Breakdown of Trust

August 9, 2021

Breakdown of Trust

If a trust would be a nuptial settlement (e.g, it is connected to the marriage), it will be evaluated during the divorce process. The concept is broad and may include trusts established previous to the marriage. The Court has the authority to modify a nuptial settlement in order to reallocate assets for the advantage of the non-beneficiary spouse and the family’s children.

Even if a trust is not regarded a nuptial settlement (as is the case with a dynastic trust), it might nonetheless be considered an asset. When a divorcing spouse is a beneficiary, the Court will want to know how much the trust has historically provided for the spouse ).

A history of regular disbursements to a divorced beneficiary paints a picture for the Court, which can conclude that these transfers will continue despite trustees’ opposite indications. Similarly, the Court may presume that a comparable request from the divorced husband will be granted based on prior distributions to other beneficiaries.

The trust’s purpose, its long-term ambition, and the circumstances surrounding its establishment will all be significant considerations for the Court. The letter of wishes and any previous letters are available for inspection. Trusts established to hold damages received by a claimant in a personal injury or medical malpractice case may still be considered when dividing assets during a divorce.

The Court will want to investigate the nature of the losses; for example, it will be simpler to argue that the trust assets should not be invaded if they were designated for cost of care, which is a component of the beneficiary spouse’s needs, rather than cash received for general damages.

Finally, in divorce cases, ‘needs’ will prevail, and the Court will not hesitate to impose an order compelling the beneficiary spouse to pay a portion of the funds kept in a trust in order to pay the non-beneficiary spouse if the Court has the authority to do so.

Offshore trusts

The Court’s jurisdiction may include offshore trusts. Just like with English as well as Welsh trusts, the Court may compel trustees or non-party recipients to participate, obtain disclosure from the trustees, and, if the trust is deemed nuptial, make orders against the foreign trust, including variation powers that may extend with making outright provision to an applicant. However, the jurisdiction wherein the trust, as well as its assets, are located will be significant.

If both the trust and its assets are located outside of the United States, the Court is unlikely to impose a variation order unless it is convinced that the order will be enforced by the Court exerting effective authority over the trust. Numerous offshore jurisdictions have asset protection/firewall legislation in place to safeguard trust assets from foreign court rulings. When this is the case, the Court may not employ its powers, recognizing the likelihood that any order will be enforced.

Requests for information

Trustees, whether onshore and offshore, may be approached by beneficiaries seeking assistance in complying with divorce-related court requirements, which must be balanced against the obligations owed to all beneficiaries. When considering voluntary requests for information or help, foreign trustees should take care not to violate any local legislation in the nation in which the trust was founded.

If the Court deems it necessary, trustees can be added as parties to divorce proceedings, allowing for direct enforcement of orders against the trustees. This may occur, for example, when trustees refuse to cooperate with inquiries and the Court requires additional information that the trustees can supply.

An order for joinder does not bind a foreign trustee in the case of offshore trusts unless the trustee agrees to English jurisdiction or the Court has jurisdiction over the trustee.

Accepting the Court’s jurisdiction

It is critical for any trustee to carefully assess whether to accept the English jurisdiction. If it is evident that the trust will not be a source of financial gain for either or both parties, the benefits of joining may exceed the dangers.

If the trustee joins, they will have a higher chance of having their voice heard through independent representation. One significant downside of becoming trustees is that the Court has broader authority to seek disclosure against a non-party to the divorce.

Trustees may occasionally seek to intervene in divorce proceedings to aid the Court with its inquiries, but must specifically clarify that they are not submitting to the jurisdiction. For instance, a trustee may indicate that they will participate in a first dispute resolution hearing (a ‘without prejudice’ Court hearing targeted at obtaining financial settlement), but specifically state that they are not submitting to jurisdiction by doing so.

Due to the fact that such reservations have not been tested, trustees face the risk of unwittingly submitting to the jurisdiction. Before the trustees appear to be actively engaged, prudent advice should be sought. While trustees may be justified in participating in ‘without prejudice’ portions of financial remedy proceedings, they must be cognizant of the danger of submission and limit their involvement to the facts of the case.

Offshore trustees must also take care not to violate any domestic law and may be required to obtain directives or assistance from the trust’s supervising court prior to taking active measures in the English proceedings.

Constructive communication

It cannot be overstated in divorce processes. In other instances, the trustees’ cooperation helps the Court to conclude that the trust is neither a financial resource nor a nuptial settlement, so avoiding further costly and frequently futile enforcement procedures. Constructive communication is frequently the best course of action, provided the trustees do not exceed their authority within the trust’s jurisdiction.

This may also be in the best interests of the other beneficiaries, as it will keep the trust out of future enforcement attempts.

It is critical for trustees to seek early counsel from family law professionals and trust consultants, both in the jurisdiction of the trust and the jurisdiction of the divorce proceedings, prior to initiating the procedures.

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