Can Discretionary Trusts be Protected on Divorce?

Can Discretionary Trusts be Protected on Divorce?

In the context of financial proceedings both spouses are required to make full and frank disclosure of their respective financial positions. For some parties, the concept of ‘full and frank’ is clear: they must disclose everything they have. For others, it can be more of a selective process. In a number of cases, one party or even both are beneficiaries under a discretionary trust.

Discretionary trusts are where the beneficiaries and / or their entitlements to assets are in a trust fund but are not fixed. They are determined by the person who set up the trust (the settlor). Where the trust is a testamentary trust (i.e. made in a Will), it is common for the settlor to sign a Letter of Wishes which relates to the exercise of the discretion.

With discretionary trusts, the trustees have the power to determine how the beneficiaries will receive payments. It is entirely at their discretion. The trustees can also select what trust property the beneficiaries can or cannot receive.

The Court will look upon the trust as a potential financial resource

So how are such trusts dealt with in divorce proceedings? It is quite common for the beneficiary of such a trust, be it the husband or wife, to say that such a trust should not be taken into account as they have no control over the trustees and, accordingly, have not access to the assets within the trust. The court, however, can take a different view and use what is called ‘judicious encouragement’ to persuade the trustees to exercise their discretion to assist the beneficiary, for example in releasing capital or property held within the trust for their benefit. The court will take into account the trust and look upon it as a potential financial resource. The court also will look at the reason behind the trust being set up, when it was set up and who in fact actually controls the trust (in particular if one of the spouses is not only a beneficiary but also a trustee). Is the anxious spouse simply hiding behind the trust in the hope that the court will disregard it and all of the assets contained within?

What the case law says

The case of Mr and Mrs Whaley addressed this issue. In that particular case, the husband’s father had set up one trust fund with the husband as a beneficiary. There was a second trust set up by the trustees of the first trust to move assets for tax reasons. The first trust fund owned shares in hotel owning companies and the second fund owned a golf course subject to a lease. The husband was not a beneficiary of the second fund. Yet the judge found that its value should be taken into account as the husband could in fact be added as a beneficiary at any time. The husband endeavoured to exclude assets from trust 1 by adding them to trust 2. The Judge took the view that the husband had control over these two funds to the extent that the trustees would do anything he asked them to do. It was not a question of the Judge placing undue pressure on the trustees to act in a manner which they would not have ordinarily done. The Judge was not prepared to simply exclude these valuable assets from the matrimonial pot, despite the fact that they were inherited assets. The wife received 36% of the total pot much to the annoyance of the husband.

Family trusts were also central in the well-reported case of Charman v Charman. The Court of Appeal in this case considered whether trust assets could be considered matrimonial assets. There were two trusts. One was set up for the children worth about £30 million and in which neither Mr nor Mrs Charman had an interest. The Court left this out of the equation.

The second trust, set up by the husband, was worth about £68 million. The husband’s case was that the trust has been set up to benefit future generations and therefore the trust should be left untouched. The Court of Appeal concluded that the trust had to be considered by the Court as a resource available to the husband. He was a beneficiary and if asked the trustees were likely to advance capital out of the fund to him. In effect, the Court said nice try Mr Charman, but when you have £68 million sitting in a fund, it’s not quite the same as  the money you have been saving up in your Christmas club book to splash out on the Christmas turkey.

Although the Court can treat assets in a discretionary or family trust as a resource that is available to the beneficiary, it does not follow necessarily that the other half can claim a share. The Court will look at what the matrimonial assets of the marriage are and divide them in the context of what could be made available to the husband or the wife if they are beneficiaries under the terms of a trust.

Is Cohabitation Grounds for Maintenance to End?

Is Cohabitation Grounds for Maintenance to End?

The payment of spousal maintenance is often a tricky issue in divorce cases. It becomes even trickier when the receiving party, usually the wife, starts to cohabit and the husband feels that it is not fair that he should be expected to continue to support his ex. Is the fact of cohabitation grounds for the maintenance to come to an end and the wife’s claims dismissed once and for all?

