Trusts and divorce: variations on a theme of matrimonial trust

English matrimonial law has a reputation for being an unpredictable beast at times. The court has a free hand to redistribute all the assets of either party on divorce, and the fact that property is held in the name of one of them does not matter. That can extend, in appropriate circumstances, to assets that a party has brought into the marriage or has received from their family. That high level of leeway on the part of the court is a unique characteristic of English divorce cases. It is often said that the courts in London are the most generous to the financially weaker party than anywhere else in the world.

There are two points in particular that settlors, trustees and their advisors should be aware of in the event of a divorce by a trust beneficiary (or sometimes even a wider family member who is not). The first is the extent to which trust assets can be considered by the court as a resource of a spouse. The second is the more extreme situation whereby the court can use its “hidden superpower”: the ability, in certain circumstances, to vary a trust.

Trust assets: a financial resource

In assessing what is a fair outcome to a matrimonial case, the court will consider what financial resources each spouse has or is likely to have in the foreseeable future. Beneficial interests under a trust are a financial resource. However, it can be difficult in many cases to assess the extent to which such resources are available in practical terms, particularly in cases where the trust interests are discretionary in nature. Beneficiaries of a discretionary trust will ordinarily have no absolute right to receive any of the trust assets, and instead only have a right to ask the trustee(s) to exercise their discretion in relation to any request for funding. It might therefore be thought by trustees that the decision could be entirely theirs to make without any other considerations. The English court often takes a contrary view.

In such a situation, the court’s task is to determine the likelihood of the trustee acting in a particular way. While the court should not put improper pressure on trustees to act in a particular way, there are a number of cases where the court will second guess what the trustees will do and make orders which effectively encourage the trustees to adopt that approach. Judgments in relation to the point have described this as looking to “the reality of the situation”, the thinking behind this being that if the course of action proposed by the non-beneficiary spouse assumes provision will be made by the trustees for the beneficiary spouse that would not cause appreciable damage to the interests of the trust or other beneficiaries, then a genuine request for the exercise of the trustees’ discretion would be met with a favourable response.

The court will look at all of the circumstances of the case in making such decisions, but there are often blurred lines which can have wider consequences. In theory, the court accepts that trustees retain the responsibility of deciding what is reasonable for the beneficiaries as a whole, yet in practice the court can and will make orders with which it expects compliance to ensure a course of action that it prefers.

The “superpower”: variation of trust

If this does not seem interventionist enough, the court may also make “an order varying for the benefit of the parties to the marriage and of the children of the family or either of them any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage.” In order for a settlement to be variable, it must have a “nuptial” element.  There is no statutory definition of what this means, but cases suggest that the settlement must be “on the parties to the marriage … [which] makes some form of continuing provision for both or either of the parties to a marriage.”

This tool in the family court’s box is potentially very wide ranging, albeit the scenarios in which it can be deployed rely on specific circumstances (and consideration would need to be given to the extent to which the court’s order would be recognised in other jurisdictions). It could allow a wholesale variation of the trust, carving out separate funds for the financially weaker spouse. However, there are more innovative and less obvious uses. In one reported case, the husband and wife lived in a home owned by the husband’s parents. The home was put into trust by the parents (with the husband but not the wife as a beneficiary). The court found that the trust was nuptial in nature and had the intention of providing housing for both spouses. The trust was therefore varied so that the wife was awarded an outright lump sum (to repay the wife for investing capital in the property) and a life interest in a sum equal to half the value of the property.

The courts of England and Wales have a long tradition of considering matters of discretion in their judgments when it comes to both matrimony and equity. Those with trust interests (or those advising them) should always have an eye to the worst-case scenario of couples being entangled within the English court system and take advice at an early stage about the potential ramifications.

If you require further information about anything covered in this briefing, please contact John Davies 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, April 2023