Historically, one of the main reasons for using a trust has been to protect assets as a trust is a separate, legal entity. When assets are in trust, they are controlled by the trustees for the benefit of the specified beneficiaries, helping to protect the assets from claims by third parties such as ex-spouses. Looking to the use of trusts as a protection in relation to divorce, a trust may be used:
- To protect assets for a person who is concerned they may get divorced in the future.
- To ensure assets can be passed to the next generation without ex-spouses of those children being able to benefit.
Firstly, and most importantly, to provide protection, the trust must be created without an intention to mislead.
When divorce arises, the courts will look at the reality of the situation when deciding if a divorce settlement should include trust assets. In cases where the settlor is divorcing, consideration will be given to the level of control the settlor has over the trustees and whether the settlor can benefit from the trust. These factors must therefore be carefully thought through by individuals who are contemplating establishing a trust with a view to avoiding assets being included as part of a future divorce settlement.
Where the divorcing party is a beneficiary of a trust but not the settlor, the courts will also look at how the trust has operated historically, and how the trustees have exercised their discretion in the past. For ‘bloodline trusts’ protective clauses can be included within the trust deed, such as restrictive beneficiary classes to exclude spouses, and powers to exclude beneficiaries if they are experiencing matrimonial problems, to aid protection.
Overall, trusts can provide asset protection in relation to divorce, however they must be set up and managed carefully to be effective.