S6E4: Navigating Trust Disputes in High-Stakes Divorces

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TRANSCRIPT

Hugill & Ip presents Series 6 of the HIP talks “Family matters”, a compelling podcast collection delving into the complexities of family law in Hong Kong. This season, our expert solicitors engage with preeminent professionals, psychologists, financial advisors and mediators to explore the real stories behind divorces, custody battles and financial disputes. Hugill & Ip brings you this series as part of our commitment to modern, client focused legal services, whether you’re navigating family law issues or simply interested about the system. Family Matters delivers sharp analysis without the jargon.

Alfred Ip  00:40
Hello everyone. Welcome to the HIP talks. I’m Alfred Ip, a partner at Hugill & Ip, today we have a very special guest, Richard. Can I ask you to introduce yourself?

Richard Wilson  00:51
Indeed. My name is Richard Wilson, and I’m a barrister at Serle Court Chambers in London, where I specialise in trust law, and I work in England and across a range of jurisdictions, particularly offshore jurisdictions like those in the Caribbean. And from time to time, I have the pleasure of working on cases with you relating to Hong Kong.

Alfred Ip  01:13
That is the reason why I brought you all the way here from London.

Richard Wilson  01:16
Well, it’s always, always a delight to be here in Hong Kong.

Alfred Ip  01:19
Thank you very much. And there’s one part in your title that we need you to explain a little bit about. What is the KC?

Richard Wilson  01:27
Oh, it’s King’s Counsel, which is a particular sort of barrister. You get to a stage in your career where you can make an application, and if you’re fortunate, like I was, you get accepted, and you get the rank of King’s Counsel.

Alfred Ip  01:43
What does one have to do to be fortunate enough?

Richard Wilson  01:46
Well, you have to be nice to people for quite a while, because you have to fill in a lengthy application form and have referees from references from judges, from your opponents, from your clients. It’s quite a it’s quite a tortuous process. And I have to say, when you get the letter saying that you’ve been appointed, the first feeling is one of relief that you’re not going to have to go through the process again.

Alfred Ip  02:12
But that is a huge honour, isn’t it?

Richard Wilson  02:14
Yeah, it’s great. It’s great. And certainly the ceremony when you actually become a King’s Counsel is in Westminster Hall in Parliament, and you have to wear your you have to wear your ceremonial outfit, which involves a really long wig and knee breeches and and all sorts of things. It’s great fun. It’s British tradition at its best.

Alfred Ip  02:36
But then actually, I was talking to another friend of mine, who is also a senior counsel in Hong Kong. And one of the things that we were talking about is, in order to be a senior counsel in Hong Kong, which is the equivalent of King’s Counsel in London, one thing that you have to be is to be honest and truthful, especially in your submission to the court, there cannot be any circumstances which you may come across as misleading the judges. Is it the case in London as well?

Richard Wilson  03:10
Absolutely, it’s the golden rule, you mustn’t mislead the court. But this is exactly the reason why I hate to admit but it’s true that a lot of time barrister or counsel does have a lot of gravity in the submission compared with solicitor. I don’t know about that, but I’ll take your word for that. Alfred, all right, today, actually, we’re talking about divorce and trust. But actually we did we come up with a name, a title of this podcast. I don’t think we did then it’s something that probably we should be thinking about at the end of it. Let’s see how it goes. Okay, we’ll see. Yeah, all right, so let me ask you the first question. You stand at a crossroad where Family Fortunes meet marital breakdowns, when offshore wealth and complex trust collide with high stakes divorce proceedings. It’s a very long way to say that people using trust to safeguard their assets, not hide their assets, safeguard their assets against spousal claims. Can you share with us some of your experience? What is the real battleground in these kind of proceedings.

Richard Wilson  04:21
That’s a very, very interesting question to start with Alfred, one of the main issues I always think, in these sorts of disputes where you’ve got the context of marital breakdown, and you’re then looking to deal with the assets and often held in trust is that the dispute is much more complicated because of that emotional battle that’s going on as well. If you’re doing disputes about commercial contracts or anything like that, it comes down at the end of the day to a fairly straightforward economic or financial question.

Alfred Ip  05:00
Yes, it’s all bad money,

Richard Wilson  05:02
exactly, but actually, in this source of litigation, it’s always very highly charged emotionally, because, understandably, people feelings are running high, and that can, that can provide an extra level of complexity because you’re trying to deal with with people, not only for their legal problems, but some of the, some of the emotional, psychological problems, I mean, in a way, where we’re part lawyer, part therapist, in these in these sorts of disputes, and that provides it its own challenges, particularly when you’re trying to do, what you often try to do is find a consensual resolution to the dispute, rather than having to go all the way to court and argue it out.

