Benefits of Using Trusts and How Trusts Are Treated on Divorce

A trust can be used to separate the legal ownership of an asset from the beneficial interest. The person setting up the trust (‘’the settlor’’) will transfer trust assets, such as property or money, to the legal owners (‘’the trustees’’) to manage for the benefit of another party (‘’the beneficiaries’’). 

There are many different types of trust which can be created both during a person's lifetime, and also upon death within a person’s Will.  The type of trust used by the settlor will depend on what the settlor wishes to achieve and the circumstances of the beneficiaries.

What are the benefits of using a trust?

Individuals can set up trusts for multiple reasons, including:

Estate and inheritance tax planning

When an asset is transferred into trust, the legal ownership of the asset vests in the trustees rather than the original owner of the asset. This means that the asset would typically fall outside of the original owner’s estate for inheritance tax purposes, so long as they survive 7 years from the date that the transfer was carried out.

Managing assets for minor or vulnerable beneficiaries

Certain types of trust can be used to manage assets for beneficiaries who would be unable to manage the assets themselves due to being a minor, or because of their disability or vulnerability. Different tax rules can apply to these types of trusts, which can often be advantageous to the beneficiary.

To manage and protect wealth for future family generations 

Trusts can provide the opportunity to transfer generational wealth down the family line whilst allowing the trustees to retain control over the management and distribution of trust assets.

Asset protection

Many individuals would like to provide for their family members, but in certain circumstances, it is not suitable to make a direct gift to them.  By using trusts (typically a discretionary trust), it is possible to allow the family members to benefit or be provided for without those assets forming part of their own estate. This can provide protection from future uncertainties such as bankruptcy and third-party claims.

To provide third parties with a beneficial interest in a property

A person can be given the right to occupy a property and receive income from the property, whilst the property itself will pass to specified beneficiaries when the trust comes to an end. These types of trusts can be used to offer protection to different individuals within blended families.

The approach the court will take in divorce financial proceedings will depend on the type of trust that the party has an interest in and the reasons why the trust was originally set up.

Section 25 (2)(a) of the Matrimonial Causes Act 1973 provides that the court must have regard to the financial resources each party have or is likely to have in the foreseeable future.

Therefore, the court must consider whether the trustee is likely to advance to the beneficiary spouse any capital from the trust in the foreseeable future. This is particularly important to achieve a fair settlement between the parties.

When a party has an interest in a discretionary trust, the court must determine the likelihood of the trustee acting in a particular way by considering the pattern of distributions made to the beneficiary over several years.

This is because it can be difficult to assess the extent to which such resources are available in practical terms. Discretionary trusts do not provide beneficiaries with an absolute right to receive any trust assets.

Distributions from discretionary trusts are instead made at the discretion of the trustees, but in consideration of the settlor's wishes and the beneficiary's needs.

Past behaviour can be considered too. For instance, if the beneficiary spouse received regular distributions from a family trust over the preceding 10 years, then the court would likely take the view that it is reasonable to expect those distributions to continue in the future, as long as there are no compelling reasons to the contrary.

In certain circumstances, the court may order an unbalanced division of matrimonial assets in favour of the ‘’non-beneficiary’’ spouse by taking into account available resources from the trust.

This means that the trustees may have to make a payment to the beneficiary spouse from the trust to financially support them.

The trustees have a duty to act in the best interests of the beneficiaries of the trust, so if a beneficiary’s assets are due to significantly decrease as a result of a financial order, it would be appropriate for the trustees to consider making a distribution to them.

Where there are few personal assets available, the court may make an order beyond the personal means of the beneficiary spouse, so they are forced to rely on the trust for their own financial funding in the future.