Reportage

The House of Lords' decision in White v White on 26 October 2000 heralded a revolution in the approach to the division of assets on divorce. This will have far-reaching implications for couples, their businesses and their advisers.

For the first time, equality is the yardstick for dividing assets and, in general, this will not be departed from unless there is good reason for doing so. The contribution of the homemaker is equated to that of the breadwinner.

The threat to inherited wealth created by this move towards equality is likely to see a resurgence of the family trust for its original purpose of protecting and preserving family assets, arguably overtaken in recent years by a primary purpose of tax planning. Although the general approach of the Family Court towards trusts is to look through them and consider the reality behind the trust structure, forward planning and careful management can still alleviate the risk to inherited wealth on divorce.

Under the Matrimonial Causes Act 1973, Section 25, the court takes into account all the available assets that the parties have or are likely to have in the foreseeable future, including settlements and trusts of all forms, under which either party to the marriage is a beneficiary, regardless of who created the settlement. There is a tendency to treat trust interests as available assets as a matter of course and to ignore the nicer technicalities of trust law.

If the trust interest is treated under the Matrimonial Causes Act 1973, Section 24 as an ante-nuptial settlement (made in contemplation of marriage) or post-nuptial (made during it), the court may order a variation of the provisions of the settlement so that income or capital may be paid to the non-beneficiary party to the marriage.

But the court can vary only ante-nuptial or post-nuptial settlements falling within the statutory definition, and has no power to vary a settlement made on either party which was not made after the marriage took place, or in contemplation of it, or in some other way identifiable with it.

The nature of the trust, the identity of the other existing or potential beneficiaries and the history of the administration of the trust in providing financial support to the party to the marriage are all relevant factors in deciding when a settlement, which is not variable under Section 24, may still be regarded as an “available asset” on divorce.

Where it is obvious that the trustees have acted simply as bankers to the beneficiary spouse, making a regular succession of income and capital distributions towards meeting family living expenses, there will be little opportunity to plead that the trust capital is protected by the trustees' discretion over distribution, when in reality that discretion has not been exercised.

In contrast, where there is no such history and it is apparent that the trustees are determined to continue with a longstanding policy of exercising rigorous control over income, and are reluctant to make any capital distributions, there is a much greater prospect of preserving the settlement from the consequences of the divorce.

A parent or grandparent who is contemplating passing on a family business to the next or next-but-one generation has still, despite the trend towards equality in financial awards in divorce, a better chance of protecting the family assets by gifting the inheritance into a lifetime trust. The earlier this can be done and the more effectively it is managed by the trustees, the less the risk that it will be depleted by the financial consequences of a beneficiary's divorce.

This accentuates the need to appoint strong-minded trustees, who will conduct a rigorous policy of caution over the frequency and purpose of distributions, and will be prepared to be joined in divorce proceedings, as they are entitled to be, to resist any application to vary if Section 24 applies.

Roger Peters is a partner in the private client department of Gordon Dadds.