It’s a matter of Trust…

With distrustful spouses and threats of divorce, it is all too common a question as to how can someone protect any family inheritance from reaching the hands of a divorced spouse? Whilst a Financial Order may be able to resolve this issue by agreeing asset division upon divorce, a Discretionary Trust is the next best solution in the event of a disagreement on assets and inheritance.

What is a Trust?

A “Trust” is a form of Estate planning that dates back to the Middle Ages when Knights would leave their lands to be held by caretakers during their participation in the 11th and 12th Century Crusades.

In the present day, there are far more laws and guidance as to how trusts work and many more reasons to use them. The basic principle of a Trust is that an asset (i.e. money, land etc.) is given to a form of caretaker (Trustee) who will hold on to and manage it on behalf of the person to benefit (Beneficiary). The Trustee therefore holds this property on the “Trust” that they will act in the best interest of any Beneficiary.

One of many common uses of Trusts today is for children who are unable to inherit or own property until they attain 18 years of age.

What is a Discretionary Trust?

A Discretionary Trust is a particular form of Trust that is set up in the same manner as the example above. The specific difference of this type of Trust however is that there are a minimum of two Beneficiaries who do not have an automatic right to any income or capital from the Trust. The Trustees subsequently have discretion to determine how and when the Beneficiaries will receive a benefit.

How do they work?

A Discretionary Trust can be established by deed as part of lifetime planning or incorporated as part of larger form of Estate planning such as within a Will to take effect after death.

The person leaving the asset (Donor) must determine the names of the Trustees who will manage the Trust and identify who will benefit (i.e. family, friends, charities). In order to be a valid Trust there must be at least two Trustees, however there is no limit on the number of Beneficiaries. A Beneficiary can also be a Trustee.

The Trustees will then have full discretion to make payments to any of the beneficiaries as and when they deem appropriate.

The relationship between Discretionary Trusts and divorce proceedings?

Whilst there is a discretion to disclose an interest in a Discretionary Trust when dealing with divorce, how the courts will view the Trust will come down to the powers given to the Trustees and the extent to which they have used their discretion in favour of the Beneficiary prior to the divorce.

If there is a pattern of payment, the courts may infer that the same resources will be available in the future and therefore make it part of financial assessment. Additionally a court may find that the Trustees will use their discretion to make payments if a court order is made. This is described as “Judicious Encouragement” following the 2013 case of KEWS v NCHC.

Whilst a Discretionary Trust will be susceptible for those spouses using them as a vehicle to hide assets, where there is a larger pool of Beneficiaries, such as a long standing family Trust spanning generations, it will be harder for the courts to link the Trust to the divorce proceedings.

These Trusts are often considered to be “non-marital” due to the operation of the Trust taking place before the marriage ever occurred. This was reaffirmed in the 2015 case of Joy v Joy-Morancho & Ors where the judge held that Trusts made in a “non-nuptial” capacity at inception cannot later be changed to “nuptial” in nature. The courts will subsequently only consider these Trusts when the needs of the parties cannot be met out of the shared marital assets of the divorcing spouses.

In summary, a Discretionary Trust provides more protection than direct inheritance and can be used to help protect family wealth. Whilst these Trusts are not untouchable, the nature and management of a Trust will ultimately determine its link with divorce proceedings and whether the family courts will include any benefit held in dividing assets.