How Trusts are Treated in Divorce Proceedings

People often assume that assets they hold in trust are ring-fenced from divorce proceedings, however this is not always the case. In divorce proceedings the court will look at everything owned by the parties and seek a fair settlement based on the parties’ needs.

Under section 25 of the Matrimonial Causes Act 1973, the court needs to consider all the financial resources the parties have available to them. This means that you need to disclose if you have a beneficial interest in a trust, as it qualifies as a financial resource. The form where you will disclose this is called a Form E, and you will need to provide details of the trust, such as how much your share is worth and when you would expect to benefit from the trust.

The court will look at many different factors when considering whether the trust is part of the matrimonial pot, such as:

Nuptial trusts are trusts that are connected to the marriage. There is no specific definition of what qualifies as a nuptial trust. However, an example would be if the spouses are beneficiaries the court will likely find that the trust is a nuptial trust. These will be considered by the court as part of the matrimonial pot. The court has wide-ranging powers in relation to nuptial trusts. They may change the terms of the trust, transfer the assets from the trust, change the beneficiaries or appoint new trustees.

Trusts can be either fixed or discretionary. If the trust is fixed, this means that the settlor (the person who created the trust) has identified who the beneficiaries are. Discretionary trusts are more complex. The trustees have discretion to choose from a class of beneficiaries. If the trust is discretionary, the court will need to assess the likelihood of a trustee making a particular decision, and if the court decides that you are likely to be a beneficiary in the near future they are more likely to determine that it is part of the marital pot and/or a financial resource available to you.

You cannot set up a trust to exclude assets from financial proceedings. If the court thinks that you have created a trust for this purpose, they will determine that the trust is invalid. Trusts set up for this purpose are called a ‘sham trust’. Rather than setting up a sham trust to ring-fence assets in divorce, a pre-nuptial agreement or a post-nuptial agreement would be the best way to protect your finances. If you are interested in a pre-nup or a post-nup, please contact our Family team who can provide tailored advice.

If you have any questions regarding how your trust will be treated in financial remedy proceedings, or any other concerns regarding divorce or separation please do not hesitate to contact our family & divorce lawyers on 020 7228 0017.