Trusts are commonly used to protect family wealth, but they are not automatically protected if a beneficiary divorces. In some circumstances, the family court can treat trust assets as available resources or even change the trust itself, potentially affecting beneficiaries, trustees and wider family wealth.

There are three main ways in which a trust may be “attacked” on divorce: the court may treat it as a financial resource available to a spouse, find that it is a sham, or conclude that it is a nuptial settlement capable of variation.

This article explains when a trust may be treated as a nuptial settlement, how the court can vary it and the practical measures that may reduce its exposure on divorce.

What is a nuptial settlement?

There is no statutory definition of a 'nuptial settlement ', which has left the courts to adopt a very broad interpretation.

In the leading case of Brooks v Brooks [1995] 1 All ER 257, Lord Nicholls described a nuptial settlement as 'one which makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children', which provides a useful starting point.

However, in the later case of Charalambous v Charalambous [2004] EWCA Civ 1030, the Court of Appeal emphasised that a settlement's nuptial character is highly fact-specific.

Therefore, rather than there being a singular test for whether a trust is 'nuptial', judges will consider all relevant factors in each individual case to determine if there is a connection between the trust and the marriage in question. These factors could include but are not limited to:

• When the trust was created and whether this was during or in the contemplation of the marriage;
• The identity of the trustees and their powers;
• The class of beneficiaries and whether that includes one or both spouses;
• The nature and purpose of historic distributions to a spouse;
• The nature, origin and source of the assets held;
• The contents of any letters of wishes.

How can a nuptial settlement be varied?

Pursuant to Section 24(c) of the Matrimonial Causes Act 1973, if a trust is found to be a ‘nuptial settlement,’ the court can make orders to vary it for the benefit of the parties to the marriage and their children.

Generally, the court will only vary a trust if there are insufficient non-trust assets to meet the parties’ respective needs and achieve a fair outcome. This is particularly true when the trust assets are non-matrimonial in nature, meaning they are assets which were acquired prior to the marriage, gifted or inherited during it, and kept separate throughout the marriage.

However, as Munby J noted in Ben Hashem v Al Shayif [2009] 1 FLR 115, ‘The court's discretion under section 24(1)(c) is both unfettered and, in theory, unlimited.’ If a trust is found to be a nuptial settlement, the court therefore has extensive powers to intervene, with potentially serious implications for its trustees, beneficiaries and assets.

The court has exercised its power under section 24(1)(c) to make highly invasive orders affecting the control, beneficiaries, income and assets of a trust. These orders have included:

• Removal of protectors and replacement of trustees;
• Addition or removal of members of the class of beneficiaries;
• Provision of income to a spouse from the trust;
• Transfer of some or all of the trust assets to a non-beneficiary spouse.

What can be done to avoid ‘nuptialising’ a trust?

The potential exposure of a trust on divorce should be considered and kept under review throughout the life of the trust.

To mitigate the risk of a trust being 'nuptialised' and therefore capable of being varied, protective measures should be implemented where possible. This may include:

• Avoiding creating a trust in contemplation of or during the marriage of a beneficiary;
• Identifying the spouses of beneficiaries as excluded persons for the purpose of the trust;
• Preparing Letters of Wishes specifying how the trustees should exercise their discretion in the event that a beneficiary divorces;
• Creating sub-funds which can be earmarked for provision in the event that a beneficiary divorces, so as to ring fence the remainder of the trust's assets;
• Requiring beneficiaries and future beneficiaries to enter into pre- and/or postnuptial agreements with their spouses to protect and ring-fence the beneficiaries’ respective trust interests.

The risk will depend on the trust structure, its history and the way it has been administered. Early advice can help settlors, trustees and beneficiaries identify potential exposure and consider proportionate protective steps before a divorce is contemplated or proceedings begin. Our specialist family law team can advise on the treatment of trusts on divorce and work alongside trustees and private client advisers where appropriate.