Trust assets in divorce: ES v SS

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Trust assets in divorce

Splitting assets is a major component of the divorce process. When dealing with divorce, one of the more complex aspects is the treatment of trust assets. Trusts, can play a significant role in the financial settlement outcomes of divorce proceedings.

Trusts are a type of legal arrangement where assets are held by one party for the benefit of another. They can be set up for a wide range of genuine reasons, including:

  • To manage or avoid tax;
  • To invest inherited assets;
  • To protect wealth for future generations;
  • To give other parties beneficial interests in property; or
  • Provide discretionary income or capital to a class or classes of beneficiaries.

 

Types of Trusts

Revocable Trusts:

These can be altered or terminated by the settlor (the person who created the trust) at any time. In a divorce, assets in a revocable trust are generally considered part of the matrimonial pot if contributed during the marriage, thus subject to division.

Irrevocable Trusts:

These cannot be altered once established without the permission of the beneficiary. The treatment of these trusts in a divorce can vary significantly based on the trust’s terms and the source of the funds.

Discretionary Trusts:

A discretionary trust is a type of trust where the distribution of the trust’s assets and income is left to the discretion of the trustees. This means that the trustees have the authority to decide which of the beneficiaries receive distributions, as well as the timing and amount of those distributions. Discretionary trusts are commonly used for asset protection and estate planning purposes.

Offshore trusts:

An offshore trust is a trust that is established in a jurisdiction outside of the country where the settlor (the person who creates the trust) resides. These trusts are typically set up in locations that offer legal and financial advantages, such as lower taxes, greater privacy, and protection from legal judgments. Offshore trusts are commonly used for asset protection, estate planning, and tax optimization.

Determining if trust assets are marital assets

The court has wide discretion under Section 25 of the Matrimonial Causes Act to determine the splitting of assets in a divorce.

For spouses of a trust beneficiary, it is important to consider the income, future capital, financial resources or other benefits they may receive.

The Court will factor in this income, capital, or additional benefits when determining the resources available to the benefitting spouse, as well as how accessible the Trust assets are currently and how they might be in the future.

Naturally, the resources accessible to a beneficiary spouse from a Trust will be determined by the assets within the Trust as well as the terms specified in the Trust deed.

Origin of Assets:

Assets placed in a trust before marriage may be considered separate property, unless they were commingled with matrimonial assets.

Contributions During Marriage:

If marital funds were used to fund the trust, the trust might be considered marital property, at least partially.

Intention and Beneficiary Designations:

Trusts explicitly created for the benefit of both spouses may be treated as marital property during a nuptial settlement.

Challenges in Valuation and Division

Valuation:

Determining the value of trust assets can be complex, especially if the trust holds non-liquid assets like businesses or real estate.

Division:

Courts often have to decide whether to actually divide the trust or allocate other assets to compensate for the value of one party’s interest in the trust. This can depend on the trust’s liquidity, the terms of the trust, and the specifics of its structure.

Tax Considerations

Divorcing spouses must consider the tax implications of dividing trust assets. Distributions or changes in trust structure can trigger tax events that may impact the net value received by each spouse.

Legal Precedents and Court Decisions

Courts review trust-related claims based on state laws and the specific details of the trust agreement.

Trust Assets in Divorce: Recent Case Law

Background

The case of ES v SS [No.2] [2024] EWFC 59 , decided on 18 March 2024 and published on 4 April 2024, involves the final determination of trust assets following the financial remedies proceedings between two parties, referred to as H (husband) and W (wife).

The primary focus was on the distribution of assets from a matrimonial trust known as the M Trust, valued at approximately £2.4 million.

Both parties initially agreed that the trust assets were matrimonial and that they had equal entitlements. However, difficulties arose in valuing the trust’s assets and determining the tax liabilities upon disposal.

Sir Jonathan Cohen presided over the case, with the task of determining how to distribute the trust assets. Previous financial remedy proceedings had resulted in H receiving £25.3 million and W approximately £18 million, a division not including the trust assets.

Issues at Hand

  • Valuation and Tax Complications: The valuation of the trust’s assets and the associated tax implications were complex, leading to disagreements among accountants and complicating the asset distribution.
  • Intentions for the Trust: Initially, H wanted to maintain the children benefited from the trust, whereas W favoured winding it up. Eventually, H also supported winding up the trust.
  • Proposed Solutions: The advisors suggested three potential solutions to preserve the final order’s spirit while minimising tax issues. However, neither party supported the creation of a bare trust due to the children’s ages (13 to 17) and potential tax consequences.

Court’s Decision

  • Trust Dissolution: The court decided to wind up the trust and distribute the funds between H and W to prevent prolonged disputes over tax liabilities.
  • Children’s Interests: It was held that the children were not prejudiced by this decision as they had no absolute right to the funds.
  • Asset Allocation: Specific non-financial interests (NFIs) within the trust were allocated to H. W no longer wished to be involved in H’s ventures, and the court rejected the use of a minority discount for the valuation of L Co, anticipating the asset would be sold as a whole in the foreseeable future.

Consideration of Costs

  • Excessive Legal Costs: The court criticized the disproportionate legal expenses (£300k) incurred to resolve the trust issues, considering the total asset value (£2.4m).
  • Costs Order: The court was not inclined to favor either party regarding a costs order due to their financial expenditure.

How can Expert Family Law assist?

Expert Family Law have a panel of solicitors who can assist with all matters of divorce, including trust assets in divorce.

We ensure that the divorce solicitors on our panel have the skills and experience required to assist on your legal case. We can assure you that your case will be dealt with in a compassionate and understanding manner.

The solicitors on our panel can assist you through the process of divorce, including the application, as well as assisting you with child arrangements, financial settlements and ancillary relief following the termination of your marriage.

Get in touch today using the form at the top of the page to find out if a divorce solicitor from our panel could help on your case.

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