Whether for tax-planning purposes or futureproofing your hard-earned finances, trusts are powerful tools. But when you’re going through a divorce, what does that mean for your trust and what’s contained therein?
Many wrongly assume that because a trust is a separate legal entity, everything is ringfenced during divorce proceedings. Sadly, it’s not that straightforward, and this is why people who enter into divorce without seeking professional advice often make catastrophic errors.
In this guide, we discuss how trusts are treated for divorce purposes and whether you could be entitled to factor in your ex-partner’s trust while dividing your assets.
Types of trusts to consider in divorce proceedings
Not all trusts were created the same. As you may know, there’s a range of different setups and purposes where a trust might come into the equation. Although the popularity of trusts has declined due to recent changes in tax law, there are still at least 733,000 trusts and estates registered with the Trust Registration Service (TRS).
Here’s a breakdown of the types of trusts that might be used in divorce proceedings:
· Discretionary Trusts – Trustees decide who receives what from a class of beneficiaries. Courts look into the likelihood of a spouse receiving funds, rather than a guaranteed right, which is why they’re popular for asset protection.
· Nuptial/SettlementTrusts – Created during or before the marriage for the couple themselves. Since they’re linked to the marriage, these are often incorporated into the final division.
· Family Trusts – Also known as intergenerational trusts, these are designed to pass wealth through the generations. Generally, courts respect these, but they can be looked at if they’ve been used to support your lifestyle during the marriage.
· Bare Trusts – Bare trusts are usually treated as belonging to the beneficiary, such as if they’re designed for a child over 18.
· Life Interest Trusts – One person receives an income for life, with capital going elsewhere later. In some cases, they can be considered to be a financial resource that courts can draw upon.
Offshore trusts also come into play, despite the increased difficulty in accessing them. Courts will use every power at their disposal if it’s believed one party is using an offshore trust to hide their assets while going through a divorce.
What information will you have to provide about trust assets in a divorce?
Judges are entitled to consider trust assets as financial resources during divorce cases per the Matrimonial Causes Act 1973. If you’re benefiting from a trust, you must provide full financial disclosure.
You’ll state the value of the interest and when it’s accessible in your Form E. Some of the core documents you’ll need to provide include:
· Trust deed
· Letters of wishes
· Financial accounts
Note that this doesn’t mean the trust in question will be dragged into the pool of matrimonial assets. The goal is to determine whether it’s a viable financial resource and whether it’s a matrimonial asset.
How does the family court treat trust assets in a divorce?
Trusts aren’t a straightforward issue because they’re not automatically considered to be marital property. Any judge will approach the issue cautiously, but are more likely to take the trust into consideration when determining the settlement if the proceeds have been used to benefit your ex-partner or to support your marital lifestyle.
For example, it might be considered matrimonial property if you were drawing from the trust to cover your mortgage repayments. What happens next really depends on when the trust was created, what its purpose was, and whether your ex-partner was a beneficiary or trustee.
If we examine the key factors, the Family court is going to look at:
· The type of trust.
· Whether it was set up during the marriage.
· Whether your ex-spouse benefited from it.
· Whether your ex-partner had any control over it.
· How the trust’s assets have been used (if at all).
· Any other beneficiaries from the trust.
Trusts created during the marriage are far more vulnerable to division during divorce. The Court can order the capital or income to be used as a provision to support your ex-partner or your children.
On a side note, the court will also check the validity of the said trust. If it’s believed the trust only exists to hide assets from a spouse, also known as a sham trust, the court does have the power to disregard it entirely.
Are you entitled to your ex-partner’s trust in a divorce?
You’re not automatically entitled to your ex-partner’s trust. The Family Court can treat the trust as a financial resource if it’s been used during the marriage for the benefit of the marriage. Likewise, they can also factor it in if you’re a beneficiary or a trustee.
Don’t assume that all assets from each side are divided equally. One study found 30% of the public assumed marriage assets are split down the middle, but the reality is far more complex than that. It’s not the goal of the court to split everything down the middle, but it is the goal to ensure a fair financial settlement that supports each party as they move on with the next chapter of their lives.
In short, trust money can be used to meet your needs in the absence of other assets. The issue is that it depends heavily on the trust’s terms, its history, its type, its use and the overall context of your divorce.
Challenging a trust during a divorce
Can you challenge a trust when you’re working out your divorce? The answer is yes, but you need sufficient grounds.
Three grounds usually lead to a challenge:
1. Sham – It’s a fake trust designed to hide assets.
2. Nuptial Settlement – The trust was created for the marriage and so should be divided by the court.
3. Financial Resource – It has been used or has a high likelihood of being used by you or your spouse if asked.
It’s then down to the court to scrutinise how the trust works and the intent behind it. By far, the most common grounds are nuptial settlements and financial resources because proving a sham trust is hard. And in cases of sham trusts, there are usually allegations of fraud, with a high burden of proof attached.
Generally, the complexity of trusts and challenging a trust means it’s not something you can realistically manage by yourself. In these cases, it’s crucial to consult a professional divorce solicitor from VM Family Law to unpick the web, establish your arguments, and lead you through the legal process.
If you’re dealing with a trust as part of your divorce, don’t hesitate to contact us for your free consultation today.