Wealth and safety: asset protection in divorce proceedings

There are a multitude of different onshore and offshore wealth protection structures, including trusts and companies, designed to shelter valuable assets.

However, as recent cases have demonstrated, some are less robust
to claims arising from the breakdown
of a marriage.

To help protect wealth, there are a number of defence and attack strategies available from an English and Channel Islands perspective as highlighted in the case of the ‘Oz family’, whose finances
are spread between England and Jersey.

Derek Oz and his wife Mary are worried about their daughter, Sarah’s, marriage and need advice. Derek is 65 and his wife Mary is 60. Derek was born in Australia and is now deemed domiciled in England.

They have two children, David (35) and Sarah (32) – both married with children. David lives in Jersey with his wife and their twins while Sarah lives in London with her husband, Mark (43), and their two children aged four and six. Sarah and Mark have been married for 13 years.

Before Derek became deemed domiciled in the UK, he established the Oz Family Trust, a discretionary trust in Jersey in the mid 1990s and gifted assets he inherited from his father to the trust.

The family trust, which has institutional trustees, has invested those assets and now has investments totalling £10m. The Oz Family Trust also has a 40 per cent shareholding in the family business, Ozmosis Ltd. Beneficiaries
of the trust include Derek’s children
and their spouses.

Ozmosis is incorporated and resident for tax purposes in Jersey. David sits on the board as managing director. Sarah is head of marketing in the UK, but is not on the board of directors. David and Sarah each have
30 per cent shareholdings in Ozmosis.

Ozmosis is worth £20m, and its assets include a property in the UK, in which Sarah and Mark live.

When their first grandchild was born, Derek and Mary established an onshore discretionary trust, the Oz Grandchildren’s Trust, funded up to their nil rate bands and topped up
with surplus income. The trust is now worth £1m. The trustees are Derek and Mary, and the beneficiaries
are their children
and grandchildren.

Sarah and Mark enjoy an expensive lifestyle, and despite receiving many
gifts from her parents and distributions from the Oz Family
Trust over the
years, Sarah having a generous salary from Ozmosis, and paying Ozmosis a very low rent, their joint investments only total £300k. Mark is an unsuccessful writer with very little income, and is the main carer for
their children.

Mark has potentially extensive claims because of the length of their marriage, their high standard of living, his financial dependency on Sarah, and his role as the main carer of their children.

The court would therefore be looking to meet his ‘needs’ for capital and income, assessed on a fairly generous basis.

However, any element of ‘sharing’ of capital or income in excess of his needs will be tempered by the fact that almost all of the assets are ‘non-matrimonial’.

So, Mark’s ‘shopping list’ would be as follows.

Sarah’s income

Vulnerability to divorce: very. Mark needs income and Sarah is the only one earning it for now. Child support would normally be dictated by the Child Maintenance Service formula, and there will be spousal maintenance on top which, at best, would be for several years while Mark finds himself a job.

At worst, it could be on a joint lives basis. Spousal maintenance might disappear if Mark receives a capital settlement large enough to meet his capital and income needs.

Planning tip: document the basis on which Sarah is receiving her salary. It should be for duties actually carried out, otherwise this could be seen as a distribution to a beneficiary of the Oz Family Trust.

Any ongoing support from Derek and Mary

Vulnerability to divorce: very vulnerable if it continues. The court can assume that family support will continue and can therefore assume that it is an extra resource that is available to Sarah.

Planning tip: it would be best for Derek and Mary not to make any further gifts to Sarah. However, they may need to come up with a sound reason why they have stopped now.

The joint £300,000

Vulnerability to divorce: very vulnerable, even if it came from Derek and Mary.
The court will pretty much ignore the ‘provenance’ of any assets if they are put into husband and wife’s joint names, and accessed by both of them.

Planning tip: Sarah may want to move this money into an account in her sole name, not
to hide it, but to have more control over when and how it is used. It may well be needed to pay for Sarah and Mark’s legal fees.

