Trusts: Every penny counts

Trusts: Every penny counts

How are the Courts approaching potential delay of proceedings amidst the coronavirus pandemic?

Case law demonstrates the need for absolute clarity from the outset, the nuanced nature of cases involving trust assets and the enhanced duties of the lawyers involved to give judges proper guidance so as to avoid unsafe decisions.

It has always been a difficult task for the courts to meet the needs of a divorcing couple where the dynamics are changing so significantly. Resources are often stretched thinly in meeting the needs of both husband and wife, especially where children are involved. While one ‘pot’ might have covered the needs of one family, that same ‘pot’ will often struggle to meet the needs of two separate family units. An inescapable reality of the Covid-19 pandemic has been even greater financial pressures on families and, for those couples divorcing, this will result in fewer assets being available. While we tentatively look forward with optimism, one of the issues that the judiciary will undoubtedly face for some time is an increase in cases before the court where a deeper exploration of the available assets is required. Before making an award, a judge must first ascertain the extent of the assets in discussion. Section 25(2)(a), Matrimonial Causes Act1973 (MCA 1973) requires the court to look beyond the obvious assets to the ‘other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future’. The wide-ranging discretionary powers conferred to family judges under ss23-25A, MCA 1973 (as amended) allow them to include trust assets as a financial resource available to divorcing spouses.

Trust assets

Statistics show an increase in divorce cases over the last 24 months, which the general feedback from family practitioners mirrors. Family lawyers will therefore need to be more alive to the court’s approach to cases where assets are held in more complex structures, for example trusts. It seems inevitable that, whereas previously the court was more frequently able to ‘ring fence’ trust assets and meet needs from other matrimonial resources, the situation now will result in a more detailed analysis where trusts are involved and an increased willingness by the courts to ‘invade’ these resources where it considers that it can, or is necessary to ensure an equitable division of the available resources between the spouses. A steady stream of recent case law has supported established principles on this issue, but a renewed look at these cases has given helpful guidance to practitioners operating in the family court, beneficiaries of trusts and professional trustees.

Fixed-interest trusts

The first step in dealing with cases involving trusts is to establish the nature of the trust itself. In relation to fixed-interest trusts, it is likely that the court will infer that the spouse’s beneficial interest in the trust is an asset available to them, or likely to be so in the foreseeable future. The court must still seek to value the spouse’s interest. This may not always be simple where the trust deed does not define this in clear monetary terms, but the court will usually deal with that by ordering the production of accounts for the trust either by one party to the proceedings, or by the trustees themselves if they are parties. The court must also look at whether the interest will be received ‘in the foreseeable future’. Case law gives differing views on what ‘the foreseeable future’ can be considered as, but the current position is set out in PJC v ADC [2009]. Here, the court determined that an interest likely to be received in about 15 years was within the foreseeable future (although only ‘dimly visible’, a term taken from the earlier case of Priest v Priest [1980],where the court considered that 15 years may be too long even though it was ‘dimly in the foreseeable future’). It may surprise practitioners, and certainly beneficiaries and trustees,to learn that the reach of the courts can extend this far into the future.

Discretionary trusts

The position with discretionary trusts is more complex. To treat an interest in a discretionary trust as an asset available as part of a divorce, the court must believe that the trustees ‘would be likely to advance’ (per Charman v Charman (No 2) [2007]) some capital from the trust if so asked by the beneficiary. A useful summary of the law can be found in Thomas v Thomas [1995], specifically at para 30 where Waite LJ distilled the law into three principles. From these principles it is clear that where a spouse can only raise capital or income to meet an award as a result of the distribution of a discretionary trust,the court should not put improper pressure on the trustees to make this distribution. However, they are required to ‘look at the reality of the situation’ and not be ‘misled by appearances’. If the court then feels on the balance of probabilities that a distribution would be made, this does not amount to undue pressure and the court can use ‘judicial encouragement’ (see Whaley v Whaley [2011]) and assume the monies held in trust are an available resource. This is often referred to as a ‘Thomas finding’.