As the law stands, if a wife has a spousal maintenance order, it can take the following forms:

  1. A term order i.e. payable until a certain event occurs e.g. when the youngest child has reached the age of 18 or finished their full time secondary or tertiary education, whichever is the later.
  2. Payable on joint lives i.e. until one or the other dies.

All spousal maintenance orders end on the remarriage of the recipient. They do not end automatically by law on cohabitation. A term order can be worded on the basis that, once the term has expired, the wife is barred from applying to extend that term.

It is unusual to find an order that states the maintenance will end on cohabitation as it is unlikely that the wife would agree to such a condition.

Cohabitation may be a catalyst for variation of an Order

The fact of cohabitation can be the catalyst for the husband to ask for the maintenance to be reviewed or indeed terminated. If the wife does not agree to her maintenance ending (which is usually the case) then the husband will have to make an application back to the court for a variation of the original order. The court has to consider all the ‘circumstances of the case’ and the fact of cohabitation has to be taken into account. The court also has a duty to consider whether there should be a financial clean break between the parties.

However, the court has to look closely at the financial circumstances of the new partner and what they ought to contribute to the household. If the new partner is impoverished and has no job then it follows that their contribution is going to minimal. However, the court can infer a notional income based on what it is likely he would be earning if in work. That said, the court has to consider the credibility of the evidence of the earning capacity. There may be an implied criticism of the wife’s choice of partner, but that in itself does not mean that she should be cut loose from the financial support of her former husband.

The case of Grey and Grey (2009) tackled this issue. In brief, the case involved a wealthy couple. The marriage had lasted 10 years and had produced one child. The capital assets were divided equally and the wife was awarded maintenance at £100,000 per year. The husband was not at all happy with the award and appealed citing that the wife was in an established relationship and was cohabiting. The wife denied she was living with her new partner. The husband, undeterred by the wife’s protestations, hired a private investigator whose report concluded that she was living with this chap. No evidence was produced of the partner’s financial circumstances. The husband’s appeal was allowed and as to the nature of the variation the matter was dealt with by the court that made the original order. The court subsequently directed itself to the following questions:

  • were the parties living together in the same household;
  • did they share daily tasks and duties;
  • how long had the parties been in a relationship;
  • was the relationship a sexual one;
  • was there evidence to show that to a third party it was reasonable to conclude that the parties were cohabiting.

In the Grey case the wife’s maintenance was not dismissed. What the Judge did was to increase the child maintenance from £16,500 to £27,500  and reduce the wife’s maintenance by the same amount. The court attributed an earning capacity for the new partner of £16,500. The husband’s earnings at the time of the re-hearing were £1.3 million gross with an expected bonus of £1 million.

Capitalisation of maintenance

On an application for variation the court can consider capitalising the wife’s maintenance i.e. paying her a lump sum to achieve a clean break. If this is an option, first the court would consider whether the original order should be varied downwards and then a formula is used to calculate what would be an appropriate lump sum payment.

In the interesting case of Dixon v Marchant (2008), on application by the husband for a variation he agreed to capitalise the wife’s maintenance in return for  a clean break. The wife said that she was not cohabiting and did not intend to cohabit. However, seven months after she received the lump sum, she married her partner. She said at the time the Order was signed off, she did not expect to re-marry. However, her partner proposed to her out of the blue and she accepted. The Court refused the husband’s appeal and said that the lump sum payment was not contingent upon the wife not re-marrying i.e. she did not have to pay any of it back. The risk of her re-marrying after payment was one the husband had accepted.

This decision may seem harsh on the husband, but then again the court cannot legislate for every eventuality. It is important to remember that at the heart of each divorce case are very personal issues and one size does not fit all.

