Trust funds in divorce

Many families across Lincolnshire use trust funds to organise and manage land, money and investments. Little thought is often given to consider what happens to the trust fund in divorce.
The biggest mistake that people make about trusts is that if the trust is “Discretionary” then it is out of reach of the divorce courts. This article explains the position as it really is.

What is a trust?

A trust is an arrangement where property is placed into the legal name of one or more people – called the trustees – who must then hold that property for the benefit or use of others – called the beneficiaries.
For example, a farmer might place his or her land into the names of their three children. The documentation tells the three children – the trustees – that they are to manage the asset as they see fit as long as it benefits some or any of the beneficiaries.
The “Benefit” will often mean producing an income for some or all of the beneficiaries or allowing some or all of them to have access to capital or use of relevant land or investments.
Individuals can be both a trustee and a beneficiary.
The person who sets up the trust, called the settlor, can also be a beneficiary.
The trustees are, essentially, the managers of the family wealth. They are responsible for taking decisions as to how it is to be invested, maintaining property and the like – or at the very least instructing fund managers and financial advisers to do so on their behalf.  The trustees can choose to distribute some of the money earned – the income – by the land or investments to the beneficiaries or reinvest it into the pot of money they are looking after.
The managers also have the power to give away some of the core assets they are responsible for. Usually this can be an outright gift or it might be on the basis it has to come back into the pot at a later date.

What is a Discretionary Trust?

Many trusts are said to be “Discretionary.” This means that the trustees are allowed to use their discretion as to whether to pay income or capital to one or more beneficiaries at any time. The trustees will essentially choose whether to pay money out or not. There is no guarantee that one or any of the beneficiaries will get income or capital, how much or when.
When looking at trust funds in divorce, many people fall into the trap of thinking that if a trust is discretionary then it will not be taken account within their divorce proceedings. They think that because there are no guarantees then the trust funds are protected or out of reach.
It would not be surprising if one spouse, who is a beneficiary, tried to convince the other spouse of this in an attempt to ward them off from asking about the trust – that would be a fundamental mistake that lose you many thousands of pounds.
Here are a couple of ways that the divorce courts can and will deal with trust funds in divorce.

What are nuptial trusts and what difference does it make in divorce?

Nuptial trusts are trusts that refer to or mention the married state of one or more of the beneficiaries. (The rules are similar for same sex marriage and civil partnerships as well.)
For example, a trust that is set up so that Trustees can pay income or capital to “Any of my children or their spouse” clearly has a marital aspect to it. The trust would be nuptial regardless of whether or not any of the Settlor’s children were married at the time the trust was set up or not.
If a trust is set up for “Any of my children…” and one relevant child is married at the time and later gets divorced then it is still likely that the court may also find that trust to be nuptial. The assumption is that the settlor knew their spouse was married and intended that a benefit enjoyed by the adult child would also have benefitted their spouse.
This wide ranging distinction is important when considering trust funds in divorce. If a trust is determined by the court to be “Nuptial” then the court can make orders to vary that trust.
In plain English, the court can re-write aspects of the trust, usually in order to divide the trust controlled money between the couple upon divorce.
In a recent case looking at trust funds in divorce, a Judge held that a farming trust should be varied so that it would pay a cash lump sum to the wife and provide a further sum of money for her to buy a house to live in, much to the husband’s and Trustees’ displeasure.

What if my trust is not a nuptial trust? Will it still be relevant to my divorce?

Even if a court finds no nuptial element to a trust then it can still make an order that will affect the trust.
A Judge can make an order against one partner – who is a beneficiary to a trust, even a discretionary one – that would force him or her to ask the trustees for income or capital in order to comply with that order.
For example, a court might order that the entire proceeds of sale of a house should be paid to the non-beneficiary spouse on the basis that the trustees will then, more likely than not, make money available to the beneficiary who did not receive to meet her or his needs.
There would need to be evidence that there was money within the trust to be able to make such payments.
If there is a history of income or capital being paid out previously then that might also make an order like this more likely.
These orders are called as Judicial Encouragement Orders. This reflects that the court cannot vary these non-nuptial trusts directly. Instead, the beneficiary will be encouraged (more like expected) to ask the trustees to make income or capital available instead.

Worried about trusts in divorce? Get expert help.

  • Are you thinking about divorce or separation or know somebody who is?
  • Are you a beneficiary to a trust fund?
  • Does your spouse have a trust fund and are they telling you that you are not entitled?
  • Do you want to know what role family trusts play in divorce?

If so, get in touch with us at Diane Genders specialist family solicitors in Lincoln. All of our solicitors are experienced in dealing with complex matrimonial financial claims. We can help you understand what trusts fund are and how they can impact you and your family not just now but after the divorce as well.
If you have any questions then telephone 01522 516500 or email us here and make an appointment to speak to one of our specialist divorce lawyers.