In divorce cases involving Trusts, courts assess whether trust assets should be included in the matrimonial pot. They examine whether a Trust was genuinely created or merely designed to shield wealth from division. Courts look beyond legal ownership to determine if a spouse realistically has access to trust funds, considering factors like past distributions and trustee discretion.
A landmark 2014 case saw Hong Kong’s top court award an ex-wife HK$750 million from her husband’s HK$1.5 billion family trust, proving courts will intervene when trusts function like marital assets. Trusts may be varied if deemed “nuptial settlements” with clear marriage connections.
While courts rarely invalidate trusts as “shams,” they will scrutinize cases where trusts appear designed to defeat spousal claims. Given the complexity, specialist legal advice is crucial when trust assets feature in divorce proceedings.
SHOW NOTES:
00:45 The Family Court position
02:20 A landmark case in Hong Kong
03:38 Sham Trusts
04:45 Takeaways
TRANSCRIPT
Trusts and the Impact of Divorce Proceedings
In many cases, Trusts may hold a substantial share of the family wealth. In divorce proceedings, disputes can arise as to whether Trust assets are treated as matrimonial property and are available for division between the parties, or whether they are non-matrimonial and should be excluded from the “matrimonial pot”.
There can also be arguments about whether a Trust has been created with a genuine purpose or as a means of defeating the other spouses’ financial claims, particularly where the assets held in a Trust would otherwise have been considered matrimonial.
The Family Court position
The Family Court has a duty to consider all the available assets and resources of the parties as well as having wide and varied powers to make orders that achieve a fair outcome in each case.
This means that when the Family Court is faced with a dispute involving a Trust, they will look past the sometimes-complex structures of a Trust and examine the reality of the situation to decide what assets are available to the parties.
Whether or not the Trust is vulnerable to orders by the Family Court on divorce depends on the circumstances in which it was created, what type of trust it is and how the trustees have managed the trust funds.
- A discretionary beneficiary has no proprietary interest in the Trust Fund, but the Family Court looks at resources; not just at ownership. What is relevant is the likelihood of the Trust Fund or part of it being made available to a spouse, either by income or capital distribution.
- The question that the Court will consider is: If the beneficiary were to ask the trustees to advance them capital, would the trustees be likely to do so? The question is not one of control of resources: it is one of access to them.
In making its assessment the Court will consider the creation and terms of the Trust; the Letters of Wishes; the nature of the Trust assets; and previous distributions made by the Trustee. In effect the Court looks at the reality of the situation and regards past conduct as a useful guide of likely future conduct.
A landmark case in Hong Kong
In 2014 a very high-profile case in Hong Kong involved the ex-wife of Otto Poon Lok To who received a HK$750 million divorce pay-out after the Court of Final Appeal ruled that Poon had to share the entire HK$1.5 billion family Trust with her. This ruling showed that Hong Kong Courts consider how Trusts operate, and not only the theoretical protection they provide.
Hong Kong Courts can vary Trust arrangements if it constitutes a ‘nuptial’ settlement, and even order that provision can be made for a spouse who is not a beneficiary.
For a Trust to be considered a ‘nuptial’ settlement which the Court can vary, it is necessary to demonstrate what kind of connection there is between the Trust and the spouses, whether 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.
The 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, for example in cases where random or recurrent demands of payments are made by the beneficiaries.
Sham Trusts
In the majority of cases the Trusts that we come across in divorce proceedings are genuine. However, 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 trustees.
The timing of the formation of the Trust, the trustees, the beneficiaries, the settlor and the 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 it is a sham is on the spouse making the allegation and this can be a costly and time-consuming exercise.
Takeaways
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.
This video is for informational purposes only. Its contents do not constitute legal or professional advice.