These are some important points to consider:

  1. Hope that your ex finds a partner who is richer than you.
  2. Consider carefully before cohabiting or re-marrying, if you are in receipt of maintenance.
  3. If you are considering capitalising maintenance, think about including a provision that part of the lump sum should be paid back if the wife cohabits or re-marries.
  4. Find out as much as you can (legally) about the financial circumstances of the new partner.
Is Wealth of Extended Family taken into Account upon Divorce?

Is Wealth of Extended Family taken into Account upon Divorce?

It is not an uncommon situation that the extended family can be significantly wealthier than the couple who are separating. Where the wealth is exclusively on the side of one spouse, surely that must be relevant when it comes to looking at dividing the couple’s wealth between them?

We need at look at different ways in which this might happen for a divorcing couple:

  • It could be that the wider family has been providing regular financial support to the couple, by way of monthly income or regular substantial cash gifts
  • The help from the wider family may have only been available when needed in the past, say to buy or improve a house
  • There may be the expectation or even promise of substantial capital in the future, by way of inheritance

Judge’s starting point

Sometimes, the parents of one spouse can have provided assistance to the couple during their marriage and the other spouse wants to argue that this is likely to continue to be the case, so it should be taken into account when considering how to divide up the capital assets or even when considering any claim against income.

The general starting point for any Judge considering the matter is to say that parents or wider family members can make their own decision as to how to gift their money and the court cannot legally require them to make such payments. So unless the parents are making it clear that any  regular support will continue, or that they are offering to financially help one of the parties to the divorce, for example to get them back on the property ladder, the Judge is not going to assume that they will provide ongoing financial support.

There is a difference between the wider family coming forward to support, which a Judge can take into account, and the family making no such promise or even stating that they will not assist, when the Judge cannot take into acccount. 

Impact of anticipated inheritance

Due to the lack of automatic rights of inheritance under English law, the court will not take into account provision under a Will for someone who has not yet died.  If the person bequeathing the assets now lacks mental capacity, it might be possible for the court to accept that money is to come to one spouse but there is then a question of timing, and whether the funds available will reduce, most usually through care costs.

In the case of Alireza v Radwan and others in 2017, it was argued that the wife’s future inheritance from her father should be taken into account by the court as a resource that she was likely to have in the foreseeable future because she was from a Saudi Arabian family where forced heirship rules apply.

The Judge who initially considered the claim, took into account actuarial tables with a view to establishing the life expectancy of her father, which was assessed at a further 16 years. The initial Judge took the view that the wife’s future resources taking into account her guaranteed inheritance could be used to repay the housing purchased for her and the children, despite it being clear that the husband had sufficient money to fund this for her.

The decision was appealed and the Court of Appeal ordered that the wife should have a further sum to buy a house in her own name outright, even though there was a guaranteed inheritance.  Part of the court’s thinking was a need to respect the wife’s autonomy and not leave her in the hands of a series of men, financially reliant on her husband, then her father.  The Judges took the view that the wife should be provided for, to give her financial independence from the resources of the marriage rather than a future inheritance. 

This case gives a clear signal to couples that it is unlikely to increase one person’s share of the family pot, by pointing to what might (or even will be) coming to the other spouse from  their wider family.  Unless there are nuptial trusts that are capable of being varied, the court has to work with the income and capital that the parties have, not what they might have in the future.

Family Breakdown: What are my Rights?

Family Breakdown: What are my Rights?

What are my rights? This is the question most people caught up in family breakdown ask their solicitor.  They are often quite frustrated at the answer!

That is because the response they will get is that it is quite difficult to say, particularly when the breakdown of the relationship is very recent and it is not clear what view the other partner to the relationship may have.  The system for dealing with any dispute arising out of family breakdown in England and Wales contains a large amount of discretion.  This means that – for the many couples who sort matters out for themselves away from a court – they have the freedom to arrive at solutions that suit their family but, if claims need to go before a Judge, it can be hard to predict the outcome.

