Divorce and Trust Funds: what you need to be aware of

  • Posted

A Discretionary Trust is a trust where a beneficiary has no right to either the income or capital of the Trust Fund.The Trustees would normally have complete discretion as to who, within the class of beneficiaries, can receive capital and income.

The class of beneficiaries will be set out in the Trust Deed.They may be defined to mean your children and any grandchildren and any remoter issue there may be.

It might be assumed that as a person is a beneficiary to a Discretionary Trust, because there is no guarantee that a beneficiary will receive any Trust Funds, those Trust Funds will be excluded from consideration when a family court makes a decision as to who receives what marital assets on divorce.

The family court cannot order a Trustee to use their discretion to advance income or capital to a beneficiary.However, if it were that simple, I would not be writing this blog! The court will actually look at the reality of the situation in terms of historically how the Trustees have used their discretion and what the divorcing spouse has in the past received from the Trust Fund.For example, if a beneficiary has received a monthly income from the Trust for several years, the family court may assume that he or she is going to continue to do so, unless there is a compelling reason why not.If the family court makes this assumption, then they may take this income into account when making an order for spousal maintenance against the beneficiary.Similarly, if the Trustees habitually use their discretion to pay capital to the beneficiary upon his or her request, then the court will see no reason why the Trustees would decline to pay capital if requested by the beneficiary in the future i.e. to fulfil a financial order made on divorce.

In addition, particular care needs to be taken when considering whether to create a Trust for the benefit of a person who is married.For example, if as a parent, you wish to set up a Discretionary Trust with your adult child as a beneficiary, you need to think about whether you are actually setting up what is called a ‘Nuptial Settlement’.If the Trust is deemed a Nuptial Settlement, the court has the power to vary it so that your child’s spouse is added as a beneficiary and can receive part of the Trust Funds.

What constitutes a Nuptial Settlement in the eyes of the family court is not cut and dry, as there is no clear definition.However, the family court will be keen to deem a settlement nuptial (and therefore capable of being varied), if other financial resources are limited and the Trust funds are needed to house a spouse and the children of the family.In some cases it will be enough that the Trust has been created for the benefit of one or both spouses, regardless of the reasons for creating it.This should be borne in mind if you are thinking of setting up a Discretionary Trust, but you do not want a beneficiary’s spouse benefitting from it on divorce.Advice should be taken if you are concerned about this possibility.

If you would like any further guidance, please contact Alastair Liddiard in our Private Client team.

Please note the contents of this blog are given for information only and must not be relied upon. Legal advice should always be sought in relation to specific circumstances. Longmores Solicitors LLP are not regulated by the Financial Conduct Authority and are not authorized to provide any form of financial advice.