09 April 2010

Family law news: The Royal Court in Jersey is willing to protect trust assets for certain beneficiaries when the trust is under attack in English divorce proceedings

Claire Blakemore
Partner | UK

This case considered whether it was appropriate for the trustees to take steps to safeguard assets for the benefit of certain beneficiaries where two Jersey trusts were under attack in ancillary relief proceedings in the English Family Division.

The judgment endorses the decision in re The H Trust [2006] JLR 2008 that there are occasions when it is important that the English Family Division has the fullest information concerning the financial affairs of the trust. The couple had 3 adult children and they separated in 1991. The husband then commenced a relationship with a new partner MS whom he did not marry. They had two children (who are both minors). MS instructed Withers LLP.

Some 4 years after the husband and wife had separated, the husband settled two discretionary trusts (the ‘Trusts') governed by Jersey law, the beneficiaries of which were the husband, his adult children, MS and his two minor children.
Ancillary relief proceedings were commenced by the wife in 2006, some 15 years after the husband and wife had separated. The wife claimed that the assets of the Trusts were a resource of the husband.

The claims in the ancillary relief proceedings gave MS considerable concern that her needs and that of her children were in fact ‘invisible' to the Family Division. In particular, this was because their financial situation was not secure and she had made a substantial contribution to the Trusts' funds.

MS made an application to the Jersey trustee (the ‘Trustee') of the Trusts for a distribution of 50% of the Trusts' assets to her and her children.

The Trustee considered it would be inappropriate in the context of the English proceedings to make a distribution but proposed that it was, without fettering its discretion, intending to create a new trust appointing 40% of the Trusts' assets for the benefit of MS and her children.

The Trustee subsequently made an application to the Royal Court in Jersey in accordance with the principles in re The S Settlement 2001/154 on the basis it was not surrendering its discretion to the Royal Court but merely seeking its guidance and blessing.

The Royal Court concluded that the Trustee had taken ‘extensive advice' and made ‘appropriate soundings' and was satisfied that its decision was a decision which a reasonable trustee properly instructed could have arrived at.
The Royal Court referred to the commentary in “International Trust and Divorce Litigation” by Mark Harper, Dawn Goodman, Paul Matthews and Patrick Hamlin (all of Withers LLP):

“the decision in Charman … demonstrates that no indication by the trustees as to how they might exercise their dispositive powers may risk the court concluding that if asked, they would be prepared to apply all or a substantial part of the assets to the requesting spouse, particularly if the requesting spouse were making the request under pressure of an order providing heavy ‘judicious encouragement' to the trustee.

Accordingly, careful consideration now needs to be given by trustees as to how to address such a request in the interests of the beneficiaries as a whole…”

This is an unusual case where, in addition to evidence of the potentially difficult financial position she and her children were likely to find themselves in, MS was able to put compelling evidence before the Trustee of her contribution to the Trusts and where, as a result of that, she was able to persuade the Trustee in effect to ‘partition' part of the Trusts' funds for the benefit of herself and her children.

The Trustee will have to consider the appropriateness of the proposal to create the new trust if the husband makes an application for a distribution (in the context of the ancillary relief proceedings). At that time the creation of a new trust will be subject to the approval of the Royal Court and will not happen until the conclusion of the ancillary relief proceedings. Nonetheless, the order of the Royal Court must be persuasive evidence that if the Family Division concludes that the Trusts' assets are a resource of the husband, the extent of that resource is limited to 60% of those assets as opposed to 100%.

It is an important decision for trustees because the Royal Court has shown that it will consider the interests of beneficiaries who may be unrepresented in foreign divorce proceedings and will, where appropriate, take steps to protect those interests.

Claire Blakemore Partner | London

Category: Article