Alfred Ip  05:48
But isn’t it more interesting in the divorce with trustee involved, that is, you have two very emotionally charged parties, and yet this party in the middle, whose job is actually to de-escalate the party’s emotion and to do things properly, because they have the wealth in their hands,

Richard Wilson  06:12
absolutely. But that actually makes for its own complexities and difficulties for the trustee, because you can guarantee in this situation, you’re probably going to annoy or alienate at least one party, and if not, if not both. And it’s a very important role, as you say, the trustee is often the person holding the assets, and they have an important role to play, particularly in unlocking the whole dispute from that perspective, but the way in which they view their position can often be very different from the way that the parties to the marriage view their position. You might have one party viewing the trustee’s job to sort of serve their interests, and the other party viewing the trustee as being hostile because they’re perceived as being there to do the bidding of one party or the other, when the reality is that the trustee has a very important independent role under the trust, looking after the assets and serving the interests of their beneficiaries.

Alfred Ip  07:15
When you have to do the right thing, you cannot please everyone.

Richard Wilson  07:19
Absolutely. It’s the old saying as well, that no good deed goes unpunished.

Alfred Ip  07:23
You see, doing the right thing override any other motive or any other reason to act one way or another. This is the reason why trustee should be someone who is professional, who has experience dealing with these kind of issues, and who knows how to do things properly,

Richard Wilson  07:43
absolutely. And that’s particularly important in this context, because the common situation where a trustee gets embroiled in these sorts of disputes is one where assets have been put into a trust structure at some point before the marriage, possibly by one of the parties to the marriage or by another family member, often as part of succession planning. And when the divorce happens, there is a battle over whether those assets can be used for a divorce, and the court, often in a in an onshore jurisdiction like Hong Kong or in England, will then have to look at what it can do in relation to the trust, and the way in which the trustee acts and has acted in dealing with those assets, can be really critically important In deciding what a judge will do and whether the judge will treat those assets as being something that they are able to distribute on the divorce or whether they have to say, well, actually, these assets just don’t belong to the parties so and say. And one of the factors, as I’m sure we’ll explore in this discussion, is is whether the trustee’s done the right thing. And we probably talk about what that what that involves?

Alfred Ip  09:06
Yeah, this is actually something that can go on for hours. But let me ask you this question. First, for the Hong Kong audience, especially men keen to protect family legacies, what would you say is the golden rule for trust creation that can withstand the fearless divorce claim and conversely, what are the silence killers, those seemingly small mistakes that can utterly torpedo a trust protective power.

Richard Wilson  09:33
It’s in two parts. Firstly, plan early. If you are getting to a point where you’re looking to plan and put in place structures to protect your assets against an impending divorce, you are undoubtedly too late and the other the other part of the golden rule is make sure that your structure is as robust as possible. Possible by you’ve already touched on this, having professional trustees who do their jobs properly and have a clear role that they stick to. Because, coming to the second part of your question, the silent killer is really this, that where you have a structure that looks like it’s independently run, and it takes the assets out of the hands of one of the parties. The real killer is where that person actually exercises control under that structure, either legitimately, through powers that they’ve reserved, which means that they can really control what happens to the assets, or behind what the courts have called a cloak against transparency, where in fact, they’re controlling them, despite them being in the hands of a trustee who has, it would seem, all of the powers.

Alfred Ip  10:54
I always say when I’m advising client to set up a trust is, what are you setting up the Trust for? If the answer is one way or another, it is our role to actually help them structure the trust in a way that it can withstand the scrutiny of later on, when there is when this is disputed, and this is exactly the reason why a lot of time it’s a bit too late when you check out the trust in order to avoid the spousal claim, because there is the presumption, and a lot of the time it’s too late because you don’t know how to do it properly.

Richard Wilson  11:37
Absolutely, absolutely. I mean, I think we’re both on the same page with this that if you are looking to put your assets beyond the reach of potential claims, in this context, we’re talking about divorces, but particularly, so, particularly divorces in this discussion, but also creditors, then it really can be problematic, because the courts have means at their disposal of clawing back assets have been settled in that situation. That’s why I say planning early is much better, because there are perfectly legitimate reasons for doing this. I mean, actually the one of the best uses for trusts is as a mechanism for succession planning, because a trust can live for a long period of time. You put in place a robust structure which has a professional trustee who manages the assets that are in the trust, and that goes on for years, and that means that the death of one generation or two doesn’t really affect the way in which the family assets are dealt with. And that sort of planning is really robust. And what is important, it seems to me, is that you have to anticipate that it might come under scrutiny or challenge further down the line, because whilst planning might be done in a in a very happy environment where the family is all harmonious, and one thinks, well, you know, there’s, there’s not going to be a divorce here, you’ve got to hope for the best, but plan for the worst. And what that means is, is making sure that not only do you do you put your structure in place properly, you manage it properly, so that all of those points that I was mentioning before about the control being exercised by people it shouldn’t be exercised are dealt with. And a useful exercise that I’m sure we’ve both been involved in is, is what’s called stress testing. Well, when you set up a structure, you say, well, look, this is what we want to put in place. And then you look at the potential challenges that might come down the down the road in the future, and look at and consider how you would react to those and whether the structure actually needs changing in order to anticipate and deal with those.

