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How secure is a trust?

How secure is a trust?

There is no guarantee that the courts will overlook a trust created prior to marriage when it comes to a nuptial settlement, finds Carmel Brown

Trusts are often set up by family members in order to make financial provision for their relatives. These sorts of arrangements can often come under attack within family remedy proceedings during a divorce.

A nuptial settlement is a disposition which makes some form of continuing provision for both or either of the parties to a marriage, with or without provisions for their children (Brooks v Brooks [1995] 1 All ER).

However, a settlement may not necessarily be a nuptial settlement even if it benefits one or both of the spouses during the marriage. In K v K (Ancillary Relief: Deed of Appointment) [2009] 2 FLR 936 (FD), it was held that a non-nuptial settlement could not automatically become a nuptial settlement following a marriage, as otherwise, all successional settlements providing benefits for an individual (without a 'nuptial character' at inception), would arguably become variable upon the subsequent marriage of the individual.

Section 24(1)(c) of the Matrimonial Causes Act 1973 (MCA 1973), provides that 'an order varying for the benefit of the parties to the marriage and of the children of the family or either or any of them, any anti-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage'. Most trust arrangements that benefit the parties constitute a settlement within the meaning of this section.

A settlement will not be capable of variation without a nuptial element and ascertaining the nuptial element is fact-specific.

Examples of nuptial settlements

Marriage settlements were customarily created to become effective upon marriage, in order to benefit spouses and their children. However, post 1973, the courts have taken a more creative approach to the interpretation of section 24(1)(c) of the MCA 1973.

A few examples of nuptial settlements include separation deeds, dispositions creating interests in succession in specified property, income provision from settled property, and pension schemes entered into during a marriage to provide benefits for the spouse of the pensioner.

In BJ v MJ (Financial Remedy: Overseas Trusts) [2011] EWHC 2708, the husband set up two trusts. One included the wife and children as beneficiaries and was clearly a post-nuptial settlement. The other trust, although set up as part of the same transaction, specifically excluded the beneficiaries of the first trust. However, it was held that the two trusts were part of the same scheme of arrangements and both were to be treated as variable post-nuptial settlements.

Nuptial settlements involving companies are more complicated, and the court's ability to pierce the corporate veil to access assets held by the company are limited. In Petrodel v Prest [2013] UKSC 34, we saw that the corporate veil is unlikely to be lifted or pierced if the companies are properly run and their assets owned outright.

The court agreed with the application of Moylan J of the principles of Ben Hashem v Al Shayif [2009] 1 FLR 115, and held that as there was no impropriety or evasion of any legal obligation to the wife, notwithstanding that the husband may have acted improperly, there was no justification to pierce the veil.

It was said that if there is no justification as a matter of general legal principle for piercing the corporate veil, it would be wrong to say that a special and wider principle applies to the matrimonial proceedings by virtue of Section 24(1)(a) of the MCA 1973.

Varying a nuptial settlement

At times it may be appropriate for an order to be made upon the dissolution of the marriage, i.e. for a property transfer or property settlement order. Varying a nuptial settlement can be an effective way to obtain financial relief for a party, and in fact, it may even benefit both parties as it can sometimes 'unlock' assets that would otherwise be held in trust, and may not be accessible for the immediate benefit of either party.

The powers of the courts are wide ranging and judges may vary settlements in order to meet the needs of the parties, but with first concern and consideration to the interests of any minor children and to other innocent third parties.

The court will look at the substance of the case, and the form of the nuptial settlement will not matter. The settlor does not need to be one of the spouses and the reason for the creation of the settlement, i.e. for asset protection, is also irrelevant.

Caught in the net?

The settlement with a nuptial character may only be a part of a larger trust structure and accordingly, the court will have to identify the extent of the property subject to an order.

The powers of variation under section 24(1)(c) of the 1973 Act are wide-ranging and Munby J provided guidance in Ben Hashem about how they should be exercised:

  • The courts have unfettered discretion and there is no limit on the extent of the power to vary;

  • The starting point is section 25 of the MCA 1973 and the Court must have regard to the factors in the usual way;

  • The objective is to achieve a result which has overall fairness, looking at the effect of the order as a whole;

  • The settlement should only be interfered with to the minimum extent necessary to achieve the purpose and do justice between the parties;

  • The court ought to be very slow to deprive innocent third parties of their rights; and

  • If a variation is likely to effect the interests of minor children, it should only be permitted if it is for their benefit, or at least is not to their disadvantage.

In the leading judgment by Lady Justice Black in the court of appeal case of P v P [2015] EWCA C(iv) 447, she said: 'The breadth of the discretion to vary a nuptial settlement is considerable, including the power to exclude a beneficiary entirely from the settlement and to transfer an asset to a non-beneficiary free from all trusts,' (Ben Hashem).

Black found that the judge's exercise of his discretion was not flawed as he had no option but to look to the trust in order to provide for the wife and children, and as there was no alternative way to satisfy the order, a sale of the trust property was necessary.

White v White - The sharing principle

The extent of variation depends on each case and the court will look at all of the circumstances and apply the usual section 25 factors. However, although Ben Hashem and D v D and the I Trust [2011] 2 FLR 29 suggested that the variation of a nuptial settlement should be limited to the needs of the applicant, in BJ v MJ, it was indicated that the sharing principle should be given considerable weight.

The courts will need to consider the origin of the funds, i.e. whether it was matrimonial property, as well as looking at the way the trust provided for the parties and children, the families affairs as a whole, and the interest of any other beneficiaries.

What can the court do?

The court can vary the terms and provisions of the settlement and once the presence of a nuptial settlement has been proved, it can be attacked in a number of ways.

By way of example, the court can exclude a beneficiary and can transfer assets of a trust to a non-beneficiary. Trustees can be replaced, protectors can be removed and parties can be given outright lump sums from the trust as well as life interests.

However, and very importantly, the powers of variation will only be applied in circumstances where the settlement assets are required to meet the parties and children's real needs, and only to
the extent that is necessary to achieve overall fairness and justice between
the parties.

Carmel Brown is a solicitor at Thomas Eggar

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