Divorce settlements typically involve a division of matrimonial assets, which are intended to provide a fair outcome for both parties. This can often mean that one spouse’s personal assets, regardless of how or when they were acquired, become subject to division. Understandably, individuals looking to protect their financial interests may explore whether placing money in a trust can safeguard it from being split in divorce proceedings. This article provides an overview of how trusts can be used to protect assets in the event of divorce, what types of trusts are available, and the limitations of such action.
How does the divorce court approach trusts?
When a marriage ends in divorce, the court’s primary aim is to achieve a “fair” division of assets. Divorce law typically considers a couple’s total wealth, which may include assets held in trust.
A trust does not automatically exempt assets from consideration during divorce, particularly when the trust has been established with an obvious intention to shield assets from the other spouse. The court has discretion to investigate the nature, purpose, and timing of a trust. If they find it was specifically set up to avoid a fair division, they may treat the assets in question as part of the matrimonial estate.
However, the court also recognises that some trusts are created for genuine reasons unrelated to the marriage or its potential dissolution. For example, family trusts that were established long before the marriage and in which the spouse has limited access may be treated differently.
What are the types of trusts and their suitability for divorce protection?
Trusts can be a useful tool in protecting wealth, but the type of trust and its structure determine the extent to which it may serve as a protective measure in divorce.
Discretionary trust
This type of trust gives trustees the power to decide who benefits from the trust and in what amounts. Because beneficiaries, including a spouse, do not have a direct or guaranteed right to assets in a discretionary trust, it may be more challenging for the court to treat the trust as part of the matrimonial assets. However, this is not a guarantee. If the spouse is a discretionary beneficiary and has historically received benefits from the trust, courts may still see it as a resource.
Life interest trusts
In a life interest trust, a beneficiary has a right to income generated by the trust’s assets, but not to the assets themselves. Although it provides income for one spouse, it limits their access to the underlying capital, which might help protect the capital in certain cases. However, courts may consider income rights as a resource during a divorce settlement, so it offers only partial protection.
Offshore trusts
Offshore trusts are established in jurisdictions outside the UK, often where privacy and asset protection laws are stricter. These trusts can make it more difficult for UK courts to enforce a division of assets held abroad, adding a layer of complexity. While offshore trusts may provide additional privacy and asset separation, UK courts can still order the beneficiary to repatriate funds, and they take a dim view of attempts to obscure assets in divorce cases. The court often considers offshore trusts with caution, especially if they were set up during the marriage or with the apparent intention of shielding assets.
Trusts for children
Trusts that are established for children or future generations, often referred to as “family trusts,” can provide a more legitimate layer of protection from divorce settlements. By setting up a trust where the children are the sole beneficiaries, the parent can sometimes shield the assets from being treated as matrimonial property. However, if a spouse has access to income from the trust or is otherwise a contingent beneficiary, courts may still consider the trust’s value during financial settlements.
Asset protection trusts
Some high-net-worth individuals consider setting up asset protection trusts (APT) to legally shield assets from divorce. These are often set up before marriage, in jurisdictions where APTs are recognised, such as the Isle of Man or Jersey. APTs require careful structuring and typically have to be established well in advance of any marital issues to be effective. However, courts may still scrutinise such trusts if they appear to be a means of evading financial obligations.
Can a trust fully protect assets in divorce?
While trusts can provide some protection, they are not entirely impervious to the divorce courts. Generally, the court views it as their duty to make a fair division of the couple’s assets, which may include trust assets. That said, trusts that were created independently of the marriage, without an apparent intent to withhold assets from a spouse, may be treated differently.
For the best possible protection:
- Establish the trust long before marriage. Trusts created during the marriage are more likely to be scrutinised and considered part of the matrimonial assets.
- Limit personal benefits. If the spouse is the primary beneficiary or has control over the trust, courts are more likely to include it in the matrimonial estate.
- Document the purpose of the trust. If the trust has a legitimate purpose (e.g., preserving family wealth for future generations), it may strengthen the argument for exclusion from matrimonial assets capable of distribution during a divorce.
What are the alternatives to trusts for asset protection in divorce?
In addition to or instead of trusts, other methods may offer effective asset protection:
- Prenuptial and postnuptial agreements
A prenuptial agreement (signed before marriage) or a postnuptial agreement (signed during marriage) can specify how assets are to be divided in the event of a divorce. While not automatically binding in the UK, the court is increasingly upholding fair prenuptial agreements if both parties received independent legal advice and provided full financial disclosure. - Gifts and transfers to children
Transferring assets to children or holding assets in trust for their benefit can sometimes provide protection. Once the assets are genuinely given away, they are no longer the property of the donor spouse and may not be included in matrimonial assets, although this approach has limitations and should be handled carefully with legal advice. - Limited company or business structure
Transferring assets into a limited company or business can offer certain protections, as businesses are often treated differently from personal assets in divorce proceedings. However, if one spouse is a shareholder or director, the value of their interest in the business may still be subject to division. - Separation of matrimonial and non-matrimonial assets
Documenting assets that were acquired before marriage and maintaining separate ownership and accounts can help preserve them in case of divorce. The court generally views assets acquired before marriage or as a result of inheritance differently, though they may still be considered if necessary to achieve fairness.
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