Navigating UK divorce: a guide for trustees of offshore trusts

Insight

10.12.2024

In the UK and the USA, between 40% and 50% of marriages end in divorce; wealthy individuals are no exception to these statistics.

The eligibility criteria to apply for a divorce in the English courts are extremely wide (and have widened further since Brexit), which may explain why London is known in some circles as the “divorce capital of the world”.

Given the above, it is not uncommon for trusts established by wealthy individuals (or trusts from which they can benefit) to be dragged into financial proceedings in the English courts. It is therefore essential for trustees, particularly those of offshore trusts, to understand the issues that may arise on divorce and what may be done to protect a trust to the extent possible.

Who can file for divorce in the UK?

The first requirement to apply for divorce in the English courts is that the marriage must have been carried out in compliance with the law of the jurisdiction in which it was celebrated.

Assuming that is the case, divorce proceedings may be brought in the English courts if:

both spouses are habitually resident in England & Wales;
were last habitually resident in the England & Wales and one resides here;
the respondent is habitually resident in the England & Wales;
the applicant has been habitually resident here for more than a year (or more than six months if the applicant is also English domiciled); or
either spouse is English domiciled (even if neither spouse is habitually resident here at the time).

The test for habitual residence is a question of fact as to whether the individual has established a permanent or habitual centre of interest in England. The court will look at a variety of factors, which may include i) motivation for an individual’s presence in the jurisdiction ii) an individual’s employment iii) where children are educated iv) where tax is paid and v) voting registration, among other factors. There is no specific time bar for establishing habitual residence; an individual can theoretically become habitually resident immediately upon arrival, if the factual background supports that analysis.

Domicile is a similar but separate concept to habitual residence and loosely can be defined as an individual’s “permanent home” ie the jurisdiction that they intend to return to at some point in the future, even if they are currently residing in another.

How might a trust be vulnerable in a divorce?

There are broadly three ways in which trust assets might be vulnerable to attack in a divorce scenario:

Nuptial Settlement

If a trust is deemed to be a “nuptial settlement” by the English courts, the court will theoretically have an unfettered and unlimited power to vary the terms of the trust as it sees fit. For example, a court may decide to settle a life interest in a UK property on one of the spouses, provide them with an income entitlement from the trust or form a sub-trust for a particular spouse’s benefit.

A trust may be seen as “nuptial” where it constitutes “some form of continuing provision for both or either of the parties to a marriage with or without provision for their children”. Although the definition of a nuptial settlement has been interpreted widely (eg a family home held within a trust structure), the claimant spouse can still face challenges in persuading the court that a settlement is nuptial, especially in relation to an offshore trust, or a truly “dynastic” settlement. The powers reserved to the court in relation to nuptial settlements are generally seen as a “nuclear option”, if a reasonable result cannot be achieved using other methods. That is even more the case if the bulk of the trust assets lie outside the UK, as the court needs to be realistic about the enforceability of its orders.

Available Resource

During divorce proceedings, a court must have regard to the income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future.

Therefore, even where a trust is not a nuptial settlement and cannot therefore be varied by the court, the court will be obliged to take the trust into account in proceedings if it is a financial resource available to either or both of the parties.

In assessing whether a trust is a resource, the court will examine the factual reality of a situation, rather than just looking at the strict trust terms. For example, if a party to a divorce is a discretionary beneficiary, the court may want to understand what that beneficiary is likely to receive from the trust by considering the nature and frequency of past distributions and any applicable letters of wishes. Even if an individual is within the beneficial class, if it is not intended that a beneficiary will actually benefit from a trust, it may not be deemed to be a resource for them.

If a trust is found to be a resource available to a spouse, a court will generally be reluctant to make orders against trust assets directly or apply improper pressure on a trustee to make distributions. It is more likely that the court will award additional non-trust assets to the non-beneficiary party and expect the trust to “top up” the beneficiary party.

Matrimonial assets

It is possible that assets may be viewed as “matrimonial assets”, even where those assets are held in trust. Where assets are matrimonial, they may be subject to division as part of the financial proceedings during the divorce.

An example of this is where shares in a family business (in which one or both spouses works) are held in trust, or the trust itself has invested in a spouse’s business. Where one or both spouses have had a significant impact on the growth of the business during the course of the marriage, those trust assets may be deemed to be matrimonial assets. Another scenario where a trust could include matrimonial assets would be where the profits from the sale of private equity investments made during the marriage have been settled in trust.

The court may also look into (and has the power to set aside) transactions where the intention was to defeat claims over those assets on divorce, such as where matrimonial assets have been settled into trust.

Does offshore firewall legislation provide any assistance to trustees?

The Hague Convention on Trusts 1985 allowed for settlors to choose the applicable law governing their trust, although the Convention specifically excluded marital rights. This left the usual international conflict of law rules applying to trusts in the context of divorce proceedings and many offshore jurisdictions therefore introduced firewall regimes to plug this gap. These regimes are designed to protect trusts settled in the jurisdiction from being interfered with by foreign judgments, including those of the English divorce courts.

However, the scope of the firewall legislation itself varies from jurisdiction to jurisdiction, as does the rigour with which the legislation is applied by the local judiciary.

Therefore, a thorough analysis of a particular jurisdiction’s firewall regime is advisable when selecting a trust location, together with consideration of the physical location of the trust’s assets as foreign judgments may also be enforced against trust assets directly (for example, under an applicable convention or treaty).

Points for trustees to be aware of

Below are a number of points for trustees to consider in making a trust as robust as possible in the event of the divorce of a principal beneficiary or settlor:

The inclusion of a wide discretionary beneficial class for the trust (rather than the principal beneficiary retaining significant powers to demand distributions) will reduce the risk of the trust automatically being viewed as a resource for that beneficiary.
A robust letter of wishes which sets out who might be expected to benefit from the trust and when may be crucial evidence in the course of divorce proceedings.
There is no one-size-fits-all in relation to information that should or shouldn’t be provided on receipt of an information request by trustees. Among other things, trustees should consider whether that information is of the kind that is usually provided to a beneficiary or settlor.
At times, it may be strategically advantageous for trustees to provide more disclosure rather than less, eg to demonstrate that a trust is not a nuptial settlement or a resource for one or both parties.
The failure of a trustee to cooperate entirely with an information request may result in adverse factual findings against the relevant beneficiary/settlor.
A trustee providing information on request is extremely unlikely to amount to the trust and trustee submitting to the jurisdiction of the English courts. A trustee may even be able to go so far as to make written submissions to the English courts without necessarily being deemed to submit to the courts’ jurisdiction, although specialist advice will be required on this point.
Care should be taken where a family office provides services to individuals in the family and also administers family trusts, as it may be easier for individuals to access sensitive trust information in the event of a divorce scenario. In such a scenario, rigorous data and confidentiality protocols should be put in place in the family office and adhered to.
A well-drafted pre-nuptial or post-nuptial agreement can provide significant protection for trust assets and should always be considered as an option. Other benefits include avoiding depleting trust assets dealing with divorce proceedings and the potential for adverse publicity.
Finally, consideration should be given to participation in non-court dispute resolutions eg private Financial Dispute Resolution hearings (pFDRs) or mediations. As well as often being a more cost-effective and tailored solution to a dispute, FDR or mediations have the advantage of avoiding the risk of publicity associated with court divorce proceedings and details on the trusts/beneficiaries becoming publicly available.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.