10th Jul 2024

Treatment of Trusts on Divorce: Analysis of HO v TL

By Grace Lawrence

Treatment of Trusts on Divorce: Analysis of HO v TL

 

HO v TL: Lessons for trusts cases, an article by FLiP Senior Associate Grace Lawrence who is a member of the Society of Trust and Estate Practitioners, was first published in HNW Divorce ‘Entrusting the Future to the Next Generation’ magazine (ThoughtLeaders4 HNW Divorce • JUNE 2024) and is reproduced by kind permission.

HO v TL: Lessons for trusts cases

Financial remedy practitioners in the HNW/UHNW space will often be instructed in cases where either their client or their client’s spouse has substantial trust interests. In such cases, there is an obvious tension between traditional trust concepts (including the trustees’ duties to act in the interests of the beneficiaries as a whole and to safeguard trust assets) and the desire of the English court to achieve a fair outcome as between the divorcing couple. HO v TL [2023] EWFC 215 is one such case. Amongst other issues, Mr Justice Peel had to grapple with the extent to which the Husband’s interests in two family discretionary trusts were accessible and therefore “financial resources” available to him.

Summary
The Husband was 48 and the Wife was 56. The parties were married for 17 years and had 3 children. They had an international lifestyle and extremely high standard of living (multiple homes, luxury holidays, full-time staff). The couple had co-founded a hotel group in which they both worked. It owned a luxury beachfront hotel which was “at the centre of the marriage and the family”. The “bedrock of the parties’ wealth” and most of the original funding for the business came from the Husband’s pre-marital wealth and capital injections from his family. Mr Justice Peel concluded that the business was worth £9.59m and there were total resources of £22.44m, over £10m of which were non-marital on the Husband’s side. The Wife, whose needs exceeded her sharing entitlement, received an award of £7.75m on a clean break basis.

Trusts as a “financial resource”
The case provides clarity on the application of the Charman test. In considering whether the Husband’s trust interests were available “financial resources”, Mr Justice Peel looked at “whether the trustee would be likely to advance the capital immediately or in the foreseeable future” (as per paragraph 13 of Charman v Charman [2005] EWCA Civ 1606).
The Husband was a beneficiary of two discretionary trusts both with wide classes of beneficiaries:

• “Trust Y” had been settled by his late father prior to the marriage and had a value of c.£2.25m. In a letter of wishes his father requested that after his death and the Husband’s mother’s death (which happened in 2022) the trust fund be divided into equal shares for the Husband and his brother; and

• “Trust Z” had been settled by the Husband’s grandmother in 1975 and had a value of £27m. The letter of wishes earmarked certain percentages of the trust fund for individual beneficiaries, the Husband’s percentage increasing after his mother’s death. It also suggested very limited outright capital distributions, so that capital would be preserved for future generations.

Mr Justice Peel referred to earlier authority which emphasized the need to look at the facts realistically and referred to the practice of “judicious encouragement” arising from Thomas v Thomas [1995] 2 FLR 668. He then listed “relevant factors” to consider when determining whether the Charman test is met. By way of summary, these included:
• The nature and purpose of the trusts, trust documents being “informative” along with evidence within the family as to the working of the trust/their expectations;

• Whether the spouse is the main/principal beneficiary or one of many beneficiaries of similar standing;

• Whether distributions to a party would “appreciably damage” other beneficiaries;

• The history of distributions and loans to a party, including their frequency, purpose and terms of repayment/security (and whether requests had been refused);

• The overall value and liquidity of the trust funds;

• Whether the spouse beneficiary has a close relationship with the trustees or protector; and

• “The extent of explanation, information and documentation provided by the trustees, and whether they declined to attend court in a witness capacity”.

Applying these factors, Mr Justice Peel concluded that 50% of Trust Y and 38% of Trust Z should be “notionally allocated” to the Husband and treated as a “resource” available to him. Mr Justice Peel relied on the terms of the letters of wishes and the earmarking therein, saying that he saw “nothing exceptional in treating the funds as desired by H’s father”. It was relevant that liquid funds were available in the trusts, that the Husband had received loans from Trust Z of £4.45m which were generally unsecured and rarely repaid and that he had never been turned down for funds.

Lessons
There are several takeaways from this case for practitioners:
1. It is clear from Mr Justice Peel’s reasoning that trust documents will often be material to outcome. Not only did the letters of wishes provide the foundation for his ‘notional allocation’ approach, Mr Justice Peel also referred to clause 11 of the Trust Z trust deed which authorised the trustees to disregard the interests of other beneficiaries when exercising their powers in favour of one particular beneficiary.

2. Careful thought needs to be given on both sides of a case to the involvement of the trustees. If the beneficiary spouse is arguing against the history of the trust i.e. saying distributions/loans will no longer be forthcoming, then the trustees will potentially need to give evidence to persuade the court to that effect. Mr Justice Peel commented that “attendance by the trustees as witness would have been helpful” not least to explain the inconsistent positions they had taken in correspondence (and he cited earlier authority which indicated that this would not amount to submission to the jurisdiction). As things stood, he saw no reason why he should accept their position “about non-advancement of funds to H at face value”.

It is not sufficient for the beneficiary spouse to defer to the trustees. Unless said spouse engages realistically with the question of accessibility, they may face cost consequences. Mr Justice Peel found the Husband to be “somewhat evasive and legalistic about his trust interests” and, in his subsequent costs judgment, said that “[o]rdinarily, this would justify an order for costs against him”. However, taking a wider lens, the Wife was ordered to pay £100,000 of the Husband’s costs largely due to her failure to negotiate reasonably.

Grace Lawrence is a Senior Associate at Family Law in Partnership. She advises HNW and UHNW individuals on all aspects of private family law including financial and children matters and pre and post nuptial agreements. Her work has a strong international dimension and many of her cases involve substantial business interests and trust structures. Grace has been ranked consistently as a “Rising Star” by the Legal 500.

During her training, Grace spent a year working in one of London’s most highly regarded private client teams. She developed a particular interest and expertise in trusts, property and estate planning which she draws on to inform her advice to her family law clients. She is a member of the Society of Trust and Estate Practitioners and she achieved a Distinction in STEP’s Advanced Certificate, International Trusts: Law and Practice. As such, she is comfortable advising trustees and beneficiaries on how best to safeguard trust interests from claims on divorce.