TRUSTS AND DIVORCE

Catriona Syed looks at the often overlooked extent of the jurisdiction of
Family Courts when it comes to divorce and trusts
(taken from Issue No 16 –  July 2001)

 

  1. IntroductionUntil a few years ago, most private client lawyers and trustees (and, indeed, their clients and beneficiaries) were blissfully unaware of the provisions of s.24 Matrimonial Causes Act 1973 (`MCA`). However, recent developments in both trust and divorce law have raised the profile of this section and the need to take into account the possibility (or should it be likelihood, with the current rates?) of divorce.
  2. The purpose of this article is to review briefly the current state of the law relating to the powers of the Courts on divorce and to suggest some practical tips on how to plan against it in trust terms.
  3. The Legislations.24 MCA provides:-
    `On granting a decree of [divorce, nullity or judicial separation] or at any time thereafter ([before or after decree absolute]) the court may make …an order varying for the parties of the marriage and of the children … or either or any of them any ante-nuptial or post-nuptial settlement (including such a settlement made by will …) made on the parties to the marriage.`
  4. At first glance this would seem to catch all settlements whenever made for the husband or wife, but in fact it only applies to `nuptial settlements`. Although this term is construed widely, it does (fortunately for those of us involved in the trust industry!) have its limits. I will consider the meaning of this shortly, but will first look at the scope of the power. The judges of the Family Court have considered their own jurisdiction from time to time. It is no surprise that they believe that they can do almost anything in relation to a settlement, even if to a trust lawyer this appears to be outside the provisions of the section.
  5. The JurisdictionThe case which may most concern trustees is E v E [1990] 2 FLR 233. In that case the court ordered complete resettlement of part of the trust fund (fair enough, although the trust was a Swiss trust with no UK assets) and removed both the Protector and Trustees in relation to that part. Two points should be noted – first, the Court was content that it had jurisdiction over non-UK assets, trustees and protectors. Secondly, had this been an English law trust with English trustees, it seems to make a mockery of the provisions of the Trustee Act 1925 and the Trusts of Land and Appointment of Trustees Act 1996 which deal with powers of appointment and removal. Trustees can be removed in the Family Division even if they have acted with propriety at all timesA common variation is to crystallise an interest which would otherwise be forfeited. This will come as no surprise to most trustees who are aware that it is not possible to set up a protective trust for oneself to defeat creditors. This seems a logical extension (in the context of the divorce legislation).
  6. A settlement must be in existence at the date of decree absolute, even if on that date the interest of the spouse in it has come to an end (Blood v Blood [1902] LRP 78). In fact, in that case the interest of the spouse ended on the day that decree absolute was granted, but the Court still considered that in an application by the other spouse afterwards there was power retrospectively to vary the settlement.
  7. What Settlements are caught by the Section?A settlement is `nuptial` if it was set up in contemplation of marriage. The test is very different from the test for wills, where, to be valid, a will has to be in contemplation of a specific marriage. In the case of an ante-nuptial settlement, it may be sufficient if provision is made for a spouse and issue, if it is likely that the beneficiary will marry. For example, consider a standard accumulation and maintenance trust. This will often give the beneficiary a life interest at 25, power to appoint a life interest to a surviving spouse and then pass capital to children at 21. It could be within the scope of the section, as it clearly contemplates that the beneficiary will marry. If this is the only asset around, then the Courts will look at it very closely, depending upon who has to make provision for whom. On the other hand, the case of White v White [2001] 1 All ER 1 may give settlors more comfort that their wishes will be carried out. This case decided that assets inherited or owned prior to a marriage would not be brought into account when considering what is reasonable provision for the other spouse.By far the majority of trusts are those created automatically by law when two or more people by real property together. It follows that if spouses own the matrimonial home jointly, then there will automatically be a trust. It will be a nuptial settlement within s.24 and the Court has been known to pass one party’s share to the other – Radziej vRadziej [1967] 1 All ER 944.Finally, Young v Young [1961] 3 All ER 695 implies that a settlement has to be created by a document. In theory, however, the trust need not be in writing. From a review of the reported cases, it seems that the Courts have (so far) fallen short of imposing a constructive trust so that they can vary it under this jurisdiction.
  8. A nuptial settlement does not have to be set up by either party to the marriage, and may apply to trusts set up, for example by the parents of a party to the marriage. The term has been held to include marriage settlements proper, traditionally funded by the bride’s and/or groom’s parents (maybe these will enjoy a comeback, but as settlements by the parties, following Catherine Zeta-Jones and Michael Douglas’ example!). It also includes separation agreements, trusts on which life policies are held, as well as the more traditional settlements which we (as trustees or trust advisers) would recognise.
  9. In the case of a settlement set up by either party to the marriage after the event, there is a string of cases which holds that such a settlement will be nuptial. Curiously, it will only be nuptial in relation to the then current marriage, not to a subsequent marriage after the first one has ended in divorce. The second marriage will not (usually!) be in contemplation at the time of the first one.
  10. How can a beneficiary be best protected?So, bringing all the strands together, are there any ways of providing for one’s offspring which will avoid this far reaching provision? The answer is `yes`, but to do so one must avoid setting up a nuptial settlement!On the basis that a settlement is preferable (which it may be, for reasons unconnected with matrimony) then make sure the settlement is not `nuptial`. It is easiest to do this by giving early – well before marriage is an option. Do not make the spouse, widow or widower a beneficiary. Have a wide class of beneficiaries and include power to add (and remove) beneficiaries. Do not make any of the terms of the trust (or the length of anyone’s interest dependant on the duration of a marriage).Even if a trust is bomb proof, this will not always keep funds for the beneficiary and his descendants. For example, a Court could make an order against the beneficiary personally. His personal circumstances may mean that he can only satisfy if the trustees make a distribution in his favour. Most trustees would carefully consider making such a distribution, if the only alternative for the beneficiary is bankruptcy, with the loss of privileges and status which that involves.
  11. Protective and discretionary trusts can give some protection, but it is limited, even ignoring s.24. Re Richardson’s WT [1958] Ch 504 and General Accident etc [1963] 1 WLR 1207 give contradictory judgements as to whether divorce is a determining event for a protective trust. A discretionary trust set up before marriage is contemplated should be safe, it should be remembered that even a discretionary trust set up after marriage by either party (or primarily for one of them) or immediately before marriage is not safe.
  12. One way to do this is not to set up a settlement at all. An easy solution may be to make outright gifts to children. However, this will not achieve the desired result because the Court would then have power to order the child to make provision himself for a divorced spouse.
  13. What does this mean for Trustees?

