30 June 2015

Trusts on divorce - how relevant are settlors' powers and wishes?

For many settlors the benefits a trust can provide are attractive. However, giving up control of assets to trustees (albeit trustees the settlor has selected) may be a concern. Significant time and expertise is often devoted to selecting a jurisdiction in which the settlor may retain maximum control over settled assets without invalidating the trust.

Conscious of this issue, and its importance in attracting international trust business, Bermuda has moved to more clearly define its position on settlor reserved powers with the introduction of the Trusts (Special Provisions) Amendment Act 2014.

Until last year, the Bermuda law on reserved powers was set out in section 2(3) of the Trusts (Special Provisions) Act 1989, which stated 'The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust.'

The Act extends the wording of section 2(3) also to cover powers granted by the settlor and (without prejudice to the generality of section 2(3)) expressly sets out a wide range of powers which a settlor can reserve or grant without invalidating the trust, including:

  • (in the case of a reservation to the settlor or other donor of trust property) a power to revoke the trust in whole or in part;
  • a power to vary or amend the terms of a trust instrument or any of the trusts, purposes or powers arising thereunder in whole or in part;
  • a power to decide on or give directions to advance, appoint, pay, apply distribute or transfer the trust property;
  • a power to act as, or give directions as to the appointment or removal of directors or officers of companies owned by the trust, or to direct the trustees how to exercise voting rights with respect to the shares of such companies;
  • a power to give directions in connection with investments or the exercise of any powers or rights arising from such trust property;
  • a power to appoint, add, remove or replace any trustee, protector, enforcer or other office holder or advisor;
  • a power to add, remove or exclude an beneficiary, class of beneficiaries or purpose;
  • a power to change the governing law and the forum for administration of the trust; and
  • a power to restrict the exercise of any powers, discretions or functions of a trustee by requiring that they shall only be exercisable with the consent, or at the direction, of a person or the persons specified in the trust instrument.

The very wide powers expressly sanctioned by the Bermuda legislation provides scope for a settlor to exert (whether personally or through a trusted appointee) a degree of control which may in other jurisdictions lead to allegations of sham or invalidity.

In passing this legislation, Bermuda is making a clear play for business from the international settlor. However, when deciding on any jurisdiction, and the extent to which powers should be reserved to a settlor, it is necessary to consider the aims of the trust. If asset protection is one aspect, and particularly asset protection on divorce, settlors should be reminded of the powers of the English Court to vary nuptial settlements or to treat trust assets as a resource of the parties, and the fact that settlors have such powers could be relevant in the determination of how a settlement is treated on divorce.

In Charman v Charman [2007] EWCA Civ 503 the Court of Appeal left open the question of the extent to which the fact that Mr Charman (who was the settlor of the trust) had power to change the trustees, was relevant to the question of whether, and if so, to what degree, the trust was a resource? In that case the wife argued that as Mr Charman had reserved those powers to himself the trust assets should be considered as his resource, essentially, because he could exert control to enable implementation of a court order to take place by selecting trustees who were willing to comply with the Court Order in the event that the current trustees were not willing to do so.

As it happened the Court of Appeal found that it could establish that the trust was a resource of the husband by relying on other factors so this issue was not determined, but instead left to be dealt with on another occasion. It does, however, illustrate the potential dangers of settlor's reserved powers.

Prest v Petrodel & Others [2013] SC34 is Supreme Court authority that the question of control is relevant to determining the resources of a party. Although the case did not relate to trust assets, Lady Hale agreed with Lord Sumption that whilst control was not relevant when establishing whether a property adjustment order could be made against an asset, it was relevant to the assessment of a party's resources under s25(2) of the Matrimonial Causes Act 1973.

In terms of settlors' wishes and intentions, these can also have an important impact upon the treatment of trust assets. Although the recent decision of P v P [2015] EWCA 447 did not involve a Court assessing the settlor's reserved powers, when it came to determining whether the trust was a nuptial settlement and, if so, what the nuptial element was, one of the settlors gave evidence in the case setting out his intentions at the time the trust was created. Mostyn J, who gave the first instance decision, looked at the powers of the trust which enabled the trustees to distribute the capital to the husband (the settlors' son). He also took into account the settlors' intentions, which were to enable the son to live in the property for the rest of his life, but with power to distribute the capital to him, and held that the entire trust was a nuptial settlement. In making the award, however, in addition to a lump sum he awarded the wife a life interest in a sum of money to enable her to acquire a property for life. The decision was appealed by the trustees. Although the Court of Appeal found that Mostyn J was correct to give 'heavy weight' to the settlors' intentions at the time the trust was created for assets to remain in the family, it also considered that he had properly balanced those intentions as against the Court's obligations to achieve fairness to the wife by making an award to meet her housing needs.

These cases therefore illustrate that whilst settlors may have more options available to them to retain certain levels of control, and they may wish to set out their intentions upon the trust being created, advice should be obtained on how such powers and intentions may be treated in the context of a divorce of either a settlor or beneficiaries. As with many decisions when settling assets on trust it is a balancing exercise that should be carried out carefully and by reference to the specific facts.


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