If a family trust is connected to your marriage, one of the first questions is likely to be whether it could affect your financial settlement. The answer depends less on who legally owns the assets and more on whether the trust is likely to provide financial support to either spouse, now or in the foreseeable future.

In divorce and financial remedy proceedings, the court must look at the resources available to each spouse when deciding what a fair financial settlement should look like. Those resources can include more than the assets that are actually owned in someone’s name.

A trust can, in the right circumstances, be treated as a financial resource.

If I don’t own the trust assets, how can they count in the divorce?

This is where things can become complicated – If you are a beneficiary of a discretionary trust, you do not usually own the trust assets because the trustees do. You may simply be one of a number of people who could potentially receive money or property from the trust.

That doesn’t necessarily mean the trust can be ignored.

The family court is interested in the resources that are actually available, or are likely to become available, to a spouse. The court therefore doesn’t simply question whether a party owns the trust, rather something along the lines of “if this person asked the trustees for money or capital, how likely is it that the trustees would provide it, either now or in the foreseeable future?”

Simply put, the court have made clear that the focus is on access to resources rather than ownership or control.

What does that mean in practice?

Imagine that your spouse is one of three beneficiaries of a family trust worth £5 million, They might say that the £5 million isn’t theirs, that it’s their parents’ trust and that the trustees decide what happens to it.

That may be perfectly correct from a trust-law perspective. However, the family court may look more closely at the reality of the situation.

For example, they might question things like:

• Who established the trust?
• Who are the beneficiaries?
• Who are the trustees?
• How independent are the trustees?
• Has your spouse received money from the trust before?
• Have the trustees paid for their lifestyle, property or other expenses?
• Has your spouse previously been able to ask for and receive substantial distributions?
• What does the trust deed say?
• Is there a letter of wishes?
• What is the purpose of the trust?
• What is the relationship between your spouse and the trustees?
• How likely is it that the trust would provide money if your spouse needed it?

The court will look at the whole picture rather than simply accepting that something is “in trust” and therefore off limits.

What if my spouse says the trustees would never give them anything?

That’s not necessarily the end of the matter as the court is not necessarily bound by what a trustee says about what they would or would not do.

The court can consider the evidence as a whole, including the history of distributions and the practical relationship between the beneficiary and the trustees. The courts have recognised that a trustee’s stated position is relevant, but not necessarily conclusive.

For example, there is an obvious difference between “I am one of 20 potential beneficiaries and have never received anything from the trust” and “I am the principal beneficiary, I have received substantial payments every year for the last decade and the trustees have historically funded my lifestyle.” – The trust may be described in exactly the same way in both cases, but the implications so far as the divorce is concerned could be very different.

What about a trust set up by parents or grandparents?

Family trusts can be particularly relevant in divorce cases.

A trust established by a spouse’s parents or grandparents may be genuinely intended to benefit a wider family group and may contain significant restrictions on distributions. However, that does not automatically make it irrelevant. Equally, the fact that a spouse is a beneficiary does not automatically mean that the whole trust fund is available to them.

Again, the court has to assess the likelihood of financial benefit in the circumstances of the particular case. For this reason, the precise terms of the trust and the history of how it has operated can be so important.

What if the trust was set up during the marriage?

This can raise additional questions. For example, if matrimonial money was transferred into a trust during the marriage or if a trust has been used to hold what would otherwise appear to be family assets, the court may need to examine the circumstances surrounding the trust very carefully.

In some cases, the issue may go beyond whether the trust is a financial resource and involve questions about the nature or validity of the trust itself.

The courts have also encountered cases involving so-called “sham” trusts or situations where the supposed trust arrangement does not reflect the reality of how the assets are controlled or used. These are fact-sensitive and can become particularly complex.

Does the court have to include the whole value of the trust?

No – There is a spectrum. At one end, a spouse may have an established entitlement to trust property which is effectively their own financial asset. At the other end, they may simply be one potential beneficiary of a large discretionary trust with no realistic prospect of receiving anything. And there are many situations in between.

The court’s task is to assess the financial circumstances realistically. A trust might therefore influence the outcome without the trust assets themselves ever becoming part of the matrimonial assets available for direct division.

Why does this matter when negotiating a settlement?

It can make a significant difference.

Imagine one spouse has £1 million in assets and the other has relatively little in their own name but is a beneficiary of a substantial family trust worth £10 million. It would be too simplistic to say that because the trust is worth £10 million, the parties should divide £11 million. But it could also be wrong to say that because the trust belongs to somebody else it has nothing whatsoever to do with the financial settlement.

The court may take the trust into account when considering the resources available to the beneficiary and, ultimately, what financial orders are appropriate.

Trusts can be complicated and transparency matters

If you or your spouse have an interest in a trust, it is important to identify it at an early stage and consider/take advice upon documents such as:

• The trust deed;
• Any deeds of appointment or variation;
• Letters of wishes;
• Trust accounts;
• Details of previous distributions; and
• Correspondence concerning distributions.

The court’s approach is ultimately one of realism, while still respecting the legal nature of the trust and the duties of the trustees.

The bottom line

A trust is not automatically “off the table” just because the assets are legally owned by trustees. Equally, being a beneficiary does not mean that the trust fund automatically becomes matrimonial property.

The key question is often how likely it is that the trust can provide financial benefit to the spouse, now or in the foreseeable future.This is why, if a trust is involved in your divorce, it is important to look beyond the headline value of the trust and understand how it actually works.

Every trust is different, and the outcome will depend heavily on the trust documents, the history of distributions, the parties’ circumstances and the evidence available to the court.

If a trust may affect your financial settlement, early specialist advice can help you identify the documents and evidence that matter, assess how the court may approach the trust and avoid assumptions that could weaken your negotiating position. Our specialist family lawyers can advise on the interaction between trusts and divorce and help you plan the next steps.