Is a Trust Protected from Divorce?

Family law solicitor Carol Toulson examines how the courts approach trusts during divorce proceedings, including the treatment of nuptial, intergenerational, offshore and discretionary trusts.

Trusts are often used as part of wider estate and wealth protection planning, and many people assume that assets held in a trust are automatically protected from divorce. However, this isn’t always the case.

A trust is a separate legal entity for managing assets. Being a Beneficiary of a trust does not mean you own the assets. However, Trust assets are not automatically excluded from divorce. Whether they are likely to be considered as Matrimonial assets to be divided on divorce, depends on a number of factors.

What Factors Will the Court Consider?

The court will carefully consider the following:

• What are the terms of the Trust.
• What is the nature of the assets.
• Was the trust established before the marriage for the benefit of one spouse or was it created during the marriage and both spouses benefited.
• What was the intention for setting up the trust, for example to protect family wealth.
• Does one spouse have control over the trust and can access its assets. Have the assets have been used to fund the family’s lifestyle.
• Are there other beneficiaries and what are their expectations of benefitting from the trust

How Different Types of Trusts Are Treated on Divorce

Nuptial trusts

If a trust is considered to be, “nuptial”, a court is likely to consider it is part of the matrimonial assets to be divided.

While there is no legal definition of a nuptial trust, a court is likely to consider a trust is  “nuptial” if it is connected to the marriage and the spouses are the beneficiaries. For example, a married couple that set up a trust for the benefit of themselves and their children would be considered a nuptial trust.

If the court finds that a trust has a ‘nuptial element’, it has wide powers to vary such settlements and all assets held in it, including varying the beneficiaries, altering the terms of the trust to achieve fairness or transferring the assets to a spouse. The court’s powers don’t extend to creating a new settlement or varying a trust that isn’t deemed to be nuptial. 

Intergenerational trust

An intergenerational trust is used to benefit the current and future generations of a family and is often set up to ensure assets remain within the family. For example, one spouse may benefit from a trust set up by their grandparents.

Intergenerational trusts are usually considered not to be a matrimonial asset to be divided. Sometimes, however, the trust may have provided large sums to a beneficiary funding or contributing towards the lifestyle of the parties. If there are insufficient monies in the matrimonial pot to meet one spouse’s needs, then the court may make an order against the trust beneficiary on the assumption the trustees will fulfil that order.

Offshore trust

With a trust held offshore, it is important to take specialist advice as many foreign jurisdictions, such as Jersey, the Isle of Man, the Cayman Islands and the Bahamas insist that trusts set up in their jurisdiction must be determined in accordance with their laws. This means that although a UK court may make an order there could be issues in respect of enforcing the same.

Sham trust

Sometimes it is argued, a spouse has set up a trust with the intention of reducing their assets because of the divorce.  If a court considers this is correct and a trust has been  set up deliberately for the purpose of avoiding claims on divorce, the trust could be considered a sham trust. The court can then disregard it completely and the spouse’s interest considered as if the assets in the trust belong to the spouse completely and can therefore be included in the divorce.

 If the Trust is Nuptial, a court have wide ranging powers. If a Trust is not a nuptial trust the court powers are more limited, but the court still has options as follows:

“Judicial Encouragement” orders

If a court does not have jurisdiction to vary the non-nuptial trust assets directly, the court can give “judicial encouragement” to the trustees to provide funds in the following ways:

“Backfill” case” - The court may order an unbalanced division of personal assets in favour of the non-beneficiary spouse expecting that the beneficiary spouse will draw on the trust to meet future needs.

“Fresh money” cases - Where there are insufficient assets to meet needs, a court can award a lump sum to the non-beneficiary spouse, beyond the personal means of the beneficiary spouse, expecting the trustee will provide the ordered funds.

How Can You Protect Trust Assets from Divorce?

Trust assets should be regularly reviewed alongside other wealth protection measures such as pre-nuptial and post-nuptial agreements. If you wish to protect assets from divorce or relationship breakdown it is always best to plan ahead. Please contact our specialist family solicitors for expert advice and legal guidance.