Divorce and trusts often go hand in hand. It is incredibly common for our clients, or their spouses, to be the settlors, beneficiaries, trustees or protectors of trusts.
Broadly, the Family Court has two alternative approaches regarding whether a trust will be included as an asset in the divorce. Either:
- determining that the trust is a 'resource' to a spouse beneficiary; or
- determining whether the trust is a ‘nuptial settlement’.
In respect of (1), if the Court does consider the trust assets to be a resource to a party, the Court will divide the assets/make orders assuming that those assets will be made available, even where e.g. those assets are held in a discretionary trust by professional trustees. It is therefore a critical issue, particularly for high net worth (HNW) individuals dealing with significant estates and considering family wealth planning.
Key factors the Court considers when determining if a trust is a resource
The recent case of HO v TL [2023] reanimated the discussion on the factors the court will consider when determining whether a trust is a resource. The Judge considered the degree of access and influence over trust assets enjoyed by the husband, by reference to a variety of factors including:
- if the beneficiary is also a trustee;
- if the beneficiary has a history of drawing funds or receiving funds through discretionary distributions;
- the nature and purpose of the trust;
- the relationship between the beneficiary and the trustees;
- the value of the trust funds and the impact of making any distributions to the other party; and
- if the beneficiary is the only or main beneficiary.
For HNW individuals who rely on trust structures for asset protection and succession planning, HO v TL demonstrates the importance of proper planning. Where a trust is likely to be seen as a resource, then the most effective way of segregating it in a divorce is a prenuptial agreement (and mid-nuptial and post-nuptial agreements). A nuptial agreement can explicitly state that, aside from the trust assets being a resource to the family, it will be excluded from division on a marital breakdown.
For further queries, please contact a member of our Family team.
