In the last issue of the Economic Report, our Focus on Trusts detailed the myriad opportunities that offshore trusts and foundations can offer to the high and ultra-high net worth family or individual. However, while IFCs can offer the investor financial stability, offshore wealth may still be affected by personal upheaval. Here, Sarah Higgins, Head of the Family group at Charles Russell Speechlys, explains how offshore trusts may be affected by English Law divorce, and the measures wealth management advisors can take to minimise or mitigate the risks.
The English family court has jurisdiction to make a financial order in divorce proceedings or the dissolution of a civil partnership, based on the parties’ habitual residence and/or domicile. If the parties have interests in offshore trusts, then these interests may be taken into account and, in certain circumstances, orders can be made directly against the trusts. Trustees can also become involved in financial proceedings if the trusts which they control come under attack and may be joined to proceedings. Nuptial agreements are becoming more prevalent to try to protect parties’ trust interests, and consideration can also be given when trusts are originally set up to minimise the risk of a trust’s assets being put at risk if beneficiaries undergo divorce proceedings.
Trusts and Divorce in England
In English divorce proceedings, a party may make an application for a lump sum, property adjustment, pension orders, periodical payments (maintenance), or for the variation of an ante-nuptial or post-nuptial settlement. The court must make an order that is fair with regard to various factors set out in section 25 of the Matrimonial Causes Act 1973. First consideration is given to the welfare of any minor children of the family (broadly natural children or those treated as children, e.g. stepchildren). Beyond this, factors include resources, needs, standard of living, age, and length of the marriage (generally including any premarital cohabitation), disability, contribution (both financial and otherwise) and, in rare cases, conduct. In all considerations, there is a yardstick of equality which means that assets are divided equally unless there is a reason to depart from equality. One reason for departing from equality would be if the resources come from a source outside the marriage; this generally means assets which parties bring into the marriage, or assets received since marriage, by gift or inheritance.
Interest in a trust may well be a financial resource. This has to be disclosed in full so that the court has full knowledge of all the relevant circumstances when making an order, or more usually, when the parties are reaching an agreement.
Trusts as a Resource
The court must also take into account any resources which a party is likely to have in the foreseeable future. It may consider interests in a trust, including a discretionary trust, if, on the balance of probabilities, that trust is a resource to which the party is likely to have recourse. The test is whether a party has ready access to assets. Cases since Thomas v Thomas [1995 2 FLR 668, CA] have referred to the concept of “judicious encouragement” by trustees to provide for a divorcing beneficiary. Mr Justice Mostyn, in the recent case of Ipeckci v McConnell [2019 EWFC 19], instead referred to a finding of future fact rather than judicious encouragement. This means that the judge was satisfied, on the balance of probabilities, that the trustees would make funds available to the wife for the purposes of satisfying a judgment against her, rather than encouraging the trustees to do so.
Variation of Trust
The English Court also has the power to vary a nuptial settlement, which may include making provision for a spouse, even where that spouse is not a beneficiary. If a settlement is not nuptial, then the court has no power to vary it. There is no statutory definition of ‘nuptial settlement’. A trust will be a settlement, but it is the nuptial element which normally gives rise to difficulties when advising. Brooks v Brooks [1995 1 All ER 257] was a House of Lords decision concerning a private company pension fund. The guidance in Brooks states that a settlement will be nuptial if ”the disposition … makes some form of continuing provision for both or either of the parties to a marriage, with or without provision for their children”.
Nuptial settlements can include settlements made either before, or after, a marriage. There may be questions as to whether a settlement is nuptial if it provides for only one spouse; whether a non-nuptial settlement can become nuptial; or whether a nuptial settlement will always remain nuptial.
The English court is not prevented from making an order for variation of a nuptial settlement simply by virtue of it being an offshore trust, but the question of enforceability must be taken into account both when the court is contemplating making an order, and when advising a client generally. An applicant spouse should consider the costs, delay, stress and likelihood of success in proceeding for variation of an offshore trust. The case has to be regarded in the round, so that it may be better to focus on trying to obtain the non-trust assets and leave the spouse with the trust interest, to be supported by that trust. This will clearly depend on the circumstances of the case.
