The Impact of Divorce Proceedings on Trusts

The Impact of Divorce Proceedings on Trusts

The Impact of Divorce Proceedings on Trusts 1800 1200 Alfred Ip
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Although there a common belief that the nature of a Trust means that the assets contained therein are not held by family members as individuals – this is incorrect. All family assets – including Trusts – held in Hong Kong and overseas are normally considered part of the ‘matrimonial pot’ in divorce proceedings.

As we have already highlighted in our previous articles “Generational Transition of Family Business and Wealth Preservation” and “Family Focus Week: 101 on Division of Assets in Divorce Proceedings”, Trusts are a common tool for estate and succession planning, even after estate duty was abolished in Hong Kong in 2006. Nevertheless, such assets must be declared when the assessment of the family wealth is made during divorce proceedings.

Once the Trust is set up, the settlor specifically gives away all, or part, of her/his assets to beneficiaries who now become the legal owners. Divorce can have an impact on a Trust where proceedings involve either the settlor or a beneficiary of a Trust. In many cases, Trusts may hold a substantial share of the family wealth. Whether or not the Trust is vulnerable to divorce depends on the circumstances in which it was created, and/or what type of Trust it is. If a Trust is vulnerable to divorce, this can sometimes have a meaningful impact on the financial position considered by the Courts.

Hong Kong Courts can vary Trust arrangements if it constitutes a ‘pre-nuptial’ or ‘post-nuptial’ settlement, and even order that a provision can be made for a spouse who is not a beneficiary. A Trust might be considered part of necessary financial income for the spouse – and hence be included in the overall matrimonial pot – and while it might or might not affect the Trust itself, the value considered and the eventuality of ordering a payment to be made out of that Trust could be options in finding a fair solution for all parties involved.

There are also cases in which certain Trusts have been set aside because it was proven that they were specifically created so that the settlor would avoid payments to a divorcing spouse. There are many ways in which it can be shown that a Trust is a ‘sham’: perhaps the trustees do not act in accordance with their duties; perhaps the beneficiary or settlor treats the assets as if they were their own, acting independently of the Trust. The timing of the formation of the Trust asset, trustees, beneficiaries, settlor and powers of distribution, including any letters of wishes in connection with the Trust, may all give an indication as to whether the purpose of the Trust is genuine or not but consideration would also have to be given to many other factors. It is difficult to prove that a Trust is, in fact, a sham. In most cases the onus to prove that is on the spouse making the allegation and this can be a costly and time-consuming exercise.

For a Trust to be considered an ‘ante-nuptial’ or ‘post-nuptial’ settlement which the Court can vary, it is necessary to demonstrate what kind of connection there is between the Trust and the spouses, as if the Trust was set up before the marriage or before the couple even met, and generally what kind of phrasing was used in the settlement deed. In many cases complications may arise if it can be proven that the intention for a future marriage was considered when the Trust was set up.

Defining if the essence of a Trust is ‘nuptial’ demands a thorough scrutiny of the drafting and circumstances surrounding its set up. Courts tend to look to see if the trustees are likely to exercise their powers in favour of such a spouse, and will also examine the pattern of previous trustee pay-outs, e.g. in cases where random or recurrent demands of payments are made by the beneficiaries.

In 2014 a very high-profile case in Hong Kong involved the ex-wife of Otto Poon Lok To who got a HK$750 million divorce pay-out after the highest court ruled that Poon had to share the entire HK$1.5 billion family Trust with her. The Court of Final Appeal accepted the argument that Kay Kan Lai Kwan – married to Poon for over 40 years – that the lower courts were wrong to rule that only two-thirds of the fund should be considered a matrimonial asset. This ruling showed that Hong Kong Courts indeed consider how Trusts operate, and not only the theoretical protection they provide.

Bearing in mind the consequences of a divorce, all family assets need to be taken into consideration, including Trusts, however proper legal advice and professional drafting can generally protect wealth planning also in case of a very acrimonious divorce. It should always be remembered that there is a duty of transparency when it comes to financial remedy proceedings relating to divorce. Off-shore accounts attempting to hide assets with the purpose of misleading your spouse and the Court, as to the extent of a spouse’s true financial position will attract criticism and could result in hefty penalties in the Court arena, such as orders for costs being made against you.

Ultimately every couple’s financial circumstances are different and, whether you are pursuing or defending claims against a Trust in matrimonial proceedings, it is important that you obtain specialist advice.

Our team at Hugill & Ip has extensive experience in dealing with Family Law and Trusts issues – so kindly get in touch with us to find out how we can help.

This article is for information purposes only. Its contents do not constitute legal advice and readers should not regard this article as a substitute for detailed advice in individual instances.

Alfred Ip

Alfred assists high net-worth individuals (HNWIs) in handling their wealth-related issues, such as contentious and non-contentious trust and probate, mental capacity, family office, amongst other wealth management matters. He is also a leading Dispute Resolution lawyer with over 20 years of experience in Hong Kong. Moreover, Alfred helps clients with issues regarding Family Law.

All articles by : Alfred Ip
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