How to make family trusts divorce proof

Wealthy families are starting to pre-emptively set up structures to protect family wealth but doing so incorrectly could expose such structures to divorce proceedings, thereby detrimentally impacting hard-earned, well-established and even generational family wealth. 

It is usually envisaged that any generation of the family would have access to wealth but with a view to preserving such wealth for future generations. In the event of a divorce in the family, such structures should be capable of adapting and, if necessary, absorbing a certain amount of damage.

Family courts

Some judges will have little knowledge or understanding of trust structures. Conversely, some judges are extremely well versed with trust structures.

Trustees have little influence on which divorce jurisdiction a beneficiary to the trust may use. It is always worth considering the following: 

1. Reviewing the likely family court jurisdiction that would apply to each of their beneficiaries at the time the trust is established. 

2. In the event that any individual who is a beneficiary to the trust is considering a move abroad, thought will need to be given to whether they are potentially entering a more hostile family court. 

3. If the beneficiary to the trust is considering (re)marriage, it’s worth factoring in the intended spouse’s background, such as nationality, domicile and where they reside. 

4. Stay aware of any marital situations so that the trustees can be warned as early as possible of any potential difficulties. 

Court powers

Family courts often have extensive powers in relation to trustees and trust assets:

1. Power to compel disclosure. Parties to financial remedy proceedings on divorce are subject to a “duty of full and frank disclosure” in relation to their financial affairs. A beneficiary will be expected to request information from trustees regarding the extent of trust assets and the likelihood that a request for assistance will be agreed to.

2. Trustees can become party to the proceedings. This commonly happens where a beneficiary is being obstructive and or failing to provide the necessary information. The family court can then require the trustees to provide information regarding the trust assets. 

3. Vary the terms of a trust if that trust is found to be a “nuptial settlement”. This is defined as “a settlement for the benefit of one or both of the parties or their children, created because of the marriage, or referring to the marriage, whether made before the marriage (ante-nuptial settlement) or after it (post-nuptial settlement)”. Such variation of trust can include reinstating a spouse who has been removed from the class of beneficiaries, or requiring the trustees to make a distribution to a beneficiary to pay off his or her spouse.

4. Letters of Wishes tend to be utilised and sought within family proceedings. The family court is very likely to want to see Letters of Wishes, as they often reveal the real intended beneficiaries and how they will benefit. It is essential to draft them carefully. They should not be changed when a marriage break-up is in prospect.

Nuptial agreements

A nuptial agreement can perform a number of useful asset-protection tasks. Its purpose is to set out the terms on which the couple agree their financial claims should be resolved in the event of divorce. Such an agreement can assist by: 

1. Fixing jurisdiction
A nuptial agreement will typically contain clauses in which the parties agree to submit to a particular jurisdiction. They provide powerful evidence if jurisdiction becomes contested.

2. Fixing choice of law
A ‘choice of law’ clause will specify the law which is to be applied when interpreting and giving effect to the agreement, regardless of where the divorce takes place.

3. Punitive costs
Agreements will frequently contain a clause specifying that a party who seeks to challenge a nuptial agreement will pay the other party’s costs.

4. Confidentiality
Nuptial agreements can contain extensive confidentiality clauses.

For international couples, care should be taken to ensure the nuptial agreement will be upheld in each state which could potentially have jurisdiction to hear the divorce.

In England, the Supreme Court in the landmark case of Radmacher v Granatino, concluded that nuptial agreements should be upheld where certain conditions are met. 

The first step to safeguarding any trust in an ultra-high-net-worth family would be to require the beneficiary to enter into a qualifying Nuptial Agreement. A clause can be included within any trust to cater for the same. There are times where this may be disadvantageous, so such a provision could be waived. Failure to enter into an agreement could result in the trust being depleted or the intended beneficiary receiving less as a result of family proceedings. 

Protection

When establishing a trust to protect family wealth, the trustees should carefully consider the following:

1. The appropriate jurisdiction for structures and investments. For example, you would not want to set up a vehicle in the Cayman Islands, when the underlying asset is a property in England. 

2. Advice from a financial adviser in the appropriate jurisdiction.

3. The class of beneficiaries and if separate trusts or sub-trusts should be created to ease the potential damage to wider structures.

4. Will a new or existing structure be considered.  

5. Assess whether a new or existing structure risks being considered a “nuptial settlement”.

6. Require all beneficiaries to enter into a nuptial agreement to protect the trusts.

7. Ensure Letters of Wishes are drafted properly with a possibility that it will be viewed by a family judge.

It is important to consider the impact of divorce on a trust and what steps can be taken to mitigate future issues for families with considerable wealth that they wish to protect for future generations. 

Nick Gova is a Partner and Head of Family Law at London law firm, Spector Constant & Williams.