Protecting family wealth

The use of trusts

Trusts are often created by parents during their lifetimes and under their wills for the benefit of their children. There are several advantages of doing so, as opposed to transferring assets to children outright, including for the possible protection of family wealth. In the event that one of the children divorces, for example, it can be less likely for the trust assets to be included in the child's estate and therefore available to the divorcing spouse than if the assets had been distributed outright to that child.

Potential court orders

However, the protection a trust can afford parents and their children against divorcing spouses can vary. There are two main ways in which a court can look to a trust to meet claims from a divorcing spouse. The court may:

  1. view the trust as a "nuptial settlement" and it may change its terms; and/or
  2. view the trust assets as a resource available to one of the parties and so make an order on the basis of a likely distribution.

What is a "nuptial settlement"?

A "nuptial settlement" is one which is made on a beneficiary "by reference" to a marriage. This includes a trust made either while a beneficiary is married, or before the beneficiary is married but the beneficiary's future spouse is included or added later as a beneficiary.  A court is able to alter a trust that is a "nuptial settlement", regardless of the terms of the trust, in order to provide a divorce settlement that is "fair".

When will a resource be available to a party?

If the trust is not a "nuptial settlement", whether or not the court will view the trust assets as a resource available to one of the parties will depend on the type of trust and the beneficiary's interest in it. It is less likely that the court will view the trust assets as a resource available to a beneficiary if that beneficiary has only a potential interest in a discretionary trust. To treat an interest in a discretionary trust as an asset for distribution, the court must conclude that the trustees "would be likely to advance the capital [in the trust to the beneficiary] immediately or in the foreseeable future"[1].

What steps can be taken?

Trustees should understand their responsibilities to manage a trust to reduce the likelihood that the court will view the trust as a "nuptial settlement" or view the trust assets as a resource available for distribution. There are a number of measures that parents can take, examples of which are set out below.

  1. Ensure that the trustees exercise their discretion when making decisions rather than simply giving effect to the beneficiaries' wishes. Trustees should do so in relation to all decisions, not just those concerning distributions, and they should make a note of the decisions they have made.
  2. Do not include children (if married) or their future spouses (if not yet married) as beneficiaries of discretionary trusts at the outset – the trustees would have the power to add the children as beneficiaries at a later date. This should prevent the trust from being considered to be a "nuptial settlement".
  3. Include the children as beneficiaries but have a detailed letter of wishes which sits alongside the trust document and asks the trustees to:
  • administer the trust in a way that minimises the chance of it being viewed as a resource of the children; and/or
  • manage the trust so that it benefits the family as a whole (i.e. grandchildren etc.) and not the children alone.

Parents may also wish to encourage their children to enter into pre-nuptial agreements before they marry (perhaps in respect of their "family" assets only) or, if they are already married, encourage them to enter into post-nuptial agreements before they are able to benefit from the assets. Although not legally binding in England and Wales, the courts will increasingly give effect to these documents provided the agreed division is "fair" in the circumstances[2].

The team at Michelmores regularly advises:

  1. families on how to protect assets against divorce;
  2. trustees on how to manage a trust to best protect trust assets; and
  3. individuals who would like to obtain information from trustees in respect of trust assets.
For more information please contact Harriet Martin or Jonathan Riley.

[1] (Charman v Charman 2007)

[2] (Radmacher v Granatino 2010)