Alfred Ip  13:52
I wish that more people would be receptive to the idea of having the structure stress tested, because to be a very honest with you, Richard, in Hong Kong, a lot of structure was set up without even lawyers involved. A lot of the time it’s just trustee putting together a letter of instructions, of intent or letter of wishes in front of the client, and client just signed it away. The problem is that later on, if circumstances change and there are something that can be done about it, it might be too late for them to restructure the trust or to do anything to make it robust against this kind of claim.

Richard Wilson  14:37
Absolutely, I think that’s that’s a very, very good point. I think part of the problem where these structures are set up without the benefit of legal advice is that these potential challenges further down the road aren’t anticipated fully and properly. And what tends to happen, and I can completely understand why it happens, but that too much control is given to the person setting up, the trust, the settlor. It’s quite understandable that if you are particularly where you’ve built a business yourself, you start that from scratch. It’s worth a vast amount of money. And then the advice that you get, very good advice for succession planning is you need to now give it away to a trustee who gets to make all sorts of decisions over the over the business. They can sell the shares. They decide which of the next generation are going to to run it. That that’s quite a hard sell because that, that element of control over the business that’s been built by the client is, you know, is quite extensive. And what’s happened is that structures are built in more and more control for the client, the set law. And what that means is great. I mean, it suits that. It suits the the the needs of the client to have that control, but it does make the structure more vulnerable in a divorce context further down the line, because what the courts can say is, well, look, you can control these assets, and therefore, if I the judge want to distribute them between the parties to the marriage, I can do that by ordering you to use this power or that power. And so it’s that it’s very much a balancing act between the control that somebody would necessarily or understandably want as part of the structure and the protection that it will provide against claims further down the line.

Alfred Ip  16:39
I completely agree with you that it’s almost impossible to advise patriarch or the creator of the family wealth to all in a sudden let go of all of the power that they have with the assets. Basically give it away in the past, there might be a very legitimate reason, for example, inheritance tax as their duty. If they don’t let go and let go for more than seven years, they cannot enjoy the benefit of tax saving. And it doesn’t make the whole process easy for the patriarch. Is still, we still talk about relinquishing the wealth that they very, very hardly worked for over the life to accumulate it. It’s extremely difficult. It’s almost inhumane. But then at the same time, when we are talking about setting up the trust with all the power reserved to the patriarch or the settlor, even telling them that, oh, just because it’s a trust doesn’t mean that it’s no longer yours. The trust is yours, so the trust access is yours. Actually it’s giving the client or the settllor a wrong impression or wrong expectation that the trust is only a paper exercise.

Richard Wilson  18:00
I think you’ve hit the nail on the head there. Alfred, I mean, the reality is, you can’t have it all. You can’t have control, or complete control, over the assets and also the protection that you are looking to have, because that necessarily comes from giving it away. Now it’s fair to say that it’s become fashionable in in recent times, the last 20 years or so, to have trusts where you build in quite legitimately and quite upfront, a significant degree of control for the wealth creator who’s setting up the trust, and, you know, a lot of the offshore jurisdictions make it very clear that doing that doesn’t undermine the validity of the trust all these things. And that’s that’s absolutely fine on one level. The problem is when you come before a court, and we’ve seen it in Hong Kong and in England, where the court’s dealing with things like divorce, and says, well, look, actually, that’s fine. This trust may be valid. It may be legitimate for you to have all these powers, but what it means is that I, as the judge, can make you use those powers to bring these assets into account. And you know, I do fear that, that there has been a tendency in certain quarters to make clients think that they can have everything, that they can have absolute dominion over the assets, they can control the levers of power, over the over their assets, whilst having effectively given them away so that they can’t be available to divorcing spouse or creditors or tax authorities. And I think that really what we’ve seen over the last decade or so, particularly, is an attitude amongst judges that actually, you can’t have it both ways. You can’t have everything. Which brings us back to that question of stress testing. Alfred I really do think that it’s a it’s a worthwhile investment for clients, to particularly those who’ve set up structures 2010, years ago, to say, well, actually, let’s look at it now in light of where things are. And you know, particularly where you’ve got the family has developed. You’ve got another generation, they’re getting married. What potential problems might be coming down the line and saying, well, look, is this structure as robust as possible, and is there anything we can do to make it more robust?

Alfred Ip  20:31
And this is exactly why we always emphasise the importance of trustee having regular review with the client, knowing what the client’s circumstances are, whether there are any changes, and whether there needs to be anything to be done with regard to a truck structure in order to make it more updated and perform its function of protecting the family wealth,

Richard Wilson  20:56
absolutely.

Alfred Ip  20:58
Yeah. And the importance of relinquishing control. Would you say that is the strategic consideration that everyone would bear in mind when they’re advising clients to set up the trust? Relinquishing control, it sounds really difficult.