Sarah’s shareholding in Ozmosis Ltd

Vulnerability to divorce: somewhat vulnerable. However, damage can be limited as:

• The court is unlikely to try to transfer any of the shares to Mark.
  It would give him cash instead.

• There will be a sizeable discount given to the shareholding value to reflect Sarah’s minority interest, the likely lack of liquidity, and the risk profile of private company shares compared to cash.

• Sarah can argue for a further sizeable discount to reflect the
  pre-marriage value of the shareholding, and passive growth
  on that figure during the marriage.

• There will be another discount to take into account capital gains tax, even if it is not actually incurred
  at this point.

Planning tip: implement restrictions in the articles of association to restrict the ability for a non-family member to be
a shareholder. Share transfer orders in England are not binding in Jersey.

The Oz Family Trust

Vulnerability to divorce: depends to a certain extent on whether it could be seen as a ‘nuptial settlement’, which has been defined as a settlement which is made on one or both of the parties to the marriage, during the marriage or with it in mind, which makes some form of continuing provision for them.

That definition can catch all manner of situations.

In Sarah’s case, the trust probably won’t have a nuptial element, because it was created before she and Mark were a couple.

However, even if it doesn’t have a nuptial element, it will be taken into account as a resource which Sarah has access to, if the court can see that funds will be given to her in the foreseeable future, i.e. within the next 15 years.

If Mark can point to a history of distributions to Sarah, that will be very persuasive evidence.

David’s interest will be protected.

Planning tip: the trustees probably should cooperate in disclosing information about the trust, but may well want to avoid participating any further in the financial proceedings, so that any English court order is not binding on them. Mark would then have to get a separate Jersey court order.

If the trustees think that Mark has good claims, a separate sub-fund (a ‘sacrificial lamb’) could be created for Sarah and her family, to show the limits of their future benefit from the trust.

The matrimonial home, owned by Ozmosis Ltd

Vulnerability to divorce: pretty safe. It is owned by the company, not Sarah or the trust. In addition, it is clear that Sarah did not originally own the property, or provide the company with the funds to buy it.

Mark would therefore not be able to use last year’s Supreme Court decision of Prest v Petrodel for a transfer of the property to go to him.

He might be able to claim that because it was the matrimonial home, the house was a ‘nuptial settlement’ but this would probably only entitle him to stay in the house for a certain fixed length of time, e.g. until he gets his capital settlement.

Planning tip: document the basis on which the property is used by Sarah and Mark, i.e. a tenancy agreement.

The Oz Grandchildren Trust

Vulnerability to divorce: fairly safe. Whether the trust is found to be a ‘nuptial settlement’ or only a ‘resource’, the court is likely to reserve the trust for the purpose it was intended for, namely to pay the grandchildren’s school fees.

Planning tip: Derek and Mary need to record in letters of wishes that this trust is only going to be used for the grandchildren, e.g. for their private education.

This trust has no history of making contributions to Sarah or David, and should not consider doing so.

What else should Derek and Mary think of?

• Their wills: they should think about creating a discretionary trust on the death of the survivor in order to avoid ‘loading’ Sarah with further assets which would be vulnerable
  on divorce.

• A post-nup for Sarah and Mark: even though the marriage may already be on rocky ground, it would be sensible for Derek and Mary to try proposing a post-nup. It would ringfence the trusts and the company and limit Mark’s claims, but it would also give him certainty and security, which might even help Sarah and Mark’s marriage to survive. Negotiating a financial outcome before Sarah and Mark have separated is likely to be much easier than afterwards.

Although some elements of the Oz family finances are vulnerable to attack, there is plenty that Derek, Mary, Sarah and the trustees can do, and there are plenty of arguments they can deploy,
to limit Mark’s claims.

Even if a post-nup proves impossible, they would still be best advised to engage with Mark and try to reach a deal without going to court. Mediation, collaborative law and arbitration are now all viable alternatives, which do not involve significant delays or huge legal costs.

Robin Charrot is a partner at Mills & Reeve

---