Children

The first point to emphasise here is that it is not the parents who have the rights, but the child.  The child’s welfare is the court’s paramount consideration and, following a provision inserted in the Children Act in recent years, the court will presume unless the contrary is shown that involvement of a parent in the life of the child concerned will further the child’s welfare.  So it would be better to say that it is (almost) the right of the child to have a relationship with both parents, where it is safe to do so.  There is not a minimum or maximum amount of time that a child should or must spend with a parent and any judge or magistrate looking at the matter will be influenced by how the child spent time with each parent before the relationship breakdown and since, and the practical arrangements for the child to move between the two households and how that impacts on the child.

In the early days of a family breakdown there may still be a number of unknown factors that have to change over time to accommodate the reality of two households, e.g. a change to working hours or more involvement of paid childcare.  The experience of a family solicitor means that we have helped couples through this before, we know the questions that need to be considered to help each family come to solutions that fit different stages of the journey through separation.

Finances – married couples

For married couples, the first step is to direct them to the actual law.

Section 25 of the Matrimonial Causes Act sets out what any Judge has to consider when being asked to deal with a couple’s finances on divorce.   This is where any solicitor will start.  The first consideration is to the needs of any children of the family and then to the needs of each party and the resources available to them to meet those needs.  It is at this point that we often have to stop and take stock, because often not everything about the finances of both parties is known to both.  We cannot give a clear idea as to the final picture if all the pieces of information are not known.

Also within the s25 factors are the length of the marriage, the age of the parties, any health issue and any contributions that either has made.  This last point is taken against the background that each spouse is assumed to have contributed equally in that the role of the breadwinner equates to the role of the homemaker, so really the section is looking for unmatched capital payments from one spouse alone.  Again one person may not have a clear idea what might be alleged by the other to be their own particular contribution.

Finances – unmarried couples

For unmarried couples, the position is quite different.

Unless there is a property or other asset quite clearly held in joint names, then cohabiting couples start from the point that they have no claims on anything owned by the other party.  To make out a claim against an asset owned solely by the other partner is often quite hard to do and much will depend on supporting paperwork and evidence of discussion between the couple.  Most people do not have that to hand when they first meet their solicitor.

There is no obligation on one partner from a cohabiting relationship to provide maintenance to the other although, if there are children, all claims for child support remain unaffected.

What are my rights if I leave the property?

This might be an easier question to answer at an initial appointment because:

  • If you are a joint owner of your home, that remains the position whether or not you live there and your claims both to return to occupy and to the money the property represents remain. However, there are a number of things to consider in moving out and you should never do this without having discussed it in advance with your solicitor
  • If you are married but are not the property owner, you can enter a notice of your rights against the family home as a spouse
  • If you have children, and hold parental responsibility for that child, you can move out with the child but this could lead to an urgent court application for the return of the child, so again this is something that should be considered carefully with your solicitor and, save for case of domestic violence, the other parent needs to be informed as to the location of the child.

Whilst the question ‘What are my rights?’ may not be quite the right question to ask, it is an understandable starting point and gives the way in to your solicitor to give you guidance as to your options and the next steps you need to take, even if at that first or even second meeting we cannot give you all the answers.

Financial Provision in Divorce Cases

Financial Provision in Divorce Cases

Following on from the cases of Miller and McFarlane, the Courts rely upon the 3 principles of needs, sharing and compensation when deciding upon the allocation of financial assets in divorce cases.  Each principle is considered in every case but in the majority of cases it will be the needs of the parties which will be the driving factor determining how the financial pot is shared between the parties.

What do needs mean in practice?

A Court must take into account the reasonable needs of the parties and how they can be met from the available capital of the marriage. The most obvious needs are for a home and an income stream. At an early stage of the divorce process the needs of the parties must be assessed and this is done in the context of the assets of the marriage. In some cases the assets of the marriage are such that the needs of the parties can be met by those assets being split equally between the parties. In other cases it may be that the primary carer of any minor children will need a bigger slice of the cake in order to meet additional needs e.g. for housing.