Richard Wilson  21:16
It absolutely does, because I think it’s, it’s something that instinctively, as I mentioned before, if you’ve built up this asset base as the wealth creator, relinquishing control of that to a third party is going to be really difficult, but it is that giving up ownership and control that provides many of the benefits. We’ve mentioned tax we’ve mentioned asset protection, we’ve mentioned succession planning, that those are the benefits that you get from relinquishing that control and ownership. And I think it’s, it’s very, very important right at the beginning when planning to focus very much on what works for any particular client. I think there is a there is a tendency, or a risk of thinking that one size can fit all and that you can, you know, you can give them all, all the power in the world over these assets. It’s all fine. But actually, I think that the way the legal world has developed, it’s becoming more and more difficult to do that, because judges are much more skeptical about structures, certainly in particular divorce context, they are. They’re looking at ways to do justice as they see it. And one of the things that that really is problematic from their perspective is one of the parties of marriage saying, Well, look, I’ve got access to and control over all of these assets, but actually you can’t touch them because they’re not really mine. That really does lay down a challenge to a judge, and one that we’ve seen in the courts that they are very much trying to rise to and find ways of bringing those assets into account, because it’s the right thing to do, in their view.

Alfred Ip  23:00
It sounds like you either do it or you don’t, don’t do it halfway: to set up the trust and retain all the power thinking they can get around and only giving the judge any reason to see through it.

Richard Wilson  23:14
Yeah. I mean, I think the clue’s in the name trust. Actually, what you want from a structure is to put it in the hands of somebody that you trust, yeah, and who will do their job properly. And you know, very often, if nor was that, that should involve a professional who’s used to doing trust administration properly and making sure that they discharge their duties. Because the beauty of a trust structure is that, you know, the trustee has to act for the benefit of the beneficiaries. They have to stay within the terms of the trust and exercise their powers properly with with proper consideration for a proper purpose. And so there are those inherent protections that are there. And if you get somebody that you can rely on to do their job properly, that is, that is the ideal structure. And if you can do that, the need for the control that people want to hold on to becomes much less.

Alfred Ip  24:11
It’s easier said than done. Have to say…

Richard Wilson  24:14
I think that’s a fair comment, it is. But as I say, we come back to this central point, which is that you can’t have it all. You can’t, you know, you can’t give away with one hand and keep it with the other.

Alfred Ip  24:26
Let’s say that a client find really, really difficult to accept the fact that I need to relinquish all the control that I have for my assets. I cannot trust anyone, which is the case actually, most of my clients who try to sell to trust have difficulty trusting the trustee. I understand that is their problem. But then, no matter how much that we want to convince them to trustee are reliable, they will have problems understanding there. Can post nup or prenup take away. This problem of setting up the trust that is using a prenup or post nub to replace the trust, or it has to be done with the trust in order to make it impenetrable.

Richard Wilson  25:11
They are helpful. They are they are something that the court will have regard to when making its decision, and that they will seek to give effect to them, but they’re not binding. They don’t take away the court’s ability to deal with the assets in an appropriate case if they if they consider them. I mean, it’s generally all part of a package of measures if you’re planning. Yes. I mean, prenup and posting up agreements are are undoubtedly going to be helpful in these situations, but they’re not a substitute, I don’t think, for robust planning and careful planning which takes into account the things that we’ve just been talking about, and the need not to give an obvious way into the assets. I mean, there are other things that can be done. It’s quite common to have a Private Trust Company, a PTC, as the trustee, which, as a company, it’s got a separate legal identity from the wealth creator, but they can sit on the board and exercise some control in that way. And I know that’s a popular solution. It’s not without its own problems from time to time, but that can be a way of doing it. So again, with careful planning at the outset, it’s much easier to sort of navigate these various problems, but you’ve got to, you’ve got to sit down and think about them and think about them carefully, but all too often, dare I say it, not when it’s a structure set up by lawyers or experienced professional trustees, but when it’s set up by others, perhaps into some, some other intermediaries, there’s a tendency not to put in the effort at the beginning of of doing the what if planning, as I always call it of saying, well, what if somebody gets divorced, or what if there’s a there’s a big tax bill, all of these sorts of things, the all the things that people don’t like to think about, the problems further down the line and factoring them into the planning…

Alfred Ip  27:14
because they do want to think about those things,

Richard Wilson  27:16
absolutely. But I mean, that’s really, in this context, the most important thing, and perhaps our job as lawyers is very often making people confront the unpleasant things that they don’t want to confront. That’s why we’re always so popular. Alfred,

Alfred Ip  27:31
I always say that if you just want to hear things you want to hear from me, then I’m probably not doing my job properly. I’m not here to say things to please you. I’m here to help you, addressing to the issues that you may have and honestly in life, there are, I always say, two major challenges. One is death, one is divorce. The first one, you cannot avoid it. The second one, you hope you can avoid it, but a lot of times it’s becoming a little bit difficult, and it’s

Richard Wilson  28:04
not always your decision.

