‘Yet once more, O ye Laurels, and once more

Ye Myrtles brown with Ivy never sere

I come to pluck your berries harsh and crude

And with forc’d fingers rude.’

When studying for my A level in English literature I never quite worked out who Myrtle Brown was, nor whether Laurel was her sister or Ivy Neversere a friend of theirs. In History I studied the period when Milton was writing1 but I never found their names mentioned in the history books either. These days you’d just Google them, of course, but the world wide web wasn’t a Thing back then. What I always took from those opening lines of Lycidas, however, was that feeling of returning to a particular theme for the Nth time.2 And maybe the specifics aren’t important anyway. Poetry is emotion recollected in tranquility, as Wordsworth nearly said.

So when I received an email asking if I would mind returning to the thorny issue of the treatment of trusts in financial remedy proceedings, willing as I was in principle to put pen to paper3 I did think ‘why? What can I say about trusts that hasn’t already been said?’

To which the answer, after a moment’s further reflection, seemed obvious. Vast tracts have been devoted to the ways in which an applicant can access the resources held within a trust. The answer, for the sake of completeness, is that a trust may be taken into account as a resource available to the parties,4 it may be a nuptial settlement that can be varied under s 24(1)(c) Matrimonial Causes Act 1973,5 and occasionally what looks like a trust isn’t actually a trust at all and the ‘trust’ assets can be dealt with in the usual way.6

But whilst many nice points arise in financial remedy cases featuring trusts7 there is a logically anterior question to that of how the court can distribute the wealth contained within a trust, which is why it should. To my surprise, reviewing the literature, comparatively little has been said about this: so here goes.

What is a trust?

I start with the basic definition of a trust:

‘A trust is a legal relationship in which the owner of property, or any transferable right, gives it to another to manage and use solely for the benefit of a designated person. In the English common law, the party who entrusts the property is known as the “settlor” (S), the party to whom it is entrusted is known as the “trustee” (T), the party for whose benefit the property is entrusted is known as the “beneficiary” (B), and the entrusted property is known as the “corpus” or “trust property”.’8

I’ve emphasised that phrase ‘gives it to another’ because it’s a zinger. It gives rise to an issue the full significance of which is sometimes not understood when trusts feature in financial remedy proceedings.

Why should trust assets be taken into account at all?

Back to basics. The three bases upon which the court can properly exercise its powers under Part 2 MCA 1973 are of course needs, sharing and compensation, which I’m going to ignore.9 A trust ex hypothesi involves dealing with assets that belong to someone other than the spouses. So why should the court be able to take money that S has settled on T for the benefit of B1 and B210 and apply it instead for the benefit of W? Why, in other words, is it legitimate to take money that doesn’t belong to the spouses and use it for the benefit of those spouses? They would not be entitled to plunder that trust fund in any other circumstances, so why should the fact that they are getting divorced give the court a power to benefit them from money that belongs to someone else and was intended to benefit someone else?

The answer is actually quite simple: because Parliament has conferred that power on the court, to use in appropriate cases. One only needs to glance briefly at Miller11 to see why: provided the relevant settlement falls within the scope of the section, an order under s 24(1)(c) can be justified in a ‘needs’ case.

But, as Munby J (as he then was) said in Ben Hashem v Shayif [2008] EWHC 2380 (Fam) the power to vary a nuptial settlement is a ‘jurisdiction to “vary”, not a jurisdiction to confiscate’.12 Like any power contained in Part 2 MCA 1973 it must be exercised in accordance with the factors set out in s 25, which of course includes an obligation to take into account all the circumstances of the case. Thus the court is compelled to take into account the position and interests of those who were actually intended to benefit from the trust. So the task facing the court, where it is asked to vary a trust that on the face of it does not benefit an applicant spouse at the expense of those it actually does benefit, is to balance those competing interests and arrive at a solution that is fair in all the circumstances. There may be a suspicion in some such cases that the nature of the litigation before it inclines the court to be rather too sympathetic to the needs of the applicant spouse and insufficiently sympathetic to the position of the non-spouse, but that, if it is anything more than a suspicion, is frankly one of the risks of litigation of this nature. The power to vary a settlement is the only form of order that permits the court to make financial provision in favour of spouses at the expense of non-spouses. It is a power that should be exercised cautiously, as Munby J’s seminal judgment makes clear, but it would not be on the statute books if Parliament thought it should not be exercised at all.

Sharing claims and trust assets

The more difficult question is should assets held in trust be included as part of a sharing claim? Returning to Miller, at [137] Baroness Hale made the point that the need for some rationale before the court’s powers are exercised flows from the fact that English law starts with a regime of each spouse holding their own property and that it is unprincipled for the court to deprive a spouse of their lawful property simply because it can. The argument in the higher-value cases is, of course, that each spouse is entitled to a fair share of the fruits of the marital partnership.

How do trusts fit into that framework? ‘It depends on the trust’, is the glib answer, but also the correct one. Plainly, each case will need to be considered, and analysed, on its own merits, but in broad terms cases of this nature can be divided into two categories: those where the assets held in trust are not the fruits of the labours of the spouses (or either of them) and those where they are.

What of the first? Suppose the class of beneficiaries under a settlement includes a husband whose father settled the proceeds of sale of the business that he (the father) built up during his lifetime. Suppose also that the settlement fits snugly within s 24(1)(c). It is easy to see why the court might vary that settlement on a ‘needs’ basis, but what is the rationale for dealing with it on a ‘sharing’ basis? It is worth bearing in mind Baroness Hale’s qualification at [137] of Miller: she was not dealing there with the totality of resources in the sense of anything that might fall within the wide ambit of s 25(2)(a), she was dealing specifically with assets actually belonging to the parties.

