Trusts are a popular way to make sure money and/or property are passed down through the family in the most cost effective way. However, there is no one form of trust, and this means the way they are treated in divorce proceedings differs depending on the type of trust you have. But can a trust protect assets from divorce? Read on to find out more.
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What is a trust?
A trust is a legal mechanism used to preserve and protect assets for certain beneficiaries. The person making the trust is called a “settlor”. When assets are transferred into a trust, the legal ownership is transferred to named trustees who have legal duties to manage and hold them on behalf of the beneficiaries.
What are the types of trust?
There are many kinds of trust, but the most commonly used are:
- Bare trusts: this is the simplest type of trust where the assets are held by a trustee, giving the beneficiary the right to the assets at any time after they reach the age of 18. These kinds of trust tend to be used to hold money for children until they have attained the age of majority.
- Discretionary trusts: these are sometimes referred to as “family trusts” and pay out income and sometimes capital to anyone in a “class” of beneficiaries. This gives trustees more power than a bare trust, although the settlor will usually leave a “letter of wishes” setting out how they want the trust assets and its income to be distributed.
- Interest in possession trusts: here, the trustees must pay any income to the beneficiary as and when it arises.
Are trusts protected from divorce?
It is important to be aware that trusts are not automatically protected from divorce. As part of financial disclosure, if you are a beneficiary of a trust, this must be disclosed. If you are not open and honest about your financial circumstances, any financial settlement could later be revisited and overturned. If you are tempted to put your money and assets into a trust to prevent your ex getting a share of them or to avoid paying spousal maintenance, the trust could be invalidated, and the assets revert into your ownership.
How are trusts dealt with in a divorce?
Although the settlor is not considered the owner of trust assets, if you are the beneficiary of a trust, your interest is likely to be taken into consideration during divorce proceedings. The court uses the following questions to determine this:
- Is the trust a financial resource?
- Is the trust a sham, set up intending to avoid divorce proceedings?
- Is the trust a “nuptial trust”?
How do I know if the trust is a financial resource?
The court will look at various factors in order to establish whether a trust is a financial resource. If the trust is “fixed”, it means that the beneficial interest can be valued. A court will also take into account how and when someone has access to the trust funds. So, if an individual has been in regular receipt of an income from the trust, it is extremely likely it will be considered during the divorce. On the other hand, if there is no sign when the trust assets will become available, the court is much more likely to disregard them.
With a discretionary trust, there is a class of beneficiaries who could inherit, and the trustees will therefore have control over when and if the beneficiaries receive proceeds from the trust. These types of trusts are often used by families because they offer flexibility, such as leaving money to grandchildren who may not have been born at the time the trust was set up.
If someone is divorcing who is part of a class of beneficiaries under a discretionary trust, the court could treat their interest as a financial resource if they are likely to receive the trust assets immediately or in the foreseeable future. If the court decides that a discretionary trust forms part of the matrimonial asset pot, it can:
- Judicially encourage the trustees to make payments to the beneficiary spouse
- Offset the value the beneficiary spouse may receive by granted the other party a greater share of the non-trust assets
- Order a variation in a “nuptial trust” so that the non-beneficiary party benefits
What is a “sham trust”?
A sham trust is set up by an individual with the aim of specifically denying their spouse certain assets upon divorce. If a sham trust is found, the court is likely to disregard it and add any assets into the matrimonial pot for consideration.
What is a “nuptial trust”?
A nuptial trust (also sometimes called a nuptial settlement) can be found if there is a connection between the settlement and the marriage. Trusts set up in preparation of marriage tend to fall into this category, alongside trusts set up to hold the family home. In order to determine whether a connection exists, the court will look at the following factors:
- The identities of the settlor and the beneficiaries
- The time the trust was set up
- The expressed intentions of the trust in a letter of wishes
Trusts that have a broad class of beneficiary are far less likely to be considered nuptial trusts unless the beneficiaries are children of the divorcing couple. The court has wide ranging powers and can change the trustees and appoint new ones, change the beneficiaries, and transfer money from the trust.
How can I protect my assets on divorce?
To be clear, trusts cannot be set up merely to deprive a spouse of assets. However, there may be ways you can still protect your financial interest in the event of divorce.
By setting up your trusts in offshore jurisdictions, such as the Isle of Man, Jersey, or the British Virgin Islands, you could prevent the effect of nuptial trusts. This is because issues relating to offshore trusts must be dealt with according to the jurisdiction laws where they are held. That said, such trusts should not be set up for the sole purpose of defeating any financial claims from your spouse during a divorce.
The most effective way of protecting your financial position is to enter into either a pre-nuptial or post-nuptial agreement. Although they are not legally binding, the courts are increasingly giving weight to such agreements in divorce proceedings.
The information on this website is to be considered a guide and is therefore not legal advice. You use this information with the understanding that Wiselaw does not accept liability for any direct or indirect losses as a result of anyone relying on or acting upon the information on this website. Whilst we endeavour to provide accurate information, Wiselaw does not accept liability for any errors or omissions on this website.