Alfred Ip  28:05
Just because you don’t want to get divorced doesn’t mean that you can avoid it, but this is exactly the reason why, if we want to navigate this risk properly, you should probably find an advisor who can help you with these kind of issues to look into things more in depth. And now I want to move a little bit more to the trustee. You just mentioned, Public Trust Company, but this is another topic that we can spend another hours and a half, maybe two, talking about it now for let’s say that it is normal, professional trustees, those who are listening to our podcast today, when a trust is directed into divorce. What are the trustees non negotiable duties and liabilities? How do they walk through that tightrope of neutrality between worrying bosses and still protect the trust?

Richard Wilson  28:53
Well, the overriding point for a trustee is, of course, that they are there to serve and protect the interests of their beneficiaries of the trust. And what that will mean in any given situation will, of course, vary, but very often, the situation we’re confronted with in the divorce context is that a trust has been set up and either by one of the parties to the marriage or by somebody else and their beneficiaries and the other, the divorcing spouse is trying to say, Well, look, these assets in the trust should be available for distribution on the divorce. I want my lump sum, because I can see all of these assets sitting there, and they’re very valuable. That provides a whole host of challenges for a trustee, particularly where it’s an offshore trustee, and the reason for that is that they’re not within the jurisdiction of the court generally. And the question for them is, do they participate in the divorce proceedings as one or other the parties might want them to? Very often, what you’ll have is the party that wants access to the assets will try and bring the trustee in. The party who doesn’t want the assets being brought into play will be trying to keep the trustee out of the proceedings. And so there’s always that, that battle, and the trustee has the difficult decision to make about what what it should do and the extent to which it should get involved. Because I think the conventional wisdom has always been, if you are a trustee in a different jurisdiction, a different place, you’re the you’re the offshore trustee, and there’s a battle going on in in a jurisdiction like England or Hong Kong, you stay out of it. You don’t let the court make orders that will let it grab your assets, and that certainly has been, as I say, the conventional wisdom. But I do think that the world has moved on slightly, because judges have become much more proactive, and, dare I say it, imaginative, in the ways that they have looked to get their hands on assets and be able to distribute them. And so the trustee’s got a very, very important and difficult decision to make about what it does. And the main area I always think of that, or certainly the first point at which that arises, is when they’re asked for information about trusts, because very often you’ll have one party saying, well, don’t give them any information. We don’t want them knowing what want them knowing what’s in the trust, because that’ll only just encourage them to go after them. But very often, in my view, giving some information through one of the parties to the divorce and showing the court that this is a legitimate structure which does actually afford the protection that you want it to afford can be, can be a much better solution.

Alfred Ip  31:47
It’s a very long way to say, if you’re hit with a divorce paper call a lawyer.

Richard Wilson  31:55
I didn’t want to be quite so, so upfront about it. But yes, absolutely, because it really is. I mean, there are, it’s a minefield. I mean, there are so many things that can can go wrong for a trustee, because you find yourself, you know, likely to be criticised by someone or other, depending on what, depending on the decisions you make.

Alfred Ip  32:18
I always say that the only way that you can protect yourself properly is to get a court order,

Richard Wilson  32:24
…and very often that will be the solution, because, of course, for a trustee, the courts are certainly in their jurisdiction, in the off, in the offshore jurisdictions where you’re dealing with offshore Trust, the courts are very receptive to trustees seeking guidance and saying, well, look, this is the difficult situation. This is what I think I should do. Will you confirm that it’s, it’s the right thing, and that, in turn, that protection of a court order from their home court can be helpful in the divorce proceedings, because the trustee may not, may be told by the court, don’t provide information. And then when the judge in the divorce is saying, well, look, why isn’t this trustee doing it? You’ve got a bit of paper saying, Well, look, actually, they’ve been told by their own court not to do it. So yes, I completely agree with that, that going to court can be a really helpful solution.

Alfred Ip  33:14
But then, of course, it’s not just, oh, just go to court and then you are absolved from anything before you go to court, obviously, you need to look through your papers, documents, see what is it there? What is it that is helpful to you getting the court order and your actually your duty to make proper disclosure when you are making making the application to court.

Richard Wilson  33:40
Yeah, and again, from a from a trustee’s perspective, making sure that you keep good records throughout the administration is really important. And that’s probably another topic that we could we could spend hours discussing, Alfred, is, you know, what should a trustee have on its file? But what you’re looking to show in this context, I always think, is that the trust is being run in accordance with its terms, and that, coming back to that question of control that we were talking about earlier, that people are not exercising control, that they shouldn’t be so that so that you have this evidence that you know that the wealth creator might be saying, well, I think you should be doing a, b and c, and the trustee saying, Well, look, that’s all very interesting. And we’ll take into account what you’re you’re asking, but it’s our decision. It’s not yours. And we’re going to, you know, we’re going to behave in this way. I mean, in these sorts of contentious situations, one of the one of the most powerful things for somebody challenging the trust is to have a whole list of requests from somebody, and every single one of them is complied with by return. An email comes and say, I’d like a distribution of x, and they say, here you are. Is the bank transfer has been done. And I think again, it’s about thinking ahead about how that will look, and not just operating a trust as a bank account for one or more of the beneficiaries.

