Asset Protection and Trusts in Divorce

Kaleel Anwar (partner) and Claire Higham (associate partner) in our Family Law team have written the below guide to help you understand some of the key issues concerning asset protection and trusts in divorce.

The role of Trusts in asset protection relating to divorce

Trusts can play a significant role in protecting certain assets from division in financial remedy (divorce) proceedings.

They are often used to safeguard family wealth, particularly in situations where there is a desire to preserve assets for future generations and protect them from potential legal claims.

The effectiveness of a trust in providing such protection in a divorce context will depend on the relevant facts and background circumstances regarding the trust (including whether it has been a ‘resource’ during the marriage), as well as its type, structure, and purpose.

Different types of trusts include:

• Discretionary trusts: These are among the most commonly used trusts for asset protection. In a discretionary trust, the trustees have the power to decide how and when to distribute income or capital to the beneficiaries. This flexibility can make it more difficult for a court to treat the trust assets as a financial resource of a divorcing party, as the beneficiary does not have an automatic entitlement to the assets. However, if the court determines that the beneficiary has a realistic expectation of benefiting from the trust, the assets may still be considered.
• Bare trusts: In a bare trust, the beneficiary has an absolute right to the trust assets. As such, these assets are generally more likely to be treated as part of the beneficiary’s financial resources during divorce proceedings.
• Life interest trusts: These trusts provide a beneficiary with the right to receive income from the trust assets during their lifetime, while the capital is preserved for other beneficiaries. The court may consider the income stream as a financial resource, but the capital may be protected depending on the trust’s terms.
• ‘Dynastic’ trusts: These are typically established to preserve family wealth for future generations. If the trust is genuinely dynastic and benefits a wide class of beneficiaries, the court may be less inclined to treat it as a resource available for division.

The effectiveness of a trust in protecting assets also depends on its governance and the independence of the trustees. Trusts that are properly established for legitimate purposes are more likely to withstand scrutiny. Conversely, trusts that are held to be shams or created with the intention of avoiding financial obligations on divorce will not.

Are Trusts considered during divorce proceedings and in divorce settlements?

Yes, trusts are considered during financial remedy divorce proceedings and settlements in England and Wales. The central information document in the process, known as a Form E, even makes specific reference to trust resources.

The family court has the power to treat trust assets as a financial resource of a party if they are a beneficiary and entitled to receive income or capital from the trust. This is particularly relevant under a key section  of the Matrimonial Causes Act 1973 (MCA 1973). The court’s approach will depend on the type of trust and its purpose. For example, if the trust is a ‘nuptial settlement’, the court may vary it under the MCA 1973. This means the court can redistribute the trust assets to achieve a fair financial settlement.

For example, if a trust was created to provide financial support to a spouse during the marriage, it is likely to be considered a nuptial settlement. Similarly, if a trust was established to hold a matrimonial asset, such as the family home, it may also be classified as a nuptial settlement. However, if the trust was created for a purpose unrelated to the marriage, such as preserving family wealth for future generations, it is less likely to be deemed a nuptial settlement.

In the case of discretionary trusts, the court will assess whether the beneficiary has a realistic expectation of benefiting from the trust. If the trustees have consistently exercised their discretion in favour of the beneficiary during the marriage, the court may treat the trust as a financial resource. Conversely, if the trust is genuinely discretionary and benefits a class of beneficiaries, the court may be less inclined to include the assets held within it as part of the matrimonial ‘pot’.

Protecting Assets in Divorce

To protect assets from division in a divorce, careful planning and independent, professional advice are essential.

The following can be considered with your professional advisers, though it should be noted that all would be disclosable and scrutinised in family court proceedings:

• Pre- or post-nuptial agreements: These agreements can set out how assets, including trust assets, should be treated in the event of a divorce. Courts in England increasingly give weight to such agreements, provided they are fair and entered into freely by both parties.
• Trust structure and governance: Ensuring as far as possible that the trust is not a nuptial settlement and that trustees are independent from the beneficiary can provide an additional layer of protection. The trust’s purpose and the independence of its administration are critical factors.
• Family Investment Companies (FICs): FICs have grown in popularity in recent years, and are typically used as a long-term planning tool for high-net-worth families. The corporate ‘veil’ is less likely to be pierced if the FIC is set up for legitimate purposes, such as wealth preservation or tax efficiency, and where the relevant spouse does not control the FIC.
• Timing and purpose of the trust: Establishing a trust before the marriage (including pre-marital cohabitation) and for a purpose unrelated to the marriage can reduce the risk of it being classified as a nuptial settlement.

It is important to note that while these and similar measures can provide a level of protection, the court’s overriding priority is fairness. Likewise, an ongoing obligation of full and frank disclosure regarding all financial resources applies to both parties in a divorce. Therefore, no structure or asset is immune from scrutiny or being considered as a matrimonial resource.

It is also important to bear in mind that the family court can deal robustly with any attempts to defeat or minimise one party’s financial claims on divorce. Such powers include freezing orders, which can be made on a ‘worldwide’ basis.

Get in touch

Kaleel Anwar is a Partner in the Family Department, specialising in complex cases involving multi-million-pound businesses, pre/post-nuptial agreements with international elements, and Islamic sharia family law.

Claire Higham is an Associate Partner in the Family team. She handles a wide-ranging caseload, including complex and sensitive children disputes as well as high-value financial matters.

If you are looking to understand more about your legal position on divorce, contact one of our expert family law solicitors today on 0330 111 3131 or via our online enquiry form.