Trusts and protecting assets on divorce - Part 1

There have also been some recent cases concerning this and so, this month and the next, we will consider this interesting topic.

Proposed changes to the law on divorce

On 9 April 2019 the Ministry of Justice published proposals to overhaul divorce law and reduce family conflict (their words).

Notably, divorcing couples will no longer have to blame each other for the breakdown of their marriage.

Proposals for changes to the law include:

• retaining the irretrievable breakdown of a marriage as the sole ground for divorce
• replacing the requirement to provide evidence of a ‘fact’ around behaviour or separation with a requirement to provide a statement of irretrievable breakdown
• retaining the two-stage legal process currently referred to as decree nisi and decree absolute
• creating the option of a joint application for divorce, alongside retaining the option for one party to initiate the process
• removing the ability to contest a divorce
• introducing a minimum timeframe of 6 months, from petition stage to final divorce (20 weeks from petition stage to decree nisi; 6 weeks from decree nisi to decree absolute).

The new legislation is expected to be introduced as soon as Parliamentary time (read “Brexit”) allows.

The proposed legislation will not cover other areas of matrimonial law, such as financial provision. Financial provision on divorce is handled in separate proceedings and the Court has wide discretion to decide on the provision for future financial needs.

None of the above will, of course, eliminate disputes as to the asset splitting on divorce if the parties are not minded to agree. For the purpose of this article we will ignore pre-nups although, interestingly, it has recently been reported that the most common pre-nup agreements are about family pets (rather than finances).

It is generally known that when assets have been acquired during the years of marriage the divorcing parties will share the matrimonial assets. But what happens if a party to a marriage is also a beneficiary under a trust?

General principles

As a general rule, where a beneficiary under a trust is a party to divorce proceedings, the Courts will have regard to the financial resources of the beneficiary and any interest under a trust or settlement is regarded as a financial resource.

The basic principle is that a beneficiary’s interest under a trust can be relevant in divorce proceedings if either the beneficiary has a vested right to trust assets and/or income, or the trustees operate in any way consistent with the conclusion that, as a matter of fact, they treat the trust assets as the beneficiary's and use them for his or her benefit. This is true regardless of the nature of the trust assets.

Matrimonial Courts tend to refuse to be bound by the technicalities of trust law and they look through trustees’ discretions to the substance of how the trust operates.

Typically, the Court will ask what the beneficiary may reasonably expect to receive from the settlement (J v J [1989] 1 All ER 1121) and this can be difficult to ascertain where the beneficiary has a revocable life interest or is only one of many discretionary beneficiaries under the trust.  However, the Courts will look at the reality of the situation. If the beneficiary, as a matter of fact, has ‘immediate access’ to funds in a discretionary trust, the Court is likely to treat the beneficiary as if the funds were his or her own. This was the decision in Browne -v- Browne (1989) 1 FLR 291. However, over the years the practice of the Courts in this area has changed.

The principle that trust assets should be included in the “pot” of marital assets to be divided between the parties in matrimonial proceedings was confirmed in the Court of Appeal decision in the Charman divorce case in 2007 (EWCA Civ 503). The original award of £48 million to the former wife of Mr Charman was then the largest financial award on divorce in English legal history. Mr Charman, as the settlor of his offshore trust, had power to change the trustees and there was also the settlor’s letter of wishes which stated that he should have maximum access to the trust’s capital and income. In the circumstances, perhaps unsurprisingly, the Court included the trust assets in the settlement. 

In the case of Whaley v Whaley (2011) EWCA Civ 617, the husband did not actually have an interest under one of the trusts, although the trustees could add him as a beneficiary and this in fact happened in practice. As the trustees were likely to make available resources at the husband’s request, this meant that the husband had access to the trust funds, and so again these funds were available for the purpose of the settlement.

 

Recent case law

Of course, every case turns on its facts and it is not surprising that the attitude of the parties in divorce cases can play a very important role in the final outcome.

Bray v Quan

Back in 2014 we reported the case of Bray v Quan [2014] EWHC 3340 (Fam) where the wife failed to get a tiger charity included in a divorce settlement.  The Court ruled that the charitable trust set up by a husband and wife to protect rare Chinese tigers was never intended to provide a future income for the couple and should not be considered in the wife's financial remedy application. Well, it did not end there. The wife appealed but in 2017 the Court of Appeal upheld the original decision that the Chinese tigers trust was not a nuptial settlement, and/or was a resource that was available to the husband. However, it still did not end there as the wife’s financial claims on divorce came before Mr Justice Mostyn in December 2018 whose decision (after six years of litigation and legal fees of around £7 million) has provided a quite incredible twist in this tale.