Alfred Ip  35:09
Operating as such is more often than we think it would be, right?

Richard Wilson  35:12
Absolutely. Yeah. I mean, I think that, and that is one of the that is one of the problems. But again, we come back to this idea that it’s quite hard to give up control, because if you have built a valuable business and you hand it over to a trustee to then to then say to them, well, look, actually, I, you know, I want a big distribution to buy my new yacht, to have somebody say, well, no, we’re not going to let you. We don’t think it’s the right decision. It’s quite a bitter pill to swallow.

Alfred Ip  35:39
It doesn’t have to be like a distribution if you want to buy a yacht or a Ferrari, right? You can always ask to trust to lend you the money…

Richard Wilson  35:50
you can!

Alfred Ip  35:51
…or simply ask to trust to buy for you, for the benefit of not only yourself, but also other beneficiaries, so they can also enjoy the fun of having a yacht or a Ferrari…

Richard Wilson  36:04
exactly. But again, we come back to think that if the trustee is going to do that for wider benefit, a court’s going to look very skeptically at it, if only one beneficiary ever gets to use it.

Alfred Ip  36:15
Okay, we touched on earlier about the judicial attitude towards the trust, we always say that the judge seems to be very cynical about the family trust and always seeing it as a way to avoid marital assets being split or supposed to claim. Do you see as a trend and that the court is becoming more and more ingenious in finding ways to get around trust.

Richard Wilson  36:43
Yes, it really has. Because I think there has been a period of time when judges have been confronted with situations where there are valuable assets in a trust and being told, look, there’s a trust. You can’t touch this. And they’ve, they’ve rather viewed it as a as a challenge that they have decided they’re going to rise to. So we’ve seen in the courts, as I say, this focus on control and saying, Well, look, can I practically compel the trustee to comply? And they’ll do that through, through a number of means, by, for example, making quite strict orders against the party who’s a beneficiary, depriving them of the actual marital assets that are in their hands, on the basis that the judge will say, well, if I take all of the marital assets and give them to the other spouse, I’m pretty sure that something will come out of the trust to make up the shortfall, and that’s been a fairly common tactic of judicial encouragement. It’s called to encourage the trustee to make up that shortfall. But actually, the courts have gone further in a different context, where where creditors have been challenging structures where there’s been a power to revoke the trust, the courts have allowed that to be used by creditors to step in and do that and get the assets back. Similarly, courts have at their disposal the doctrine of “sham”, which is basically where the piece of paper says one thing, but the reality is different. They say, well, actually, these assets aren’t really held on the trusts that you say they are there. The reality is, is that they belong to one of the parties to the marriage.

Alfred Ip  38:35
But it sounds exactly like those trust cases that we have come across in the past, which has been severely attacked, from Otto Poon to Zhang Lan, all these names that become very familiar within, not only within the trust industry, but also to those clients who is looking to set up trust or or to use trust to ringfence, to protect their wealth. They put this way not make sense. So what I would say is that the mistake that they committed in the past is just use it like their own pocket and tell whoever, trustee, lawyers, whoever, do what they say. And this is the big no no, isn’t it?

Richard Wilson  39:18
It’s, as I say, it’s very difficult, but it really is a balancing act between control and protection. I mean, if, if there is a single message that I can sort of impart in this podcast, it really is that that the days of thinking that you can have it all by keeping control but getting protection of your assets, I think those days are gone because of the way in which the courts are rising to the challenge of getting their hands on assets that are held held in trust. I mean, I wouldn’t, but I wouldn’t want listeners to think that trusts are not a good structure. I think they really are. I mean, as I say, from succession planning perspective and asset protection, but you’ve just got to get it right, and you’ve got to accept that the cost of the protection is ceding a degree of control, which makes it all the more important at the outset, when you’re doing the planning, Alfred, which you do a lot more of them than I do, of working out what sort of structure where, where the balance should be for a particular client. It’s quite an involved and detailed process to get the right structure. And it means that, dare I say, that the tendency in the past, going back 10-20, years, of having off the shelf structures that are sold by intermediaries is probably not the best way forward again, promoting work for lawyers, but I think it really is important to have a bespoke structure that suits the needs of particular clients and their circumstances.

Alfred Ip  40:58
I think this is more than just the initial set up of the trust, talking about the structure itself, that is important, the ongoing administration of the trust is equally important, because I can only imagine that an email between the client and the trustee, we shouldn’t call them the client, but then the settler and the trustee communicating over the disposal of certain trust assets, and the trustee complying with such requests is damaging enough.

