The impact of divorce on a family trust fund
By Amanda Erskine
“Is my Trust Fund protected if I get divorced?” is a question asked by many spouses who are part of a family trust.
Trusts are commonly found in large farming families where generations have worked to build the farming business and various trusts have been created as a way of protecting farming property and wealth from the effects of divorce.
The key characteristic of a trust is that the assets contained within the trust (the “Trust Fund”) are legally owned by the trustees appointed to manage it. They are not owned by the beneficiaries (i.e. the family members). With farm trusts the trustees could be the elder members of the farming family or a professional advisor appointed by the family to manage the farm assets under the trust.
Since the beneficiaries do not own the assets in the trusts, many people perceive that their Trust Fund will be safe on divorce and will not form part of the assets a court may look to divide between separating spouses. Unfortunately this perception is wrong and many spouses involved in family run farms find that the trust ends up playing a critical role within their divorce.
There are different types of trusts and how they are treated on divorce can vary significantly. Factors to be considered include why the trust was originally created and who was expected to benefit. Was the trust designed to pass down family wealth to blood relatives only, or are spouses allowed to benefit too?
If the divorcing spouse has a right to receive income or capital from a trust, this can be considered part of the overall assets the court is being asked to divide between the parties. These assets are not beyond the court’s reach. The court will consider a number of factors which includes both parties’ present and future financial resources; from whichever source they may be derived.
In certain cases, a trust could be interpreted as a “nuptial” trust, or relating to the marriage. If this is the case the court has the power to vary the trust, dismiss the existing trustees and appoint new ones, and distribute the assets.
Divorce proceedings can have serious consequences for family trustees, professional trustees and beneficiaries, including the spouses themselves and the wider family.
It is therefore essential that anyone going through a divorce who has a Trust Fund seeks advice from expert family lawyers who are supported by a team of trust and tax solicitors.
Amanda Erskine is a solicitor in the Family department at Barker Gotelee Solicitors.