Case law: Court highlights importance of considering whether assets in family trusts are available on divorce
Spouses setting up a trust should ensure they take advice on whether the trust assets could be taken into account when a court considers a financial settlement on divorce - because the trust is a sham, or for any other reason – following a recent ruling.
This update was published in Legal Alert - October 2017
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A husband set up an offshore trust for the children of his marriage. Around £50 million (the majority of the spouses' assets) had been transferred into it.
He and his wife later divorced. She claimed the trust was a sham, so the trust assets should be available when the court was considering how to divide up their assets for the purposes of a financial settlement.
The High Court identified five 'fundamental principles' when considering whether an act or transaction was a sham, including two main points:
- There must be a dishonest intent. Where documents or agreements are properly and formally drawn up there is a strong presumption that the parties intend to honour them.
- Transactions or documents will not be treated as sham unless all the parties to them (including, in the case of a trust, the trustees) share a common intention that they are not to create the legal rights and obligations they give the appearance of creating.
These are stringent tests to satisfy - even more so if the allegation is that an act or transaction was originally made in good faith, but has later become a sham. Specifically, in relation to trusts, the courts have said that "once a trust has been properly constituted … the property cannot lose its character as trust property save in accordance with the terms of the trust itself, for example, by being paid to or applied for the benefit of a beneficiary in accordance with the terms of the trust deed. Any other application of the trust property is simply and necessarily a breach of trust: nothing less and nothing more".
Here, the Court ruled that the wife had to establish not only that the husband had a dishonest intention when he set up the trust (ie. that he did not intend it to create the legal rights or obligations it purported to create for himself, the trustees or the beneficiaries,) but that the trustees either shared that dishonest intent or were recklessly indifferent to whether or not it had to honour them.
The Court found that the wife had failed to satisfy these tests. However, it is still open to her to claim, for instance, that the trust is a 'nuptial settlement', which can be varied by the court.
- Spouses setting up a trust should ensure they take advice on whether the trust assets may be treated as available when a court is considering a financial settlement on divorce, whether because the trust is a sham, or for any other reason
Case ref: ND v SD and Ors  EWHC 1507
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