Richard Wilson  41:33
Yeah, it really is. I mean, look, I mean, I wouldn’t want listeners to think that what, as you said, we shouldn’t call the client, but all too often is called the client once is irrelevant. It isn’t. I mean, the the law makes absolutely clear that the settlor wishes are in material consideration for a trustee. So if you, if you do, set up a trust, you’re well within your rights to write to the trustee and say, look, I think actually, you know, my younger son, he’s a he’s a bad and he’s got a drug habit, or he’s spendthrift. You shouldn’t be giving money to him. The trustee really is under an obligation to listen to what the settlor says and to take it into account and and that’s quite an important part of the relationship. But what they shouldn’t be doing is just acting on request back to what we were saying before us treating the trust as a as a bank account. And I think that that is one of the problems in administration, that it becomes very easy to lapse into a, you know, settlor says jump. Trustee says how high, and that is something that needs to be kept under review now. But of course, you know, it may well be the uncontroversial requests. It’s perfectly legitimate, and I wouldn’t, I wouldn’t want viewers to listeners to think that the trustees job is to say no, it really isn’t, but it is just to make sure that they don’t store up problems for the future.

Alfred Ip  43:01
I think between a yes and a no, there are plenty of room for trustee to maneuver and how to maneuver depends on what sort of advice that they will be receiving, especially from the lawyers, on how to communicate properly in the course of their trust administration in order to make sure that this is watertight.

Richard Wilson  43:26
Yeah,

Alfred Ip  43:27
yeah. And which ring back to the ultimate message of this podcast. If you don’t know what to do, find a lawyer.

Richard Wilson  43:35
You’re on that point. I mean, you’re absolutely right. And you know, there are many variations between yes and no. And if I’m in a case where we’re looking to attack a structure and say, well, look, these assets are supposedly held on a trust, but just look the one that one of the first things, if you’ve got the disclosure of those communications, one of the things that will make someone like me really happy is to see a whole series of emails saying, you know, I want x to happen, and it happening by return, and it being very much a clear pattern of just doing exactly what’s said. And I think trustees really need to think very carefully about the optics of it. I remember somebody once saying to me in the context of lawyers saying that what you should be taught at law school on the first day is never write a letter that you don’t want read out in court, and I think that’s sort of good advice for a trustee as well. Never have a file note or an email correspondence that you don’t want to see the light of day in front of a judge, because when it becomes contentious. If disclosure of information is given, you are going to have to justify your position and say, well, look, you know, it’s all very well for you to say you’re exercising an independent discretion. You’re the one making the decisions here. But just look, there’s 100 decisions here. You’ve gone along with everything without any question, without any scrutiny and without any documentary evidence on your file to show that you’ve really applied your mind to it, rather than just doing what you’re told.

Alfred Ip  45:09
In other words, be prepared what your files look like and whether the court is going to look at it favorably. Don’t do anything that you will regret in future.

Richard Wilson  45:23
Yeah, I think that’s I think that’s right, but of course, it’s got to reflect the reality. I mean, what I’m saying is, you know, the trustee has to be trusted to make its own decisions. And I think clients when setting up trusts just need to be prepared and for the reality of that that that actually, if they want a robust structure that is going to protect assets, they will need to be prepared for a trustee to do things that they don’t necessarily want. Now that might not be the right answer for them, and it might be that they want to build a structure with a greater degree of control over various things. They might want to have a veto on things. And that’s great that can all be accommodated. But the trade off is that it might not provide as much protection against claims in a divorce or another in other contexts, as it as it would if they seed control completely.

Alfred Ip  46:24
It sounds to me that this is like the sound bite that we are going to give to our client, just because you want you don’t want something to happen, it might be good for you at the end…

Richard Wilson  46:36
there is a difference between what you want and what is good for you.

Alfred Ip  46:39
If only you always know what you want, then I don’t have a value to you, but

Richard Wilson  46:45
It is difficult. I mean, I can completely sympathise with a lot of the people that we’re talking about are really dynamic go getters, who’ve been great successes in the business world, who are used to making decisions and getting results and having people you know trust their judgment, and so that that exercise of giving up control can be can be really tricky and counterintuitive,

Alfred Ip  47:11
and if you want to not give up control, but coming across as giving up control sounds totally contradictory, but there are things that can be done, what I can say is, call us, we really have a discussion with us on how to structure your trust in a way that will be robust in future.

Richard Wilson  47:35
Yeah, I mean, but that scrutiny will involve looking at you know whether the reality reflects what’s on the piece of paper. And so, you know, I’ve already mentioned this, this idea of a sham, that you can that if you have got a situation where the Trust says, well, this, this person doesn’t have any control over anything, but actually, the evidence is that really they do, the court will say, well, the trust doesn’t really operate in that way, and can go as far as to say it’s a sham. So what you have to be prepared for in all of these situations is to justify the reality of the situation, a piece of paper which says one thing really won’t protect you if it if things aren’t running that way, and that’s a very important piece of it’s a very important thing for both clients and trustees to bear in mind when entering into these structures, and critically, as the as the structure continues during its lifetime.

