Till death us do part?

Tuesday, 01 May 2012
How the courts deal with inherited, pre-acquired and trust assets for a divorce in England and Wales.

The general approach adopted by the English Family Court to inherited and pre-acquired wealth (non-matrimonial property) on a divorce is: it is placed into the asset pot to be dealt with by the court; the court decides how important it is to a particular case, having considered its nature, value, timing and circumstances in which the property was acquired, and the way the parties arranged their finances; if the asset has become entangled in matrimonial property then it is likely to be shared between the parties; and if one party’s financial needs cannot be met without recourse to it, it is unlikely to carry significant weight.

However, there is still uncertainty on how the court reflects the existence of non-matrimonial property in the division of assets on divorce. The court has recently adopted four different approaches, namely:

1. Take into account all the circumstances of the case and decide what is fair – the ‘hunch’ test. Robson v Robson1 involved a 21-year marriage, with assets of GBP22.5 million that had largely been inherited by the husband. The Court of Appeal awarded the wife GBP7.3 million (32 per cent of the assets). The level of the award was principally based on the wife’s needs.

2. Identify the scale of the non-matrimonial property and exclude it, subject to need and compensation. Jones v Jones2 involved a childless ten-year marriage, with assets of GBP25 million consisting almost entirely of the proceeds of the husband’s company (worth GBP2 million at the date of the marriage). At first instance, the Judge concluded that the value of the business, at the time of the marriage, should also reflect the ‘springboard effect’, namely that it had latent potential because of the ten years of pre-marriage work, which took its value to about GBP15 million. The wife was awarded GBP5.4 million (50 per cent of the matrimonial property and 20 per cent of the total) having taken into account the fact that the company had latent potential at the time of marriage. On appeal, the Court of Appeal increased the wife’s award to GBP8 million and valued the non-matrimonial property (i.e. the company) at GBP9 million, taking into account the latent potential/springboard effect and passive growth.

And in K v L,3 the parties were married for 21 years. The wife had assets of GBP58 million, which she inherited 13 years before the marriage. The inheritance had grown organically and had been kept separate from family finances. The couple had a very modest lifestyle. The husband could only justify an award by reference to his needs. He received GBP5 million and his appeal was dismissed.

3. A two-stage process, separating matrimonial property (to be shared) and non-matrimonial property (to be excluded subject to needs/compensation). Test the overall fairness of the award as a percentage. In FZ v SZ and Another,4 the parties had been married for seven years; the assets were valued at GBP18.1 million, of which GBP2.1 million had been brought into the marriage by the husband. The wife was awarded just under GBP8 million, which represented around 50 per cent of the matrimonial property (44 per cent of the total assets).

4. A mix of the above. In N v N,5 the parties had been married for 29 years and had total assets of GBP17 million. The matrimonial assets were valued at GBP4.1 million; the husband’s inherited chattels came to GBP2.3 million and he had GBP10–11 million in an inherited shareholding in a family company. The wife was awarded GBP5.3 million (about 32 per cent), based on a mix of all the above approaches (50 per cent of matrimonial property and 25 per cent of non-matrimonial).

Practical advice

Presently, the most effective way of safeguarding non-matrimonial property on divorce is to have a pre-nuptial or post-nuptial agreement, particularly following the recent Supreme Court decision in Radmacher v Granatino.6 Consider the nature of the inheritance; for example, a valuable heirloom intended to be retained in specie is of a different character, and may be treated differently, from an inherited portfolio of stocks and shares. Keep the inheritance separate from family assets and do not use it to enhance the family’s lifestyle.

There are ways the court can access trusts on divorce, most commonly by treating the trust as a ‘financial resource’ of the beneficiary spouse and making an order on that basis. These are known as ‘judicious encouragement’ orders. In practice, the court orders the beneficiary spouse to pay their spouse a lump sum, which can only be funded via distributions from the trust. If the beneficiary spouse does not pay the lump sum then they may be committed to prison for non-payment. In reality, this places significant pressure on the trustees to fund the lump sum.

