Getting Caught up in a Beneficiary’s Divorce

1. Getting Caught up in a Beneficiary’s Divorce STEP Bermuda – June 2012 Dawn Goodman and Sue Medder Withers LLP

2. Introduction • The White v White revolution - the ‘yardstick of equality’ • Trusts • part of the assets available for division to satisfy the ‘yardstick of equality’ • Trustees • joined to proceedings? • disclosure obligations? • assisting the Court?

3. The methods of attack (1) • Variation – Ante and post nuptial settlements - Matrimonial Clauses Act 1973 s 24(1)(c): “ an order varying for the benefit of the parties any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage, other than one in the form of a pension arrangement” • Connection between the settlement and the marriage?

4. The methods of attack (2) • Trusts as a resource (s.25(2)(a) Matrimonial Causes Act 1973) “ if the husband were to request the trustee to advance the whole (or part) of the capital of the trust to him would the trustee be likely to do so?” Charman No 1 [2005] EWCA Civ 1606

5. Trust Assets a Resource? • Nature of assets? • Inherited Wealth? “The nature and source of the asset may well be a good reason for departing from equality within the sharing principle” Robson v Robson [2010] EWCA CIV 1171

6. Inherited wealth / pre-acquired property (1) • Robson v Robson [2010] EWCA Civ 1171 • 21 year marriage and two children aged 20 and 17 • H’s capital assets mostly inherited pre-marriage valued at £22.3 million (included Oxfordshire stately home and estate) • Extravagant lifestyle • ‘Dynastic plan’ argument rejected as assets had funded lifestyle • W received £7m

7. Inherited wealth / pre-acquired property • Whaley v Whaley • 20 year marriage, 4 children • Assets £10 million • 7 million held in two trusts Y & F Trusts • H beneficiary of F trust H not a beneficiary of Y Trust • Trust settled by H’s father • Held assets in Y Trust could be taken into account because H could be added as a beneficiary

8. The methods of attack (3) • Sham • There must be a common intention as between the trustees and the settlors that ‘the arrangement is otherwise than as set out in the trust deed’ – Munby J • Family Division jurisdiction to decide allegations of sham and corresponding proprietary claims against third parties: • Goldstone v Goldstone [2011] EWCA • Kremen v Agrest [2010] EWHC

9. Disclosure • Request by whom and in what capacity? • What documents to disclose? • Obligations owed to divorcing beneficiary / class of beneficiaries? • Letter of wishes?

10. In the Representation of U Limited [2011] JRC 131 • H settlor and beneficiary • W excluded as beneficiary • Offshore Trustee • W’s request for disclosure • Trustee application for directions

11. Assisting the Beneficiary – Assisting the Court? • No Comment? • Prejudicial to a trustee and beneficiaries? • Inferences to be drawn? “if the trustees refused to participate meaningfully or helpfully in the court’s enquiry, the court could draw robust conclusions as to the likelihood of future benefit” BJ v MJ [2011] EWHC 2708 (Fam)

12. Trust review – prevention is better than cure! • What are beneficial interests of beneficiary intending to marry? • Are spouses in the class? • Are children in the class? • What, if any, is the pattern of distributions? • Are there assets in jurisdiction(s) where couple live which could be brought home to trust jurisdiction?

13. Review of trust continued… • What does the Letter of Wishes say? Should settlor (if alive) be invited to review? • Are there any trustees / protectors / other fiduciaries in jurisdictions which make the structure more vulnerable to attack? • Is the beneficiary in question a fiduciary? Should he / she be encouraged to stand down? • Are critical documents in jurisdiction(s) where beneficiaries are resident?

14. Management of settlements to protect against attack • Creating sub funds? • Exclusion of spouses from the beneficial class? • Change of the governing law of the trust? • Removal of beneficiaries from key roles in the trust, such as Trustee? • Handling and dissemination of trust documents and information. • Reviewing letters of wishes. • Limiting future distributions

15. Pre-nuptial agreements Are they worth the paper they are written on? • Not legally binding yet, but following the Supreme Court decision in Radmacher (October 2010), Courts encouraged to give effect to nuptial agreement freely entered in unless terms unfair • Primary purpose – to protect assets on divorce • e.g. ring-fencing of inherited wealth or money made prior to marriage e.g. selection of jurisdiction for divorce – can be decisive (S v S 1997; Ella v Ella 2007)

16. Post Radmacher ? • A V Z (No 2) [2011] EWHC • B V S (Financial Remedy: Marital Property Regime) [2012] EWHC 265 (Fam)

17. In the Matter of The Representation of A (A minor) and B (A Minor) [2012] JRC 086B • A cautionary tale “It is a bold move for the court but we find ourselves constrained into setting aside the instrument of appointment because in our view no reasonable trustee would have excluded the grandchildren as beneficiaries”