Alfred Ip  48:40
To wrap up, I have only one question left, that is, what’s the most surprising and unexpected outcome you witnessed it in a trust related divorce case, and what lesson did it teach you?

Richard Wilson  48:53
Well, it was probably in a case I was involved in here in Hong Kong, where we had a divorce going on here valuable family trusts that had been set up for succession purposes. There weren’t they weren’t asset protection trusts, but one party to the marriage was trying to bring them in. The trustee did what you’d expect a trustee to do, and what we’ve just been saying that they ought to do. They went to court, I think, and were told by the court in offshore jurisdiction that they should not be getting involved. But there were other family members who were beneficiaries, who wanted to get involved in the divorce proceedings because they wanted to stand up in front of the court and say, well, look, actually, this trust isn’t just about the husband. We are all beneficiaries, and this trust, our interest should be taken into account. And they applied to be allowed to participate in those proceedings, the court said no, which we thought was quite surprising. But I think the lesson there is, again, that this skepticism sometimes from judges can manifest itself in a number of different ways. And I think in that case, the judge was, was really saying, well, look, if the trustee is not going to be prepared to come here to court and be subject to my orders and and, you know, be be required to do what I tell it to do, I’m not going to have somebody else come here and get the benefit of making a case without the without the jeopardy of if it goes wrong for them, my orders being able to be translated into real action.

Alfred Ip  50:27
But it sounds to me that just because the trustee is not submitting to the jurisdiction of the divorce court in Hong Kong doesn’t mean that the judge is not going to make any order against the trustee.

Richard Wilson  50:42
No, I mean, they often will, they’ll have, they’ll they’ll try. And then there are all sorts of complications about enforcing in the trustees own jurisdiction, because if it many of the offshore jurisdictions have what’s called firewall legislation, which prevents, specifically foreign divorce court orders being enforced in those jurisdictions. Now, another layer of complexity is, of course, that the assets that you’re actually fighting about will very rarely be in those offshore jurisdictions. You know, if you’ve got a Hong Kong divorce, very often the property we’re talking about being divided might be valuable real estate here in in Hong Kong, and that means that the court might, might well say, well, look, actually the assets are here, and I will make an order. And so it can be quite difficult in that way, because the courts will, will seek to do what they can to come up with it with a just outcome, as they see it and and I think that as a takeaway point, it is quite important nowadays, particularly to be seen to be the good guys in a dispute, by which I mean that in the past, there was a tendency, perhaps, to say, well, look, I don’t really care if I’m viewed positively or negatively by the court. These assets are protected in the structure you can’t touch them, Judge, do your worst. Well, actually, the courts have done their worst, and they’ve managed to find ways around structures in a number of cases, and therefore it’s much more important, I think, to be able to project a meritorious position. And that goes on a number of levels, particularly about the purpose of the trust, and saying, well, look, actually, this isn’t about asset protection. It’s about legacy and succession planning and to have a trustee that isn’t being seen to be just sort of pulling down the shutters because it suits one of the parties to the marriage to do so, and I think that overall impression that is given from the trust’s perspective, whether it’s by one of the parties or the marriage or the trustee, is really, really important now that the courts are becoming much more activist, interventionist and proactive in attacking structures…

Alfred Ip  53:11
let’s see if I’m correct in that respect. If the trust is not going to be intervening or involved in the divorce proceedings, it’s almost certain that there will be a first influence. So might as well for the trustee to come forward and explain to the court that the structure is actually legit, that it should be protected, instead of just attacking it for anyone’s benefit.

Richard Wilson  53:42
Yeah, that’s that’s completely right. Now there’s, as we I’ve mentioned balancing acts a few times, and again, this is a balancing act for the trustee. It’s a very, very complicated question to answer of how far the trustee should go, because one of the things that you don’t want to do is unwittingly submit to the jurisdiction and make yourself amenable to orders being made. But thought should be given to the things that fall short of that. So, for example, giving information, perhaps through a party and saying, well, look, you can your party to this litigation. You can, you can give this information. We’ll, we’ll write to you with it, but you should put it before the court to explain the trustees position. And that might, that might be a solution, because I say that the impression that is given by the trustee should be as much as possible a positive and cooperative one, but not one which unnecessarily brings the assets within the grasp of the court.

Alfred Ip  54:54
It is a difficult job. It’s particularly difficult when the trustee often have no previous experience in a divorce setting. Hopefully, they have not gone through the divorce themselves on a personal level, but also facing similar situation when they are hit with a divorce petition or document and it is so complicated to do the right thing, that the only way that they can discharge their duties is to go to a lawyer and seek proper advice.

Richard Wilson  55:28
I was about to say it sounds like another situation where they need to give you a call. Alfred,

Alfred Ip  55:32
Thank you very much, Richard. We have learned a lot throughout this podcast, and if there’s anything else that we got on this topic, either from ourselves or from our audience, we know how to find you.

Richard Wilson  55:45
Thank you, Alfred, it’s been a pleasure.

Alfred Ip  55:47
Thank you very much.

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