Trusts have long been a favoured way for wealthy families to preserve their assets. When managed well, trusts can be a very effective way to protect assets and pass them down through the generations. However, many trust practitioners have noted an increase in disputes relating to trusts in recent years.
This is often due to more beneficiaries being increasingly financially literate, and therefore wishing to engage more directly with the management of the trust. Sometimes disputes can also arise where there is broader interpersonal conflict within a family. Clear, open and regular communication with everyone involved is essential to build trust and understanding within the family.
Many hold the mistaken belief that trusts are “bomb proof” and can protect assets even where issues such as divorce arise. This is not the case. Divorce is one of the more common triggers for disputes regarding trusts. In recent decades, the English divorce courts have developed sophisticated ways to assess the role trusts play in divorce. The courts can and will attack trusts if they think it is fair to do so.
Disclosure of the identity of the trust and its assets during divorce proceedings is a thorny and complex issue. The divorce courts encourage openness, but beneficiaries may have legitimate reasons to protect their privacy. Specialist advice is needed in such cases.
While the courts will respect the interests of third parties, they will consider whether the trust assets are a resource available to either separating spouse. If so, the courts have draconian powers available and, in extreme cases, can destroy the trust itself. One of the tests that the court will apply is whether the trust assets are a “resource” available to the parties. To try to head off this attack, the trust must not be used as a piggybank.
The trustees must maintain their independence and demonstrate it clearly by, for example, occasionally refusing to provide money to beneficiaries. Having knowledgeable and experienced trustees is crucial to protecting a trust and avoiding disputes, since they will know the best ways to provide protection. Skilled, personable and experienced trustees are adept at gaining the confidence of all family members across the generations, and can often smooth over any undercurrents of discontent long before a full blown dispute emerges.
The best way to make a trust less vulnerable to attack during a dispute is to ensure that it is set up properly by specialist trust advisors. It is also better if the trust does not directly own assets in the UK, since they may be taken away by the court. Many wealthy families use complex overseas trust structures because they are better able to survive disputes. Some offshore jurisdictions are safer than others. The location of the trust and the trustees is a key consideration. However, the offshore nature of many trusts also means that disputes can be very complex, with issues arising not only in England, but simultaneously in places such as the Caribbean and Channel Islands.
Trusts remain an excellent way for families to safeguard assets and achieve greater privacy, even as information sharing regimes increase their reach. Yet, to avoid costly disputes, families should seek out advisors with both excellent technical knowledge and the softer skills, such as the people skills necessary to communicate well and keep all concerned informed, involved and confident in the trust’s management.
Alex’s article was published in Tatler’s Experts’ Corner, here.