Divorce creates uncertainty and stress for all parties. Where a husband or wife are beneficiaries the trustees will wish carefully to consider the potential impact of any divorce proceedings on the trust and the position that is taken by the trustees.
Often the overwhelming desire for trustees will be to get through the process as quickly and painlessly as possible and, hopefully, with the trust emerging pretty much unscathed. However, what seems like the best solution now can sometimes store up complications down the line.
This article examines the issues that can arise after the divorce process has come to an end, and the steps that can be taken to provide protection to the trustees and the beneficiaries.
When is the end not the end?
Where a financial settlement includes ongoing maintenance payments to a spouse, there remains a possibility of a) a variation in the future, or b) an application to implement a “clean break” through capitalising the maintenance.
Whether a clean break is possible or not will depend on the circumstances. It may be that the capitalisation of maintenance was considered at the time of the divorce but was not affordable or appropriate. However, circumstances can change.
For example, what happens when there is a liquidity event within the trust, or the beneficial class changes (with, for example, the death of a life tenant) or the cost of capitalisation reduces as the age of the recipient of the maintenance increases?
Unless the recipient remarries (bringing the maintenance to an end automatically) there is a real risk that the divorce settlement can be reopened. Crucially, this can be the case whether the beneficiary is meeting the maintenance payments from their own earnings or from trust income or distributions.
This prospect will inevitably be of significant concern to trustees and the beneficiaries of the relevant trust. It should be borne in mind that the process of applying to vary maintenance can be as lengthy and costly as the original divorce – and the outcome is notoriously difficult to predict.
A ray of light?
In the recent case of Mills v Mills, the Supreme Court of England and Wales examined the ability of an ex-wife to vary her maintenance payments.
Mrs Mills had divorced her husband around 15 years ago and she had received the majority of the liquid capital. In the subsequent period, Mrs Mills had purchased a large property (with a substantial mortgage) and made some poor investment decisions.
As a result, Mrs Mills no longer had enough capital to meet her needs, and therefore sought an increase in her maintenance to help fund her rent. The application produced a significant amount of negative press attention in the UK, often featuring the phrase “meal ticket for life”.
Nearly 30% of Mrs Mills’ budget was now going towards meeting her rent. In the meantime, the husband had remarried, and had a 9-year-old son. Although he had little liquid capital, the Supreme Court found his businesses were doing well.
The Supreme Court found that it did not fall to Mr Mills to meet his ex-wife’s income shortfall. Courts in the future will need good reasons to require a spouse in Mr Mills’ position to fund payment of the other spouse’s rent in circumstances where their housing needs have already been catered for through the provision of capital at the time of the divorce.
Where does that leave trustees?
The case of Mills certainly offers some relief to trustees concerned about the risk of financial irresponsibility by a beneficiary’s former spouse, and trustees whose beneficiaries are paying ongoing maintenance.
Nevertheless, the risk of an increase in the annual sum and of a further capital award being made in lieu of ongoing maintenance remain.
What steps can trustees take to mitigate those risks as much as possible?
- Trustees will wish to obtain independent family and trust law advice at an early stage.
- Trustees may need to grapple with questions as to whether they submit to the jurisdiction (and file submissions on behalf of the whole beneficial class) or not, or whether to seek a more limited role (such as providing evidence on specific points).
- Where requests for information and/or documentation start to be received, it may be prudent to seek judicial directions. The views of the other beneficiaries may also be sought (and consideration given to their involvement in any directions application).
- The structure of any financial provision on divorce should be considered carefully, particularly when it comes to housing provision. Does the provision need to be made by an outright transfer or could it be made, for example, within a sub-trust?
- The trustees may form a view as to whether an early clean break is advisable to give certainty to both the trustees and the other beneficiaries. They will also wish to bear in mind the risk of a UK court making a “broad brush” divorce order if inferences are drawn in the absence of an active involvement.
- The potential risk of a future application should be weighed against the cost of an early clean break. Where a recipient of a clean break on a divorce remarries soon afterwards, the paying spouse can feel as though they have “overpaid”, a concern that trustees may also find themselves sharing.
One final caveat, where there are children, even with a clean break there is always the remaining risk of a financially reckless spouse making an application for further financial provision on behalf of a child or children – but that is a topic for another day.
If you require further information about anything covered in this briefing note, please contact Claire Gordon, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, December 2018