Understanding how to navigate the division of family trusts during a divorce can be one of the most complex challenges separating couples face. Trusts can involve generations of wealth, intricate legal structures, and conflicting interests from beneficiaries. While many see them as out-of-reach or untouchable due to their design, family trusts are often scrutinised during the dissolution of a marriage, especially when large assets, inheritances, or long-standing family legacies are involved.
When dissolving a marriage, one of the fundamental legal tasks is identifying, valuing, and distributing shared marital assets. This includes everything from the more typical bank accounts and properties to more obscure or sophisticated financial instruments such as trusts. Dividing trust assets is not a straightforward matter of cutting them down the middle; it demands a nuanced understanding of the legal structure and purpose of the trust, the intentions of the settlor, the jurisdiction in which the trust is held, and the couple’s relationship to the assets.
This article takes a comprehensive look at the considerations, legal principles, and strategic approaches involved in dealing with family trusts amidst divorce proceedings. Whether you’re the beneficiary, the trustee, or the spouse of someone connected to a trust, this guide aims to illuminate the path forward with clarity and care.
The basics: what is a family trust?
A family trust is a legal entity created to manage and protect assets, typically for the benefit of family members across generations. In the context of estate planning, trusts allow settlors (the person creating the trust) to specify how their wealth should be distributed, when, and under what conditions. Trusts also offer privacy, creditor protection, tax advantages, and can shield assets from misuse or mismanagement.
Broadly speaking, a trust comprises three primary roles: the settlor, the trustee, and the beneficiaries. The settlor establishes the trust and places assets within it. Trustees manage and administer the trust following its terms. Beneficiaries receive assets or income from the trust, either during the settlor’s life or upon specific events like death or a beneficiary reaching a certain age. Some trusts are fully discretionary, allowing trustees to decide what each beneficiary receives and when. Others are fixed, with specific entitlements allocated to individuals.
The relationship between a trust and a divorcing spouse can vary greatly depending on how the trust is structured and the law of the country in which the divorce is taking place. Family courts will examine whether the trust is a genuine third-party instrument or essentially a vehicle for one spouse’s personal wealth. This determination can directly impact whether and how the trust assets are included in a marital settlement.
Is a trust considered marital property?
One of the first and most important considerations is whether the trust assets can be classified as marital property. In general, if an asset is deemed marital—meaning it was acquired or accrued during the course of the marriage—it is subject to division upon divorce. Trusts, however, reside in a grey area because they may contain assets from outside the marriage or may not be legally ‘owned’ by either spouse.
Nonetheless, courts may pierce the veil of the trust to determine its relevance in the matrimonial context. If the trust is found to function as a financial resource or as a mechanism for the benefit of a spouse, it may become a subject of negotiation or judicial scrutiny. This is especially the case when the trust has consistently provided financial benefit to the marriage—such as funding school fees, paying for living expenses, or contributing to joint investments.
The element of control becomes crucial in these assessments. If one spouse has been both the trustee and a significant beneficiary, or if they have the power to appoint or remove other trustees, courts may find that the trust serves as a de facto extension of their personal finances.
Even when trusts are irrevocable and theoretically beyond the reach of the settlor, if the historic use of the trust assets shows a pattern of integration into marital life, they may be taken into account when assessing financial settlements or maintenance claims.
Different jurisdictions, different rules
The jurisdiction in which the divorce takes place plays a major role in how trusts are treated. In England and Wales, for example, courts have wide discretionary powers to ascertain the “needs” and “resources” of each party. This means the court does not necessarily have to treat a trust as marital property to factor it into the settlement; it only needs to establish that trust resources are accessible in practice or could be likely to provide future benefit.
Contrast this with a jurisdiction like the United States, where marital property rules vary widely by state. In some states, courts adhere strictly to equitable distribution principles, while others operate under community property regimes. In such systems, a more clear-cut analysis of asset ownership may limit flexibility in assessing how trust wealth is treated.
Compounding this are offshore trusts, which are commonly established in jurisdictions like the Channel Islands, the Cayman Islands, or the British Virgin Islands. These trusts often bring complications due to local trust law, norms around privacy, and the reluctance of some jurisdictions to follow foreign court orders.
Additionally, identifying and proving the existence and terms of a foreign trust can be a litigation-heavy process. A spouse seeking insight into their partner’s offshore arrangements may face uphill battles of discovery, legal representation across borders, and potential loopholes in the trust deed.
The difference between revocable and irrevocable trusts
Another critical distinction relates to whether a trust is revocable or irrevocable. A revocable trust can be altered or terminated by the settlor during their lifetime, meaning that the assets within it are typically considered to remain part of the settlor’s estate. Therefore, if a spouse has set up a revocable trust and retains control, courts are more likely to view the assets as accessible for divorce purposes.
