between the parties or order a variation of the trust if it is found to have a nuptial element so as to create a fair resolution of any financial claims.
Trustees are not under a duty to make disclosure to the court about the trust. However, if the trustees refuse to respond to a reasonable request for disclosure from a party to proceedings then the court may make take an adverse inference against the trustees or, alternatively, a party may make an application for disclosure against the trustees.
If a spouse applies to vary a trust which possesses a nuptial element, the trustees may be joined to the proceedings as parties (whether by their own application or on the application of another party to the proceedings). Joinder of trustees is not an essential pre-condition before a trust with a nuptial element can be varied, meaning that if trustees elect not to engage with proceedings then an order can still be made varying the trust.
Ultimately, trustees must be guided by the best interests of all of the beneficiaries. The approach demanded of the trustees differs in each case.
Protectors are appointed to oversee a trust. Protectors can be given a range of powers, including the ability to veto payments being made to a beneficiary. When a potential beneficiary of a discretionary trust divorces, for example, a protector could use that veto power to protect trust assets from being taken into account as a resource for the potential beneficiary on their divorce.
Where a spouse is the protector of a discretionary trust and they are also its settlor and within the class of beneficiaries, then there are potential dangers should they divorce. If the trust is a discretionary trust and the spouse has the power to appoint and remove beneficiaries, there is then a risk that the court may find that the spouse has control of the discretionary trust if there is virtually no chance that the trustees would fail to comply with a request for funds from the spouse. The trust assets could then be regarded as a financial resource available for the court to take into account on divorce.