The interplay of the discretionary jurisdiction of the English Courts in the division of matrimonial property and trust law has been an area of notable evolution in recent years.
The Court of Appeal’s decision in Charman v Charman can be seen as the high water mark of a growing trend on the part of the English Courts to look through trusts (especially self-settled) and treat them as a ‘resource’ of the settlor regardless of other beneficial interests in the trust fund.
At the centre of the case was the question of whether the assets of the Dragon Trust, settled by Mr Charman in 1987 during his marriage to Mrs Charman and now based in Bermuda, should be taken into account in evaluating the matrimonial property available for distribution between the parties.
The core conclusion of the Court was that it did not accept Mr Charman’s contention that the assets of the Dragon Trust should be left entirely out of account because they were deposited in a ‘dynastic’ trust for the longer-term benefit of members of his family. The Court upheld the finding of Mr Justice Coleridge that the Dragon Trust was not a dynastic trust. It even expressed doubt that this would have been very influential in the result. Therefore all of the £68m trust assets were regarded as a resource available to Mr Charman.
In a departure from the previous importance placed on the pattern of distributions, the Dragon Trust was considered to be a ‘resource’ of the settlor despite the absence of such a track record of regular distributions. This was not considered by the Court to be significant on the basis that there had been no need for such distributions: ‘_it is in law a perfectly adequate foundation for the aggregation of trust assets with a party’s personal assets … that they should be likely to be advanced to him or her in the event only of need.’ _
It was accepted that the Court could look at the reality of the situation and that trustees of such trusts can generally be expected to respond favourably to reasonable requests made of them by settlors and to comply with any expression of wishes on their part.
The Court also upheld Mr Justice Coleridge’s decision to ignore the tax saving of £20m achieved by Mr Charman’s moving offshore.
Implications for settlors and trustees
The case suggests that self-settled trusts settled during marriage are more likely to be regarded by the Court as a ‘resource’ of the settlor.
In a purely English law context this is extremely material. However, the conflict of laws interplay with the Court’s judgment where trusts are offshore remains to be seen. Against a background of offshore jurisdictions seeking to strengthen their resistance to the enforcement of foreign judgments, a future case will have to determine whether judgments of this nature will be enforced.
In practice, the key may lie with the balance of an individual’s personal assets against those assets held in trust. Where a sufficient proportion of an individual’s overall assets are held personally rather than in trust, the English Courts will be able to ensure that their judgment is ultimately upheld.
It is now fair to assume that trusts established during marriage by a settlor where he or she is named as a beneficiary are very likely to be regarded by the Court as a ‘resource’ of the settlor, as well as being capable of variation on divorce as a ‘nuptial settlement’.
However, settlors and trustees may ensure that steps are taken to enable them to retain the capacity to mount a valid argument against the inclusion of trust property within the matrimonial property available for distribution between the parties.
Letters of wishes which request that trustees regard a settlor as the principal beneficiary whose wishes should be followed are likely to increase the likelihood that the Court will view the trust as a ‘resource’ of the settlor.
Furthermore, the retention by a settlor of the power to remove and appoint trustees may encourage the Court to view the trust as a ‘resource’ of the settlor: In Charman, it was said ‘the husband’s power to replace the trustees was indicative of the likelihood of advancement.’ This is a departure from earlier trust law thinking that the power to replace trustees is fiduciary and cannot therefore be exercised lawfully in response to a refusal by a trustee to accede to a request for a distribution. While this argument was not fully addressed by the Court, the operation of such powers by an independent third party may offer a settlor a stronger position.
Finally, the postscript of the judgment advocated the reform of asset division on divorce in England and Wales to provide a degree of certainty that the Courts are currently unable to provide.
Whether through such reform, an appeal by Mr Charman to the House of Lords, or further case law, evolution of asset division on divorce in England and Wales is inevitable.
The Charmans married in 1976 when neither had significant resources. They lived in England and had two children, both now adults and both very generously provided for under a separate trust fund.
- During the 27-year marriage, Mr Charman had a hugely successful career and built up considerable wealth in the insurance market in the City of London. It is accepted his contribution to the marriage was ‘exceptional’. Mrs Charman did not contribute to Mr Charman’s business activities at any time.
- In early 2003 Mr Charman moved to Bermuda and separated from his wife, who continues to reside in England. He saved over £20m in tax by his move to Bermuda.
- Mr Charman contended that, whatever the size of the matrimonial assets he had accumulated, his wife should be awarded substantially less than it had been ordered she should receive because of his unique and exceptional contribution to the creation of the family’s wealth and his importance in the global insurance market.
- Mr Charman also contended that the assets left in the Dragon Trust, set up in 1987 and now based in Bermuda, should be left entirely out of account because they were deposited in a ‘dynastic’ trust for the longer-term benefit of members of his family.
- Mr Justice Coleridge held that Mrs Charman should receive an award of £48m and held that the assets of the Dragon Trust should be taken into account fully in evaluating the matrimonial property available for distribution between the parties.
Mr Charman is seeking leave to appeal to the House of Lords.