personal finance

Will divorce affect my grandchildren’s trust fund?

As a grandfather, I set up a trust fund for the benefit of my two grandchildren for educational and other purposes. Their parents are now divorcing in an English court and the mother is insisting on disclosure of the capital sum in the trust on the basis that her husband will see the benefit if the funds are used for private school fees and that this assistance will free up funds for increased maintenance to her. I am the sole trustee and not party to the proceedings, and do not wish to disclose. Can the divorce court force me to?

Jane McDonagh, partner at Simons, Muirhead & Burton law firm says there’s some practical advice at the end of my response, but first as straight an answer as it’s possible to give without knowing more: yes, the wife might well persuade the court that it’s important to know more about the trust and its impact on the husband’s spending needs.

If the court is persuaded that it needs to know more, then the husband is its first port of call on the assumption that he will have the trust documents, or would at least know the extent and purpose of the trust. If the husband is not able to provide sufficient detail, the next stage, as you suggest, may be an attempt to include you in the proceedings.

Judges are usually reluctant to involve third parties to this extent unless the circumstances are exceptional. The court would have to be convinced that such an order would pass the test of being necessary and proportionate to the issues in the case. The wife’s lawyers will argue that the ease with which you can access and disclose details of the capital sum makes the request proportionate. And the fact that this might well significantly alter the husband’s income needs in the future makes it necessary. But in truth, a lot will depend on the approach of the judge hearing the application.

Jane McDonagh © Handout

The significance of the trust fund is dependent to a large degree on the husband’s case in the divorce proceedings. If he is saying that despite the trust he will still be the one paying the school fees out of his own pocket, the court is more likely to deem details of the trust relevant in order to rebut (or prove the truth of) that argument.

However, if the husband concedes that he will not be paying the school fees, the capital sum in the trust fund might be somewhat of a moot point. You do, however, say that the trust is both for educational and other purposes. The wife might well therefore go for disclosure anyway and explore those other purposes, as this will still have an impact on the husband’s income needs.

Finally, a note of practical advice. Though this is a deeply personal issue and one which will understandably cause alarm and discomfort to you, please think carefully before deciding on a course of action. The wife already knows about the trust. The court might well view any unwillingness or refusal to disclose more information as suspicious and that in absence of disclosure, it is within its rights to draw adverse inferences. I cannot say more without knowing more detail of the case, but it is possible that a refusal to co-operate might have a more damaging effect than the disclosure of the actual fund’s capital sum.

Brett Frankle, partner in Withers’ family law team says in short, yes a court can enforce disclosure of a trust, and this issue comes up quite a lot in divorces.

Grandparents frequently want to provide for their grandchildren, and sometimes set up trusts to pay school fees, like you have. On other occasions I have seen funds set aside for general living expenses, sports clubs, holidays and even deposits for a home, in due course.

Whatever it is ultimately for, trusts established under English law will be susceptible to disclosure in English divorce proceedings.

The English court has far-reaching powers to obtain information. A judge will want to know what the assets in the case are, and also what liabilities there are. If school fees are funded by a trust then that does impact on available income for the parents and so it is something the court will want to have details of. It can be a really important factor in a case and it can have an impact on whether maintenance should be paid and, if so, how much.

Brett Frankle © Handout

The court always looks to the reality of the situation and simply not disclosing the details of the trust does not get around the issue. If school fees have been paid by the trust, then everybody knows of its existence, and the court can make robust assumptions about future schooling contributions if information isn’t made available to it.

It is true that there may be ways to limit what can or should be disclosed (although not necessarily completely). Having funds offshore and trustees outside of England and Wales are often ways that people seek to limit the divorce courts from being able to obtain information, but it can become a logistical nightmare to plan arrangements like this when trust funds need to be used. Running a trust in this way may also result in horrible tax consequences both for you and your grandchildren.

Going to great lengths not to provide information in the divorce also leaves open the risk that the court will take a broad brush view on the availability of funds. That may count against your grandchildren — if the money isn’t there to pay school fees — and possibly also your son, because it might be assumed he can pay maintenance as the trust will pay school fees.

It can be frustrating to have to give information. However, it is often better to be clear and honest to avoid confusion and uncertainty and to allow the court to make a fair award, based on actual information, rather than on assumptions that may not be true.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.

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