The concept of reasonable needs is viewed in the context of the lifestyle the parties have enjoyed during the marriage. The Court will take into account the standard of living the parties enjoyed during the marriage and whether that standard can be maintained post divorce. It can be the case that standards enjoyed during the marriage may have to change. One may find in the post divorce apocalyptic dawn that one has to drink Cava instead of Bollinger.

A major point to make and one which can be difficult for clients to grasp is that, if a case goes to Court, the District Judge will have very wide discretion to decide how the assets of a marriage should be divided. You may get different opinions from different Judges. The old joke ‘a good lawyer knows the law, a great lawyer knows the judge’ is true to some extent as you can gauge from previous experiences how Judges will deal with cases. This may all sound a bit arbitrary but, although there is no set formula, there are guidelines that the Court has to take into account. These include for example the age of the parties, the length of the marriage, the contributions that each has made to the marriage (including any future contributions) and the earning capacity or lack of it.

The foremost consideration is the welfare of any minor children and the Court will want to ensure that any division of the assets makes reasonable provision for the primary carer to look after the children and to have sufficient income to do so.

What does sharing mean?

Following on from Miller and MacFarlane, the Court has stated that sharing should not only mean sharing the capital assets of the marriage. The House of Lords referred to sharing ‘the fruits of matrimonial endeavours’. A couple commit themselves to the marriage and as a result should be treated as equal partners in the marriage and thus, when the marriage ends, the fruits of that marriage should be shared.

So what assets can be shared?
All of the assets of the marriage are taken into account whatever their provenance i.e. whether they were acquired pre-marriage or post separation. Everything in the first instance goes into the melting pot. If it is feasible to ring-fence inheritances or pre-owned assets then they can be left to one side. If, however, the needs of the other spouse would be severely compromised by simply having a share of the matrimonial assets and their needs would not be reasonably met, then the other assets have to come off the bench and go into the mix. This was the situation in the case of YvY (2012) where Mrs Justice Baron awarded the wife a lump sum of £8,738,000. The award represented 32.5% of the net assets of the marriage and left the husband with £18 million. It did, however, invade the husband’s inherited wealth which formed the bulk of the family assets.  The Judge acknowledged that the assets were non-matrimonial but that in “… the ordinary course, this factor can be expected to carry little weight, if any, in a case where the claimant’s financial needs cannot be met without recourse to this property”.

I have dealt with a number of cases where discretionary trusts feature. It is important to be aware that a beneficial entitlement to a discretionary trust will not simply be ignored. Disclosure has to be made of the Trusts in question and any Letters of Wishes. Questions can be put to the Trustees concerning releasing funds and the Court can give ‘judicial encouragement’ to the Trustees to release money to the beneficiary where needs dictate. It is a resource that is available and cannot be ignored even if the funds are not necessarily readily available.

As mentioned, the principle of sharing does not stop with capital but extends to income. There is a case to argue that income resulting from work carried on during the marriage should continue to be shared if the needs of the parties are similar. Income is shared generally through spousal maintenance. This can often be a thorny issue especially if one party wants a clean break. The Court has to consider in each case whether a clean break is appropriate. If not, then spousal maintenance will be payable either on a joint lives basis or under a term order.

What does compensation mean?

The Court recognises that one spouse (usually the wife) may have given up a career to care for children or to support her husband in his career. She has therefore placed herself in a relationship-generated disadvantage in relation to her earning capacity. Even if the wife under the needs heading has had her needs met by the Court settlement, she will still be at a disadvantage in earning an income in the future and the question may arise as to whether she should benefit from any future surplus income the husband may generate. The Court in the McFarlane case said that, as an equal division of the capital did not meet the reasonable needs of the wife, she should benefit from the future earnings of the husband and she was awarded a joint lives maintenance order to meet her future needs and to compensate her for her own loss of income.

It is important to remember that each case turns on its own facts and no case will have the same outcome as another. Clients will bring to the table their own stories, fears, concerns and expectations. So if you have any queries, please get in touch.