Trust assets as an accepted resource

In circumstances where the trust is an accepted resource to meet an award of the court, it may not be necessary for the trustees to be joined to the proceedings, but the court is still likely to consider the Thomas principles. Without needing to make a ‘Thomas finding’ the court may, in making its award, still have in mind the resources that it considers would likely be available to the beneficiary spouse. An example of such an approach can be found in the case of ZN v GN [2020], heard by Cohen J, which involved a wealthy family with considerable assets held in trust of which the wife was the principal beneficiary. The husband contested that the trusts were unlikely to ever demand repayment of the considerable sums that had been advanced to the wife during the marriage. As the wife accepted that the husband’s claims were affordable from the available assets, the trustees were not formally joined as it was not envisaged that an order would be required against them. From the judgment, it is clear that despite not being joined, the trustees had given the court very clear evidence on the level of funds they were prepared to make available to the wife by way of loan so as to settle the husband’s claims.In addition, the wife had access to her own resources although these were limited in comparison to the amounts held in trust. Cohen J commented specifically (at para 29) that:

I do not feel in any way bound by the trustees’ limit of £2.2 million. Whilst the trusts are not under the control of the wife, the trustees have a history of being of assistance to the wife albeit by loan rather than gift, no doubt to maintain the investment value of the settlements, but the wife has her own resources to which she can look.

Adding (at para 64):

I am satisfied that it is an award the wife can afford. If the trustees will not help her out over and above £2.2 million, then she will have to make her own decisions as to what she sells.

Evidently, the history of the trust providing funds on request was a significant factor in this case, even where the clear evidence of the trustees was that the money they were now prepared to make available was limited. While the court did not make a finding under the Thomas principles such that any order was made against the trustees, the inference was clearly that it would be likely in the circumstances that the wife could in fact encourage the trustees to meet the entirety of the husband’s claim and therefore that it was effectively an available resource to meet the ancillary relief award. Cohen J’s approach in this case would seem to be one that accords with the general tide of recent cases.

A Thomas finding

Where the trustees make no indication that funds will be available to the beneficiary spouse, the court must then look procedurally at how such an issue is to be dealt with. Thomas is clear that to make a finding that an asset not held in the name of an individual is nonetheless a resource available to them, the court must first hear evidence and be satisfied that this is the case. It follows that if the court does not hear evidence, it cannot make such a finding. Trustees should therefore consider whether it may be more beneficial to resist being joined to the proceedings (and giving evidence) balanced against the risk that the court may make adverse inferences against the trustees arising from their failure or refusal to participate, as in Joy v Joy-Morancho [2015], although this did relate to adverse inferences drawn where an overseas trust refused to submit to the jurisdiction. If it seems likely that that the trustees would make the necessary advancements and/or the other spouse insists on pursuing the issue (and provided the trust is based in this jurisdiction), then the trustees should be joined to proceedings. This should be done at an early juncture, most likely at the first appointment hearing. The need to be joined is not only to ensure proper evidence is filed but also to ensure the eventual enforceability of an order against the trust (see Moor J’s comments in TM v AH [2016], which clarified the judgment of Munby J (as he then was) in A v A (No 2) [2007]). A recent case demonstrating the risk where orders are improperly made and cannot effectively bind the trustees is Wodehouse v Wodehouse [2018]. In this case, the beneficiary husband had represented himself at first instance and at first appeal. The wife was represented throughout and the professional trustees were represented at first instance only. Despite the professional trustees having been involved at first instance, all parties had failed to properly identify the correct trust instrument holding the assets that were required to meet the court’s award. As such, the trustees appearing before the court were not in fact those of the trust against which an order was eventually made. While the two trusts in question (one fixed and one discretionary) were effectively managed as one,they did have different trustees. The correct interpretation of the trusts was not bought to the attention of the judge at first instance or on first appeal. On second appeal, and with the husband now represented (by the co-author of this article, Sean Hilton, and Phillip Blatchly of 1 Hare Court) the order was considered by the Court of Appeal to be ultra vires in that it was made against a third party not a party to the proceedings. Facing the prospect of the matter being remitted back down to a first instance tribunal, the wife withdrew from proceedings. For more detail on this case, please see ‘The complete picture’ by Sean Hilton (FLJ188, July August 2019). This case demonstrates the need for absolute clarity from the outset, the nuanced nature of cases involving trust assets and the enhanced duties of the lawyers involved to give judges proper guidance so as to avoid unsafe decisions.