In contrast, an irrevocable trust theoretically removes the settlor’s control over the assets, placing them out of legal reach. However, this is not an impenetrable barrier. Courts will look not just at the legal documentation, but also at the practical realities of how the trust functions. If a spouse appears to treat an irrevocable trust as a personal pocket—drawing on it for personal expenditure or lifestyle enhancement—it may be perceived by the court as a resource, particularly in high-net-worth cases.
Trusts created before the marriage
One major factor in evaluating the place of a trust in divorce is timing. Trusts created well before the marriage, especially those deriving from family inheritance or ancestral property, are often treated differently from those established during the course of the marriage itself. Pre-marital trusts may be viewed as non-marital property, but again, if the trust comes to play a prominent role in the couple’s financial life—supporting day-to-day expenses, housing, or investments—the argument that it should be protected from division weakens.
Where the trust is kept separate, unaccessed, and untouched for the duration of the marriage, courts may be more willing to preserve it as individual property. But a long marriage, entanglement of lifestyles, or dependence on trust income may paint a different picture.
Valuing trust interests
One of the most challenging aspects of dealing with trusts in divorce is placing a value on the interest one spouse may have in the trust. Unlike a savings account or a jointly owned home, a trust interest, especially in a discretionary trust, is not guaranteed. The courts must weigh possibilities against certainties.
A spouse may not have a legal right to demand distributions from the trust, but historical behaviour of trustees—such as regular gifts or income payments—could suggest a reasonable expectation of future benefit. Actuarial professionals and financial experts may need to be called upon to estimate the prospective value of these benefits, turning uncertain future income into a figure upon which a settlement can be based.
The role of trustees in divorce proceedings
Trustees often find themselves in a difficult position when divorce proceedings touch upon the trust they administer. While their duty is to the beneficiaries and to the preservation of trust assets, they may be served with disclosure requests or even court orders requiring production of trust documents. Trustees must tread a fine line between cooperating with courts and maintaining their fiduciary obligations.
In England, there’s a concept known as ‘the Charman principle,’ referring to a case where the court held that a trust should be treated as a resource where there was a likelihood of future benefit. Trustees may be invited or compelled to participate in the divorce process, and may be required to provide affidavits outlining how the trust has functioned in the past and how likely it is to support a beneficiary in the future.
Negotiating settlements involving trusts
Given the complexity of law surrounding family trusts, negotiation rather than litigation is often the preferred path for resolving matters. Mediation sessions, private financial dispute resolution hearings, or collaborative law approaches can help preserve privacy and avoid the public scrutiny of open court hearings.
Where trust assets are a potential resource, the spouse benefiting from the trust may agree to offset these against other asset division outcomes—perhaps retaining the trust in exchange for relinquishing claims to real estate or pension rights. Creative settlements can help to acknowledge the economic realities of the marriage without unpicking family legacies or long-standing trust architecture.
If trusts are seen as benefiting children or other dependents, it may also affect how they’re considered in settlement negotiations. Preserving wealth for the next generation can be a shared priority, guiding both parties to pragmatic resolutions.
Protective measures for trust assets before marriage
For families wishing to shield trusts from the uncertainties of divorce, proactive legal planning can offer some protection. Prenuptial agreements and postnuptial contracts provide a framework for clarifying what will happen to trust-related interests in the event of a split. While not always determinative, especially in the UK where they are not absolutely binding, these documents are increasingly influential.
Trust deeds themselves can also include protective clauses, such as exclusion of spouses from beneficiary lists and anti-nuptial clauses. Still, simply inserting a clause excluding future spouses may not be sufficient—judges may still examine overall fairness and practicality.
The best approach is to address trusts early, transparently, and with expert professional advice. Solicitors, trust specialists, and family law barristers working in tandem can help structure arrangements that reduce ambiguity and preserve the purpose of the trust without inviting future litigation.
Conclusion
Dealing with trusts in the context of divorce is rarely straightforward. From legal interpretation and jurisdictional challenges to valuation issues and the intentions of settlors long passed, these matters require more than a tick-box approach. They ask solicitors, judges, and couples alike to balance principles of equity, family legacy, and practical need.
Ultimately, the treatment of trusts during the breakdown of a marriage hinges on a deep dive into function, fact, and fairness. It’s a journey that demands both sensitivity and technical precision, ensuring that financial rights are protected while acknowledging the unique nature of trust structures.
With calm-handled negotiation, expert guidance, and a readiness to compromise where needed, what seems like a legal minefield can sometimes become a path to closure, fairness, and future peace of mind for all parties involved.