Should Trusts be considered in a divorce?
You can set up a trust in anticipation or even during the course of divorce proceedings. But if the intention is to hide or protect assets from the spouse/ former spouse, then you will probably just end up lining the pockets of the divorce lawyers as they fight over it. The Courts are unlikely to be impressed by such strategies either.
But Trusts to protect children and spouses are likely to be less problematic and may solve perceived problems (for example, family assets being lost when one spouse remarries and dies, leaving their assets to a brand new spouse rather than the children, trusting the new partner to be fair. They are not always!)
But if the trust is an agreed benefit for (say) children, or the soon to be former spouse, then that can be a useful way of setting things up. If the trust is considered by the Court to be a nuptial settlement (because one or other spouse can benefit) then the Court has powers to vary it should they consider it appropriate.
For pre-existing trusts, even if one party is a beneficiary it is more difficult for the Court to order a settlement from the trust and this will depend upon the type of trust, beneficiaries and financial means of the spouse.
Using Trusts for Gifts to Children.
Making a gift to a trust which MAY benefit a child can be a useful way of avoiding the receipt of large amounts of family money being the financial trigger for a divorce with the sudden availability of a much larger pot of money to split. The same applies where the child perhaps runs a business which could run into financial difficulties. A suitably secured loan from the Trust would normally be safe.
Back to Divorce issues – for the child too.
A simple returnable loan from a family trust would not normally be considered an asset for divorce settlement purposes either.
Whether or not a trust will be considered a matrimonial asset, or an asset available to one of the parties will depend upon the precise circumstances of the case. However, it is often better to consider setting up the trust than doing nothing because a trust will at least offer limited protection. If the Court considers it should be included in the matrimonial settlement, it may just vary the distribution of non-trust assets to balance out the value of the trust.
Such a loan can also cut inheritance tax on the death of the child, with the loan being recalled on death (to reduce the taxable estate) and then loaned to (typically) the deceased childs’ children. This process can keep money in the family for up to 125 years or even longer with considerable potential tax and other savings,
Particular attention should be given to the management of Trusts in a potential divorce situation. If the Trusts is seen as an extension of one parties personal bank account, then it is highly likely to be included in the settlements as if it was!
If the trust has multiple potential beneficiaries, and the divorcing party has had little benefit to date, then the prospects of success are higher. The domestic situation at the time it was set up may also have a bearing on the courts view.
Use of trusts to protect against creditors
Protection against creditors is much wider than for divorce and typically where the settlor is not the person in financial difficulty then the trust assets are not considered assets of the debtor so can be protected.
Trustees may be well advised to make distributions as loans not absolute payments out though those loans will rank equally with other debts and may not be recoverable, so secured loans may be preferable.
It is of course pretty pointless trying to set up a Trust when things are clearly going wrong, the Insolvency Act will almost certainly be used to undo blatant attempts to avoid creditors.
Like Lasting Powers of Attorney, Trusts should be set up when things are good, so why not contact us today, if the financial sun is currently shining on you?