Trusts coming under closer scrutiny by Courts in contested divorces

Trusts coming under closer scrutiny by Courts in contested divorces

In an effort to achieve a fair division of matrimonial assets, the Court is increasingly demonstrating its willingness to scrutinise the beneficial interests of divorcing spouses under family trusts.

A high divorce rate seems to have become the norm rather than the exception in the western world. This reality, and the Court’s determination to achieve fairness on the dissolution of marriage, has generated a measure of uncertainty with respect to the treatment of trusts. In a discretionary trust context, a beneficiary has only a right to be considered in the exercise of the trustees’ discretion and this has shielded beneficiaries on divorce, who had no fixed entitlement to any portion of the trust fund. However, the Court, in divorce matters, is concerned about achieving a fair division of marital assets and increasingly has taken the view that a divorcing spouse’s interests under a trust should be subjected to closer scrutiny.

As a result, the Court will consider any expressed wishes or objectives of the settlor, but will also look at the particular powers of the trustees and how those powers have historically been exercised. A pattern of distributions from trust to a beneficiary, who is a party to the divorce, where the funds have been used and enjoyed by the divorcing spouses, will tend to show that the trust fund is matrimonial property. The beneficiary has enjoyed regular, significant distributions and the beneficiary and his or her spouse, have an expectation that such distributions will continue in the future. A trust established by a previous generation of the family as a “dynastic” trust, may be less vulnerable than one set up upon marriage, by and for the benefit of the divorcing spouses and their offspring. However, there are no definite rules to be applied. The Court will have regard to all of the relevant circumstances and, therefore, each case will turn on its facts.

A trust which is determined to be essentially non-marital will be safe from direct intervention because in such circumstances, the Court has no grounds to order the trustees to take any particular action. Nevertheless, this does not stop the Court from taking the view that the trust has been in the past, and remains, a notional resource to one of the parties to the divorce. On that basis, the Court can award a settlement, the terms of which are such as to necessitate an appeal by the beneficiary to the trustees for resort to the trust fund. In other words, there may be no other way for a divorcing spouse to meet his or her financial obligations without requesting a distribution from the trust. While not subject to the direct authority of the Court, the trustees of the relevant trust have a duty to act in the best interests of the trust’s beneficiaries and would be hard-pressed not to make a distribution where the alternative may be extreme hardship for the beneficiary concerned.

Divorce can mean challenging times for trustees. Tough as it may be in the process, trustees need to remember that they have a duty to act in the best interests of all of the beneficiaries and to be impartial. They need to stay informed, take advice and, where appropriate, seek directions from the court with respect to what information should be produced, when and to whom. Although it may be tempting to consider excluding the divorcing spouse, this is likely to be seen as highly provocative and is unlikely to achieve the desired objective of protecting the trust fund in the long run.