There are particular considerations to be taken into account when looking at an offshore trust in divorce proceedings. Most major offshore centres have introduced legislation that protects trusts from orders of foreign courts based on ‘personal relationships’; developing a ‘firewall’ or ‘hurricane shutter’ to uphold the validity of trusts, in the face of orders of foreign courts to vary or set aside trusts established under their local law. The effect of the firewall provisions is that if an English court makes an order to vary a nuptial settlement in divorce proceedings that concern an offshore trust, the local court is unlikely to recognise or comply with it. There are such firewall provisions in the Cayman Islands, Bermuda, the Bahamas, the BVI, Gibraltar, Cyprus, the Isle of Man, Guernsey and Jersey. Evidence as to enforceability is therefore likely to come into play when the English court is asked to decide about making a variation order, in the first place.
There are various possibilities for getting around the firewall if a variation of trusts application is proceeded with – these depend on the facts and circumstances of the particular case. Firstly, it can be argued that the trust is a sham, in which case the firewall does not work as the assets are not held in trust at all. Secondly, there can be an argument that the party has not settled assets into a trust which belong to them but are held jointly with the applicant. If the settlement to be varied is not a trust for the purposes of the firewall legislation but is a settlement which can be varied (for instance, it has been held that a company can be a settlement for this purpose), then the firewall legislation would not apply. There is also a further argument, which may be deployed in relation to an order varying a trust that is governed by the laws of a British Overseas Territory, if local legislation is regarded as being “repugnant” to a provision of Parliament.
Consideration may be given, when trusts are initially drafted, in order to try to avoid them being, at some time in the future, subject to variation. Reducing the benefits or potential benefits to a spouse may be helpful. It may be sensible to include certain powers, such as to set up sub-trusts, or to appoint to new settlements, in order to contain the nuptial part of a settlement, which may otherwise be under attack. A trust may be less likely to be regarded as nuptial if it has an express purpose which is not nuptial. An example of this is the case of Quan v Bray and Save China’s Tigers [2015 EWCA Civ 1253], in which the court held that the settlement was not nuptial as it had been set up to benefit Chinese tigers. However, it may be important to consider whether there had been financial benefit to the spouses after the trust had been set up – which might indicate an intention to benefit them even if the trust document said otherwise.
Pre or Post Nuptial agreements
Beneficiaries should be advised to consider entering into a nuptial agreement, either a pre-nuptial agreement or, if this has not been completed in time, a post-nuptial agreement. In accordance with the case of Radmacher v Grantino [2010 UKSC 42], the court should ‘give effect to a nuptial agreement that is freely entered into by each party, with a full appreciation of its implications, unless in the circumstances prevailing, it would not be fair’ to do so. A nuptial agreement may be effective in limiting a party’s claims and can provide an acknowledgement that no claim will be made against particular trusts, and that they will not be regarded as a resource. However, to be effective, the needs of the spouse in the weaker financial position must be provided for; if necessary, by other assets. Alternatively, the provision for the poorer spouse can be set out in the agreement, so that if the marriage breaks down and the matter is litigated, the amount of provision is limited, even if it does need to be provided for by the trust.
As demonstrated above, the fact that assets are in held offshore trusts, does not mean that they are out of the reach of the English court in the event of divorce. The potential for divorce should therefore be considered at the earliest possible stage, ideally when a trust is being set up. There will obviously be other, more immediate considerations than simply trying to ‘divorce proof’ an offshore trust, and jurisdictions which may appear attractive from this perspective may not be appropriate for other reasons. However, both spouses may benefit from a well drafted nuptial agreement: The spouse with the trust interest, in order to limit what might otherwise be payable on divorce, and the other party, to avoid expensive and stressful proceedings, by setting out in advance, how much will be paid and how this is to be provided.
Partner and Head of the Family Group