Parents are frequently concerned that generosity to their child may end up benefiting his or her spouse in the event of divorce. However, as a High Court case showed, taking legal advice on the creation of a discretionary trust can be a highly effective means of avoiding such an outcome.
The case concerned a couple aged in their 30s who had been married for almost 10 years prior to their divorce and had one child. The wife’s parents had been opposed to the marriage from the outset. The couple lived modestly, but the wife’s father was extremely wealthy. During the marriage, the wife had established two discretionary offshore trusts, which were said to have a combined value of £17.6 million.
In those circumstances, the husband sought a capital payment of between £1 million and £1.5 million from the wife, who was a beneficiary of the trusts. He asked the Court to make an order giving ‘judicious encouragement’ to the trustees of the trusts to distribute to the wife sufficient funds to make such a payment.
In dismissing the husband’s claim, the Court noted that the case should stand as a cautionary tale to those tempted to embark on expensive litigation in the hope of prising money from a discretionary trust. It raised the perennial and intractable problem as to what weight should be given to resources which belong, not to a divorcing spouse, but to his or her parents or a family trust.
The Court found that, although the trusts had been settled by the wife, her role had been that of a passive cipher. Whatever the source of the funds, payments into the trusts had been arranged entirely by her father. She had received nothing from the trusts and her father was adamant that nothing would be paid out of them to any beneficiary prior to his death. By a letter of wishes, the wife had also irrevocably excluded herself from giving any advice to the trustees.
Although the Court had the power to make financial orders in reliance on funds held in a trust, it would be wrong to put undue pressure on overseas trustees, over whom the Court had no jurisdiction. Given the father’s stance, judicious encouragement would in any event be very unlikely to persuade the trustees to make a payment from the trusts for the ultimate benefit of the husband.
The Court noted that the husband earned £130,000 a year from his employment and had sufficient resources to support himself in a very good lifestyle and to purchase a home of his own. His only pressing need related to his debts, which were entirely referable to the costs of the proceedings. In those circumstances, he had no objective, reasonable or justifiable need for any lump sum from the wife.