As usual, the trustees’ only duty is to his beneficiaries. However, it is to all beneficiaries, not just to a person entitled to one element of trust assets (e.g. the life tenant). In the absence of a Court order, the trustees should not be paying capital to a beneficiary to enable him to provide for a divorcing spouse, unless the trustees genuinely believe that doing this is in the best interests of the beneficiary in question. To take any other approach runs the risk of being a fraud on a power.

Trustees are unlikely to be a party to any proceedings at which the question of rewriting the trust is considered. Even if they have notice of such proceedings, it is questionable whether they have any locus standi to appear and be heard. In some cases this means that the trustees are unable to protect the interests of people whose interests will be cut down by an order of the Court. An example would be siblings of a beneficiary who take capital on the beneficiary’s death should he die childless. Ironically, in other cases, this lack of locus standi may help the trustees. For example, if the divorcing spouses are both beneficiaries, the trustees’ duty is to be impartial. This may be difficult if the funds came from the father of one spouse who has a close relationship with the trustees and would not expect them to take a neutral stance.

In short, divorce is always expensive and unsatisfactory. Keeping one’s wealth in trust improves the financial position theoretically if the trust was set up with sufficient distance between it and the marriage. The landmark decision of White v White improves the position for trusts set up by persons other that the parties to the marriage, particularly those set up before marriage. In the case of trusts set up by the parties, there is every chance that they will be rewritten or set aside by the Courts without notice to the Trustees.

Catriona Syed is a partner of Charles Russell of New Fetter Lane, London