Trust assets may no longer be immune from divorce settlements

6 August 2011

It has long been held that the Scottish Discretionary Trust is an extremely secure way of keeping assets safe for future generations. They have enjoyed protection from the changing fortunes (or misfortunes) of the people who set them up, often to see that children and grandchildren will be guaranteed financial support, or to ensure long-held property does not pass out of the family. This is usually managed under the watchful eye of a group of trustees. However, in recent cases in both Scotland and England, it appears that the Trust may not be so untouchable in the future.
In a high-profile divorce case heard in the Court of Session, an ex-wife sought a financial settlement from her estranged husband. The husband, Mr Morrison, had previously been a highly successful businessman worth over £20 million but the business had failed by the time of the court action. He now only had an income from a £700,000 pension pot, but had also ensured there was money in trusts for his five children all from previous relationships to Mrs Morrison.
Money in a trust is usually protected and seen as separate from a persons assets. However, the Judge Lady Clark stated that this fund could be accessed for the purposes of meeting the payment of a £1.6 million pound settlement for Mrs Morrison. Of that sum, over £789,000 was to be drawn from the children’s trust fund.
This was a very significant decision. It had previously been firm law that trusts were not able to be touched by the court when seeking to meet payments, for example in insolvency, or in cases of divorce. Now, it would appear that trusts will not be safe from being raided by the courts to meet financial demands and this could have serious implications for generations of families who have built up assets and rely on them for future income.
There are important differences between Scottish and English trust law. Under Scots law, the beneficiaries are not in fact considered to have ‘ownership’ of the trust assets, and have no ‘real’ rights to them, which differs from English law. This is perhaps a reason why trustees in Scotland have an extra burden of responsibility as they alone have discretion when making decisions relating to the trust – legally, they are the owners of the trust assets.
South of the border, in a more recent case (Whaley v Whaley [2011] EWCA Civ 617), it was confirmed that it was correct for a court to order a trust to make payment to meet ancilliary relief. The case had been an appeal against this on the basis it put unreasonable pressure on the trustees, but this argument failed. The husbands trust assets were accessible resources in order to make the payment and the trustees would be compelled to do this if the husband asked them. It was held that Mr Whaley had been treated fairly by the court. 
If you are party to a divorce action where family trusts make up part of your wealth, you should seek advice early in order to protect your family’s assets and income for future generations.



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