To get there we need to remind ourselves of the facts of this case which were as follows.

The couple, Stuart Bray (SB) and Li Quan (LQ), established a UK-based charity called Save China's Tigers in 2000, married in 2001 and, in 2002, set up a Mauritius trust called Chinese Tigers South Africa Trust (CTSAT), largely funded by SB. For the next 12 years they spent much of their time working together for the cause, with the support of the Chinese government. This included the setting up in South Africa of a breeding environment for Chinese tigers loaned to them by the Chinese government.

However, they later fell out and SB removed his wife from being a director of the charity project.

In 2012, in the first claim for financial settlement LQ claimed that the trust's assets should be considered in the award because, as her counsel suggested, there is in fact a 'complex web' through which SB ultimately intended to extract funds back from the trust for himself.

She claimed that CTSAT was a dual-purpose vehicle, established not only to advance the cause of the charity but also to provide financial benefit and support for the husband and wife personally over the long term (in effect a nuptial settlement – see below for what this means).

CTSAT had assets worth about £25 million and there were practically no matrimonial assets outside it.

There was a lot of contradictory “evidence” produced by the parties which was largely rejected by the Court and in the end Mr Justice Coleridge concluded in SB's favour and indeed made some rather unkind comments about LQ, for example that she had “become blinded by her desire for revenge and this has led her to fabricate where she thinks it will assist her case”.

LQ’s appeal was that the trust was in effect a nuptial settlement. If it were it would be available to SB as a financial resource as per section 25(2)(a) of the Matrimonial Causes Act 1973.

Trusts and nuptial settlements 

At this point it may be appropriate to clarify what a nuptial settlement is. It is not necessarily a formal trust. It may be a trust or other settlement for the benefit of one or both of the parties to a marriage or their children, created because of the marriage, or referring to the marriage, whether made before or after the marriage. The term ‘settlement’ is not limited to a formal trust-like structure, less formal arrangements can satisfy the test, for example a life policy and a licence to occupy a property have been held to constitute nuptial settlements. 

The importance of this wide definition for the above case was that if the Chinese tigers trust was found to be a nuptial settlement, the Court would have been able to exercise its extensive powers to order that the trust itself was varied to provide the wife with capital. Alternatively, if the Court had found that the trust was a financial resource of the husband, the Court could have made an award against the husband himself, in the expectation that the trustees would make funds available to the husband to meet the liability.

In Bray v Quan the Court of Appeal upheld the decision that the CTSAT was not a nuptial settlement, nor was it a financial resource of the husband in respect of which the Court could make orders to provide capital to the wife.

Bray v Quan in 2018

This is where we come to the 2018 hearing of LQ’s financial claims and the extraordinary turn of events. 

As the trust was effectively “ring-fenced” and there were no other current capital resources of the marriage to share, only the issue of LQ’s maintenance remained to be decided. 

The judge in the first case clearly stated that he found LQ to be an ‘unreliable witness upon whom the Court cannot rely’ whereas he found SB’s evidence having “all conventional hallmarks of honesty and accuracy.” 

However, by the time of the 2018 hearing, a completely different picture had emerged, with Mostyn J describing the husband as ‘manipulative, arrogant, menacing and contemptuous of the Court's authority. I do not accept any of his evidence unless it is either agreed or is corroborated by clear contemporaneous documents’. The wife was, by contrast, found to be a ‘credible witness’. 

The judge also found that the husband could continue to generate significant advisory fees from his role with the trust, in effect bringing the trust assets into the equation through the back door so to speak. 

The outcome is that, within the same case, the capital outcome of the case arose from a finding that the husband was entirely honest, whilst the income outcome of the same application arose from a contradictory finding that he was entirely dishonest. 

And the result? After awarding LQ maintenance of £64,000 per annum, the judge decided to leave open for a later date LQ’s claims for capital for the reason that it was foreseeable that SB may in due course accumulate sufficient sums to make a proper clean-break capital settlement for her benefit. Leaving capital claims open in this way is highly unusual as the Court’s goal is finality wherever possible. 

Given the history, this is unlikely to be the end of the matter. There may yet be an appeal by SB against the maintenance order. Similarly, LQ’s claims for capital are pending and will depend on any evidence that SB has generated wealth to meet an award, and achieve a clean break. 

Conclusions 

The above case illustrates the dangers of lengthy litigation (not just in terns of costs) and the fact that the end result may simply depend on an individual judge’s assessment of the evidence presented by each of the parties. However, it also provides a useful reminder of how the Courts approach the question of whether a nuptial settlement exists. Next month we will look at some more decisions involving trusts and divorce.