In the first of a series of three articles, international divorce law firm, Hughes Fowler Carruthers, look at issues related to divorce and how they can be addressed from a family offices perspective.

In the first of a series of three articles, international divorce law specialist, Hughes Fowler Carruthers, look at issues related to divorce and how they can be addressed from a family offices perspective.

Family offices have many responsibilities but, in general, their primary concern is protecting assets of the family from being attacked by third parties and to ensure that it is protected for future generations.  Numerous tools are available to a family office to do this but one in particular has, through the ages, served not only to protect money from being spent by one generation but also to provide tax advantages: a trust structure.

Although such structures may achieve a significant amount of protection both in terms of tax savings and preservation of assets if there is a dilettante generation, they may well be susceptible to attack by someone very close to home – a divorcing spouse.

If the spouse of a family member succeeds in obtaining jurisdiction in England and Wales for a divorce to proceed then the English court will have power to deal with all relevant assets.  The court is well used to dealing with wealthy families where part or all of the assets are held in trust or in complicated company structures. As Coleridge J said in J v V: Disclosure: Offshore Corporations [2004] 1 FLR 1042:

“These very sophisticated offshore structures are familiar nowadays to the judiciary who have to try them. They neither impress, intimidate nor fool anyone. The courts have lived with them for years.”

The Family Court has developed a reputation (not without cause) for developing inventive and innovative ways of attacking such structures to ensure that the poorer spouse is treated “fairly”. The court has a number of tools available to it, including:

(a)          Declaring the trust a sham (although this is only done on very rare occasions);

(b)          Varying trusts because they are “nuptial”;

(c)          “Judicially encouraging” trustees to make payments to beneficiaries which, in turn, can then be passed on to the spouse;

(d)          Offsetting the value of the trusts of which one party is a beneficiary against other assets, and then ordering that the non-trust assets be transferred to the poorer spouse.

Problems have arisen, however, after such orders have been made, in their enforcement. Although the English court has power to make orders of foreign trusts (even those trusts which solely own foreign assets) there can arise difficult issues about whether the foreign court will enforce such an order, for example, purporting to vary its trusts in its jurisdiction.

Given all of this complexity, there is clearly a need for family offices to be fully informed about this potential area of attack close to home and to ensure that suitable safeguards are in place to protect the assets from such eventualities.

Quite often, such factors are not at the forefront of the advisor's mind when advising on day-to-day family office matters. These, in turn, may have potentially disastrous effects in later divorce proceedings. For example:

- An advisor may recommend setting up new trusts or amending the present trusts to take advantage of new tax legislation. By taking such steps, an old trust structure may be turned from one which had previously been impervious to attack within divorce proceedings to a nuptial settlement which can be varied. The English court would then have power in any divorce proceedings to re-write the terms of the trust and, for example, appoint the spouse as an absolute beneficiary.

- If the advisor recommends a distribution of trust assets to one beneficiary, then other beneficiary spouses may use that distribution as an example of why the trustees could be “judicially encouraged” to make payments to their spouse. 

These are two examples of acts which, on the face of it, would not appear to have much relevance to future divorce proceedings but, nonetheless, can have a dramatic impact.  Advisors must always therefore tread carefully when taking such decisions and be wary about their long-term impact.

Given that enforcement of financial orders can be problematic, particularly where foreign trusts are involved, advisors should always bear in mind, when considering the location and governing law of a trust, whether the proposed jurisdiction would, in general, enforce orders against a trust which is being attacked in another jurisdiction.

Unfortunately, the divorce rate is rising and, given the wide powers of the English court, these are issues which more and more have to be taken into consideration by advisors in family offices.