Guidance for trustees and the requirements of the court

In circumstances where the trustees are joined to proceedings, the court will look to all the circumstances of the relationship between the beneficiary and the trustees before making a finding under the Thomas principles. This may include:

  • the history of the trust, especially if it appears to have been created with the intention of putting assets out of the reach of the other spouse (as in AAZ v BBZ [2016]), and the origin of the monies in the trust (including whether those monies are matrimonial in nature or not);
  • what the trustees say they will, or will not, do via a statement of intent;
  • how much power or influence the beneficiary has over the trustees;
  • whether the trustees have previously granted funds and the circumstances of any such distributions;
  • any separate agreements or discussions between the beneficiaries;
  • the interests of the other beneficiaries and whether a distribution would impinge upon their rights (particularly any children or unborn beneficiaries);
  • how liquid the trust assets are; and
  • the long-term objectives of the trust.

It is likely that if so joined, the court will direct that the trustees should file a statement setting out their case alongside disclosure orders for documents such as the trust accounts.It will also request that a representative of the trust attends to give evidence at a trial. If it is necessary for the court to resolve the issues of dispute before a final determination of the matrimonial proceedings then this may be done as a preliminary issue trial. This is significant as there may be cost consequences of hearing the issue under the civil sphere. While it is an obvious point, there is a definite need for the trustees to take their own early advice where a beneficiary of their structure is entering into divorce proceedings. Not only must they remain conscious of their duties to any other beneficiaries but they should seek to make their position clear to the beneficiary spouse at the very outset. If the trustees do not intend to exercise their discretion to make any distributions, then a statement of intent confirming the same may provide significant protection to the trust and the beneficiary spouse, in terms of the breadth of resources that the court should then consider available to that spouse. It can also be necessary for the trustees to assist the matrimonial lawyer of the beneficiary spouse in ensuring a proper interpretation of the trust documents and in identifying the trustees and beneficiaries. It is also true that a discretionary structure with no fixed entitlement for any beneficiary is more difficult for a claimant spouse to attack. Trustees should ensure that they ‘do the basics’ from the outset – manage the trust properly, avoid becoming a chequebook for the family and make proper decisions about distributions, so that if the trust is later brought into matrimonial proceedings, it is less likely that the trust will be considered a cipher or resource for one spouse or the other.

Overseas trusts

If, however, the trust is based overseas, then it may not wish to submit to the jurisdiction of the court. In Re H Trust [2006], the Royal Court of Jersey indicated that it would not normally be in the interests of an offshore trust to submit to the jurisdiction of a foreign court (including England and Wales). This is because submitting to the jurisdiction makes it more likely that the trustees would have to put into effect any orders made by the foreign court in their domestic home court. Refusing to submit to the jurisdiction also limits the likelihood of any orders for disclosure being enforceable (because only the local court of the trustees can make orders that are binding on the trustees). Where cases do involve offshore trusts, the trustees and beneficiary spouse should seek advice both in the jurisdiction of the proceedings and in the home jurisdiction of the trust itself. Practitioners may also need to carefully consider whether a claim is better issued in the family or civil courts and look in more detail at service provisions, cross-border treaties and of course forum conveniens.

Conclusion

As family court judges face more situations where there are insufficient matrimonial resources to meet the parties’ needs, they will more readily look to ‘all other resources’ that might be available and trusts most certainly fall under that umbrella. This may be a symptom of the changed financial landscape, and/or the inevitable increase in cases in which trusts are involved coming before the courts as such structures are more commonly used. Regardless of the cause, family practitioners must be more aware of these issues in order to advise clients robustly from the outset.

This article was first published in Family Law Journal (Legalease), see here.

Cases Referenced

  • A v A (No 2) [2007] EWHC 1810 (Fam)
  • AAZ v BBZ [2016] EWHC 3234 (Fam)
  • Charman v Charman [2007] WTLR 1151
  • Joy v Joy-Morancho & ors [2015] EWHC 2507 (Fam)
  • PJC v ADC [2009] EWHC 1491 (Fam)
  • Priest v Priest (1980) 1 FLR 189
  • Re H Trust [2006] JLR 280
  • Thomas v Thomas [1995] EWCA Civ 51
  • TM v AH [2016] EWHC 572 (Fam)
  • Whaley v Whaley [2011] WTLR 1267
  • Wodehouse v Wodehouse [2018] EWCA Civ 3009
  • ZN v GN [2020] EWHC 1316 (Fam)

 

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