No one plans to get married so that they can get divorced, but it is perfectly sensible to plan to protect the inheritance of your children from unexpected circumstances. Trusts and divorce are complex areas where the personal finances of the couple divorcing, their children and families, and even businesses can become embroiled in tension and lengthy legal issues.
Our first, and most important piece of advice is simple. If you are thinking of establishing a trust to protect what you wish to leave to your children or other beneficiaries, take professional advice from the very beginning.
Trusts form part of your estate planning, so in any case, you should take professional advice when you are considering your will, lasting powers of attorney, your assets, and how you want your final wishes to be executed.
Our top 3 tips to effective estate planning
1. Get professional advice.
Getting elements of your estate planning wrong, or creating ambiguity or a lack of clarity in your instructions can leave your relatives confused at best, or your instructions open to challenge at worst.
2. Consider a holistic approach
Consider all of the elements together. Estate planning is a complex area that includes your will, trusts, how you want to divide your assets, manage tax liabilities; especially inheritance tax, who you want to select as attorneys and executors, and your beneficiaries.
3. Leave a clear ‘road map’ for your beneficiaries
It’s a good idea to make sure that your instructions are easily found, easy to understand, and easy to action. Your family will be mourning so making it easy for them to sort out your estate will reduce the stress on them.
So what about divorce and trusts?
When you divorce your marital assets will be considered and divided by the court in the event that a settlement can’t be reached out of court.
A trust can be challenged in the court for several reasons:
- If it can be shown to be a sham designed to hide assets
- If the trust has not been established correctly
- Proprietary estoppel*. This could be available for a spouse attempting to claim an interest in trust assets
Trusts can be established for many reasons, but most often to manage tax liabilities, to provide a beneficial interest in an asset, or an income for a third party(often a family member), to invest inherited assets, or to protect assets and wealth for future generations.
In the event of a divorce, if your spouse is a beneficiary to a trust then the court will consider this future benefit or income as part of a settlement. The court will have to consider the availability of the actual assets themselves, and the terms of the trust deed.
Is a trust always considered by the court?
The short answer is no. The court will establish whether the trust represents matrimonial or non-matrimonial assets. If the trust is deemed to contain non-matrimonial assets, it will be excluded from the assets under consideration. This is likely providing the trust is not deemed to have been established to defeat the other spouse’s claims, or to hide matrimonial assets. A trust is also likely to be excluded if there are sufficient assets outside the trust to reach a suitable financial settlement.
So what is a trust?
There are different types of trust. The more common types are:
- Declarations of Trust. These provide for third parties to have an interest in a property
- Life interest trusts. These provide for a specified person to live in a property for their lifetime.
- Discretionary Trusts. Allow for the trustees to make certain decisions on how income and assets should be distributed
There are other types of trust too including offshore trusts which allow individuals to avoid UK tax by living off capital created overseas.
When a trust is established its assets will be given to it by a “settlor”. The assets are legally owned by the trustees who manage and make decisions for the trust. That doesn’t mean, however, that they automatically have the right to benefit from the trust. They manage the trust on behalf of the Beneficiaries, according to instructions in the Trust Deed. The fact that someone has an interest in a property or other asset doesn’t mean that it is easily shared with a spouse in the event of divorce.
Trusts are complex legal arrangements that are designed to protect assets for different reasons, but often to safeguard assets and income for future generations. If they are not established correctly they can be successfully challenged in the Family Court.
So our most important piece of advice is to seek professional advice from the outset to ensure that everything is done correctly and the risk of exposure in the event of challenge is reduced to an absolute minimum.
To discuss Trusts and Divorce in detail get in touch with a member of our team