Broken trust: the Court of Appeal rules that family trust assets can be taken into account when calculating a spouse's wealth for the purposes of a divorce settlement.

The Court of Appeal has recently handed down judgment in the case of Whaley -v- Whaley, in which it ruled that it was right to take into account Mr Whaley's likely share of a family trust when calculating ancillary relief for his wife.   

Mr and Mrs Whaley separated in 2008, having been married for over 20 years. The couple owned substantial assets totalling around £3.5 million but in addition, Mr Whaley's father had created a family trust prior to his death, for the benefit of Mr Whaley and his two brothers (the "Farah" trust).

In 2008, the trustees of the Farah trust created a separate trust (the "Yearling" trust) from part of the Farah trust, supposedly for the sole benefit of the children of Mr Whaley and his brothers, and for tax purposes. The suggestion was made that this was an attempt to put assets out of Mrs Whaley's reach.

The parties engaged in litigation for the purposes of deciding how the marital assets should be divided between them. Under the Matrimonial Causes Act 1973, when assessing ancillary relief the court must have regard to property and financial resources that each of the parties to the marriage is likely to have in the foreseeable future.

High Court judgment

Mr Whaley had argued that the money available in the Farah and Yearling trusts was just over £3 million. The High Court found that the trust assets were significantly more than claimed, and were closer to £7 million. It was determined that Mr Whaley had attempted to undervalue the trust assets with a view to making fewer resources available for ancillary relief.

The High Court held that historically the trustees of both the Farah and Yearling trusts would simply do Mr Whaley's bidding: that he would be able to request funds from the Farah trust, and he could be made a beneficiary of the Yearling trust. It therefore concluded that the trust funds were resources he was likely to have in the foreseeable future.

It was calculated that taking into account the needs of Mrs Whaley, plus her share of the wealth accrued during the marriage, the total payable to her for the purposes of ancillary relief was around £4 million. This was despite the fact that Mr Whaley would clearly not be able to meet this award without a substantial grant of assets from the Trust.

Appeal

Mr Whaley appealed the decision on several grounds. In relation to whether the trust funds could be taken into account for the purposes of ancillary relief it was argued that if the Court was to assume that Mr Whaley would have access to funds from the trusts, it would put improper pressure on the trustees to favour him at the expense of the other beneficiaries.

The Court of Appeal rejected all grounds for appeal. It noted the high probability that the trustees would allocate funds to Mr Whaley and concluded that it was right for the trust funds to be taken into account as available resources.

Comment

Historically the courts had said that trustees with discretionary powers should not be put under pressure by making over-demanding orders.  However, this case shows that the Courts will apply pressure if the trustees have power to do so and the Courts consider that the proposed course is reasonable.

Implications

The case may make life more uncomfortable for trustees.  Indeed they may be called to give evidence in divorce proceedings, and their behaviour, actions and words could be picked over in detail.  In addition beneficiaries, spouses, and children may have competing claims and interests, so the balancing act required of the Trustees may become more difficult to manage.  Having good independent legal advice can be invaluable.  

In preparing trust documents the legal advisers should now give consideration to whether to limit the scope of the discretion available to the trustees in the trust specifically to address the risk of a claim in a divorce situation - if funds are only available for specific purposes it will be harder for the Courts to simply "set-off" trust funds against other marital resources when calculating ancillary relief.  In addition, further thought should be given to the impact the constitution of a trust might have on the availability of funds for individual beneficiaries, as a single pot of trust funds distributable at the trustees' discretion to a class of beneficiaries may put some beneficiaries' interest in jeopardy in the event that another beneficiary becomes divorced. Finally, where a divorce settlement is reached amicably and the divorcing beneficiary requests an advance of funds in order to pay-off a spouse, the trustees may wish to seek the protection of the Court to reduce the risk of the other beneficiaries claiming that the fund has been unfairly diminished at their expense.

Ashfords' Trusts and Estates Team can assist on any matters regarding a will or trust. For taxation and estate planning advice please contact Rachael Crocker on 01884 203088. In the event of a dispute in relation to a deceased person's estate or a trust please contact Robert Horsey on 01884 203086.

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