What, then, is the basis for the argument that assets whose provenance is outside the marriage form part of the fruits of the marital partnership? This is not fruit that has been nurtured and harvested by the spouses themselves, it is a windfall. It is no more ‘matrimonial’ in nature than an inheritance or a pre-death gift intended to avoid inheritance tax.13 The whole point of a trust is that the class of beneficiaries, even if that includes the spouses, are not the owners or even the controllers of the trust assets.

Marital home held in trust

Perhaps the most difficult spes of property in this context is the matrimonial home. Imagine a case where a family trust makes available a property for a young couple to live in at some nominal rent. The mere act of providing this property can itself constitute a nuptial settlement14 but how should the court exercise its’ discretion over that settlement? Should it simply award something in the nature of a licence to occupy, as in Ben Hashem itself, or should it go further and deal with the fee simple in that property?

The high water-mark argument for saying the spouses should be awarded the property outright comes from White and Miller, in particular those well-known passages about the importance of the matrimonial home. At [22] of Miller Lord Nicholls said:

‘The parties’ matrimonial home, even if this was brought into the marriage at the outset by one of the parties, usually has a central place in any marriage. So it should normally be treated as matrimonial property for this purpose. As already noted, in principle the entitlement of each party to a share of the matrimonial property is the same however long or short the marriage may have been.’

Thus, the argument goes, a property that is made available to the spouses other than on arm’s-length terms can, where the jurisdiction exists, be treated as matrimonial property and subject to the sharing principle, even if this deprives other beneficiaries of the potential to benefit from that asset.15

The risk is that this argument takes Lord Nicholls’ observations out of context. First, he said ‘normally’, not ‘always’, but more importantly he was plainly referring in Miller to the situation where one or other spouse actually owns the matrimonial home. In Scottish law, for instance, ‘matrimonial property’ has a specific statutory definition and function16 which requires the court to differentiate between ‘property belonging to the parties or either of them17 at the relevant date which was acquired by them or him (otherwise than by way of gift or succession from a third party)’ and any other property. In English law ‘matrimonial property’ has the same essential meaning but not the same function. Under English law, whether property is properly regarded as ‘matrimonial’ is a factor that informs the exercise of discretion, not a statutory factor that mandates the particular treatment of such property. So how, the counter-argument goes, can property, not owned by either of the spouses, even if it is the home where they live, be regarded nonetheless as their ‘matrimonial property’? It is not their property at all.

Financial fruits of the marriage held in trust

Let us consider the second possibility, where the parties themselves have generated the value held within the trust, and have settled it (typically for tax, dynastic or asset-protection reasons) into a trust. In a number of such cases the settlor18 gives a good impression of seeking to have the best of both worlds, that is to retain all the access and control over the trust property that an absolute owner would enjoy, yet retain the benefits of ownership within a trust structure.

Plainly, each case in this category will be fact-dependent. But let us start with an arm’s-length trust where the parents, say, have specifically settled 90% of their fortune on trust for the next generation with the intention that this will avoid (or at least minimise) inheritance tax. Some years later they get divorced. W says ‘I had no part in that decision, H was simply trading with my as-yet-unascertained share of the matrimonial property’.19

The problem with that is that it is difficult to see any legitimate basis upon which a claim can be made to property that was once owned by one spouse but subsequently disposed of in arm’s-length circumstances. A sum of money donated to charity, for instance, could not be said to still be part of the parties’ matrimonial property, albeit one might be able to argue that an add-back should be made.20 So how can a party validly claim, following a legitimate piece of estate-planning, that assets transferred into a trust should still be regarded as ‘matrimonial property’? As Mostyn J observed in BJ v MJ the court should hesitate ‘before overriding a decision or agreement made during a marriage to isolate funds in a separate legal structure for the formal benefit not only of the spouses but also of their children and remoter issue’.21

Plainly all will depend on the circumstances. If, under the trust instrument in question the parties retain an entitlement to benefit, it might be possible to regard some proportion of the trust fund as having being notionally ringfenced for their ongoing benefit, and thus subject to the sharing principle. But what if the whole trust fund benefits only the next and subsequent generations? It may be, if the evidence justifies it, that an attack on the creation of such a trust could be mounted under s 37 MCA 1973 or ss 423–425 Insolvency Act 1986. That apart, it is difficult to see how property that might formerly have been regarded as wholly matrimonial but is now held in a validly settled trust, could possibly remain subject to the sharing principle after the parties, or one of them, decided to give it away. Returning to [137] of Baroness Hale’s speech in Miller, it is a feature of English law’s system of separate ownership of property by spouses that each of them is free to do what they will with their property, even during a marriage, subject of course to the safeguards and modes of redress Parliament and the courts have been willing to put in place to remedy situations where that freedom is abused. But where those ex-post facto adjustments are not available, the question again arises of how property not owned by the parties can be said to be matrimonial property at all?

Sham trusts

The spouse who wants the best of both worlds obviously creates difficulties, at least conceptually. Again, the outcome is always fact-specific. Curiously, there are still no reported cases of the argument even being run in the context of a divorce that a trust deed contains so many reservations and limitations on the trustees’ powers that it is not in truth a valid trust at all. Arguments that a trust is a sham are evidentially difficult because much depends on the necessary shamming intention being shared by settlor and trustee alike, which will frequently be difficult to prove – especially if the trustees are professional trustees who may be subject to local regulatory requirements.22 Many cases involve trustees taking a somewhat lax approach to the proper discharge of their duties in a way that always seems to benefit the settlor in particular, but whilst that may be a breach of trust, it does not render a validly established trust a sham and it does not convert a trust fund into matrimonial property.

None of this is to say that in any given case, on its own particular facts, assets held in a trust fund cannot properly be regarded as matrimonial property and subjected to the sharing principle. But considerable care must be taken before the court can safely arrive at such a conclusion.