There is still uncertainty on how the court reflects non-matrimonial property in the division of assets

The concept of ‘judicious encouragement’ stems back to what remains the leading case on this topic: Thomas v Thomas.7 Glidewell LJ held that: ‘The court should not put improper pressure on the trustees to exercise [their] discretion for the benefit of the wife’ and that the court should look at the reality of the situation: ‘If on the balance of probability the evidence shows that, if trustees exercised their discretion to release more capital or income to a husband, the interests of the trust or of other beneficiaries would not be appreciably damaged, the court can assume that a genuine request for the exercise of such discretion would probably be met by a favourable response.’

In sickness and wealth: Trusts tips

Consider entering into a pre-nuptial or post-nuptial agreement to ring-fence trust assets.

Trustees should seek advice, at all stages, from a specialist family lawyer on:

  • The different ways the court can access trust funds and enforcement of the same. This is relevant in a number of trust-planning aspects, including:
  • the jurisdiction in which a trust is to be situated
  • the design of the trust, e.g. if there should be numerous structures containing different types of trust assets, some less accessible than others
  • who the beneficiaries will be (can the spouse be excluded and can there be a wide class of beneficiaries?)
  • The distributions that have or will be made from the trust, e.g. has the beneficiary spouse received distributions or have they been refused? This is key in considering whether the court will make a ‘judicious encouragement’ order. If distributions are to be made to a beneficiary spouse, can they be made by loan rather than outright cash payments?
  • The taking of proper minutes, correspondence and the drafting of letters of wishes.
  • Whether the trustees should intervene in the financial proceedings.

Recent cases

In M v W (Ancillary Relief),8 the parties were married for six years with limited assets outside two offshore trusts, of which the husband was a potential beneficiary and had benefited historically. Both trusts had been established long before the marriage. The key factors were needs, liquidity and the trustees’ willingness and ability to provide that liquidity. The w ordered the husband to pay the wife a lump sum of GBP800,000 and periodical payments, on the basis that the husband would receive the funds on the liquidation of some of the trust funds.

In B v B,9 the husband’s resources without trust funds were worth around GBP6 million and the total assets were worth GBP14.5 million. It was the husband’s case that he had created the trusts (with assets originating from his father) on behalf of certain family members and a charitable foundation, and that it was always agreed that his interests were subordinate to their interests. It was the wife’s case that the trusts were, in reality, resources readily available to her husband. Moylan J relied on the principles in Thomas v Thomas and concluded that the trustees would exercise their discretion in favour of the husband and the trust would not be appreciably damaged. The wife was awarded GBP4.5 million and the husband was ordered to contribute substantially to her costs.

And in Whaley v Whaley,10 the assets were either GBP3 million (husband’s position) or GBP11 million (wife’s position). The difference was the value of trust assets, set up by the husband’s father before the marriage. The Judge found that just over GBP10 million was available, of which GBP7 million was made up of assets in two trusts. The trusts were held to be resources and the trustees would be likely to accede to a request by the husband. The wife was awarded GBP3.8 million. The husband’s appeal was dismissed on the basis that the Judge had formulated the correct test and reached unimpeachable findings of fact.

  • 1. Robson v Robson [2011] 1 FLR 751.
  • 2. Jones v Jones [2011] 1 FLR 1723.
  • 3. K v L [2010] 2 FLR 1467.
  • 4. FZ v SZand Another [2011] 1 FLR 64.
  • 5. N v N [2010] 2 FLR 1093.
  • 6. Radmacher v Granatino [2010] UKSC 4.
  • 7. Thomas v Thomas [1995] 2 FLR 668.
  • 8. M v W (Ancillary Relief) [2010] EWHC 1155 (Fam).
  • 9. B v B [2010] EWHC 3422 (Fam).
  • 10. Whaley v Whaley [2011] EWCA Civ 617.
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Tracey Dargan

Tracey Dargan is an Associate Solicitor at Irwin Mitchell LLP.

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