14: Variation of trusts
When a married couple divorce (or civil partners apply for a dissolution) and they cannot reach agreement on financial matters, they can ask the court to decide. When that happens, the court exercises wide discretionary powers contained in a now rather aged piece of legislation entitled “the Matrimonial Causes Act 1973”. Under that statute the court has the power to make a variety of powers, one of which is to make an order:
‘Varying for the benefit of the parties to the marriage and of the children of the family or either or any of them 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 in the form of a pension arrangement’.
For many years this power to vary settlements (or trusts) was seldom used but in recent years it has become more commonplace, often to the consternation of the trustees who hold assets under the terms of the settlement which one party seeks to vary. This worry is understandable given the wide range of orders the court can make when it does decide to vary. The court can, in theory, vary the terms of the settlement in any way it sees fit. It has been said that the court will exercise caution before making a variation order but equally that the court discretion is both unfettered and, in theory, unlimited. It is within the court’s powers to vary a settlement by wholly excluding a beneficiary from the settlement or by transferring some asset or other to a non-beneficiary free from all trusts. The court can use its powers to remove a trustee or protector. It can direct that income or capital provision be made for a spouse or even the creation of an entirely new trust. The exercise of the powers can therefore have a dramatic impact.
Historically the expression “settlement” has been given a wide meaning and in recent years certain judges have decided to treat a variety of property owning structures as settlements. It is not just conventional looking trusts which fall within the definition. Equally, there can be a debate as to whether a particular settlement is sufficiently “nuptial” to be caught by the power. For a settlement to be considered a “nuptial settlement” there has to be a connection between the settlement and the marriage. It has been said that the settlement has to be upon the husband or wife or both in the character of spouses with reference to their present or future marriage state. However, in DR v GR Mr Justice Mostyn opined that the test of what comprises a nuptial settlement can be expressed as “any arrangement which makes some form of continuing provision for both or either of the parties to a marriage” which sounds rather less rigid.
Concern has recently arisen over whether a settlement which at its inception was not nuptial could become “nuptialised” in part or in whole by a subsequent action. Certainly judges in the Family Division have considered that the actions of trustees could lead to a trust being treated as a nuptial one capable of variation but there remains potential uncertainty over what triggers such a change. What is clear is that trustees ought to think carefully about the wider potential consequences before they exercise powers which may be vested I them. An innocuous change may have unforeseen consequences should there be a divorce further on down the line.
It is clear that the courts will not simply vary a settlement without notice to the trustees. The court rules provide that notice must be given to the trustees of an application to vary. If the trustees are based offshore and there are no assets in England, they may decide not to take part in the divorce proceedings but, when there are assets in England, it may be sensible for the trustees to take a different stance and wish to be more actively involved.
So how should trustees react when they receive notice that one of their settlements could be the subject of such an order? As mentioned, much may depend upon the extent to which trust assets are physically in England. Traditionally trustees based off shore have avoided submitting to the jurisdiction of the English court. Nonetheless there may be cases where the trustees will be able to protect the interest of their beneficiaries by taking an active role in the process. In DR v GR Mr Justice Mostyn took the view that there was no need for trustees to be joined to the proceedings. However, in a more recent decision handed down in March, Mr Justice Moor, took a different view. He stated strongly that, in his experience, trustees are to be joined when there is an application to vary the trusts of which they are trustees. He considered it a tenet of Article 6 of the European Convention on Human Rights that requires a fair trial that trustees should be joined before the court varies the trust of which they are trustees. He thought it was hard to see how a court could make such an order without them being parties to the litigation, let alone to say that any variation made should be binding upon them.
This is therefore another example of where a rather “mixed message” is being sent by the judiciary. The prudent thing is therefore for the trustees to take prompt advice from family lawyers versed in this area before making what could turn out to be an ill-advised decision.
19 May 2016