No Content Set
It is clear that a well drafted and properly administered trust can be an effective asset protection vehicle in the context of divorce. Broadly the test now applied by the Family Division of England and Wales (the "Family Division") in relation to trusts is to decide whether the trust should be treated as a resource available to the relevant party – for example, if the husband were to request the trustee to advance to him the whole (or part) of the trust fund of the trust, the trustee would be likely to do so (the "Charman Likelihood Test").
Obviously this test raises some interesting issues for trust counsel to consider in the drafting of trusts and letters of wishes. The test also raises some key points for trustees to consider in the practical administration of trusts, notably concerning the need for trustees to exercise their own independent discretion (distinct from direction or influence from the beneficiary / settlor spouse) and, fundamentally, being able to evidence the same.
If the resource line of attack is open and sufficient it is likely that there will be no need for the aggrieved spouse to attack the trust by asking the Family Division to vary the trust under English law matrimonial legislation (e.g. to order distributions or to vary the beneficial class). Enforcement issues can arise with the variation line of attack if dealing with a foreign law trust outside of the jurisdiction (e.g. when dealing with a Jersey or Cayman trust). In more recent times, and consistent with the resource line of attack, the approach of the Family Division has broadly been to preserve the integrity of trusts and particularly so if there are sufficient assets held outside of the trust.
Of course the facts and circumstances applicable to ultra-high net worth families looking to establish trusts with an eye on asset protection will vary dramatically, and many factors will simply be outside the control of legal counsel and trustee. Ideally all planning would be carried out in advance of marriage or contemplation of marriage for instance, but this is not always feasible! That said the purpose of this short paper is to pull together some practical pointers on the drafting and administration of trusts so as to ensure, so far as is possible, that a trust is considered to be dynastic in character rather than a resource of the beneficiary / settlor spouse.
The Charman Court of Appeal judgment from back in 2007 still provides us with helpful guidance today. Indeed the Charman Likelihood Test has been applied in a number of cases most recently by the Hong Kong High Court in LCYP v JEK  HKCFI 1588.
Background on Charman
Of interest to us:
(a) Mr Charman was the settlor of the trust and his letters of wishes stated that he wished to be considered the primary beneficiary. Indeed the first letter of wishes stated that he wished to have the fullest possible access to the capital and income of the trust including the possibility of investing the entire trust fund in business ventures undertaken by Mr Charman. Both letters of wishes were inconsistent with a dynastic trust analysis.
(b) Mr Charman retained a large degree of control over the trust (he had the power to remove the trustees).
(c) As regards income, the trustees informally regarded the trust as an interest in possession trust for the benefit of Mr Charman, with no distribution of income to any beneficiary other than Mr Charman.
(d) The wealth in the trust had been built by investment in accordance with Mr Charman’s instructions. Mr Charman's requests had led the trustee to make multiple investments in the insurance sector (for the most part highly successful).
(e) The practical reality – the trust was a key component in Mr Charman's overall financial and tax planning.
We assume an appropriate asset protection strategy has been formulated for the UHNWI taking into account the assets and relevant jurisdictions and further that the establishment of a dynastic trust is part of the strategy (perhaps in tandem with a pre-nup). What are the relevant considerations on drafting?
These are general pointers and of course every matter will differ on the facts.
Ogier is a professional services firm with the knowledge and expertise to handle the most demanding and complex transactions and provide expert, efficient and cost-effective services to all our clients. We regularly win awards for the quality of our client service, our work and our people.
This client briefing has been prepared for clients and professional associates of Ogier. The information and expressions of opinion which it contains are not intended to be a comprehensive study or to provide legal advice and should not be treated as a substitute for specific advice concerning individual situations.
Regulatory information can be found under Legal Notice
Sign up to receive updates and newsletters from us.Sign up
No Content Set