It is usual practice for parents or grandparents to consider how they can leave their estate to children or grandchildren, in a tax efficient way. Trusts can be the most efficient way to do this.
Inherited money is considered by many to be family money and therefore the intention is that it should stay in the family. By placing assets in trusts, it is often believed that as well as being tax efficient it will be a protective measure if there is a future separation or divorce.
Are trusts treated as matrimonial assets?
Family courts dealing with financial matters on divorce regularly have to deal with assets that are held on trust. In the absence of a prenuptial or postnuptial agreement, the court will need to decide whether or not trust assets are a matrimonial asset.
The party who has set up the trust and therefore has the asset is the settlor. The trust will have trustees and beneficiaries. The trustees effectively manage the trust and the beneficiaries benefit from it.
In certain trusts, known as discretionary trusts, how the beneficiaries benefit from the assets in the trust is decided by the trustees. A spouse who is the beneficiary of a discretionary trust may not have any real understanding of what is in the trust and what value it has, so whilst they would need to disclose it they may not be able to provide anything substantive. Due to the discretionary nature, it is difficult for family judges to ascertain what benefit there may be and often it is even harder to quantify it. Trustees are not a party to any financial proceedings on divorce and therefore are not bound by court orders, unless the court joins them to the proceedings.
As part of the disclosure process the court could order an expert to value the trust, but it is not straightforward with a discretionary trust. The court would need to look at any gifts the beneficiary has previously received and what they might be expected to receive in the future. The Family court may then take that into account when dividing the other assets.
Life interest trusts usually give someone a right to live in a property during their lifetime and again that could be taken into in the event of a divorce, particularly in terms of their housing needs being met (and/or there being a potential source of income).
Even offshore trusts can be taken into account. Parties have a duty of disclosure in financial proceedings on divorce, meaning that even if they cannot give an exact value, the trust should still be disclosed.
How can trusts be protected in the event of divorce?
It is therefore important for those seeking advice on tax planning and those who are to become beneficiaries, to understand that trusts are not safe from the family courts on divorce.
For that reason, to give as much protection as possible to the person benefiting from a trust and peace of mind to the settlor, it is sensible for there to be a prenuptial agreement if the beneficiary is due to marry or a postnuptial agreement if they are already married at the time the trust is set up.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
[View Source]