Divorce for earl’s son highlights trusts issue

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A divorce battle involving the son of Britain’s “most married peer” has raised a worrying question: are assets in a discretionary trust protected when a married couple part?

Henry Wyndham Wodehouse is the third son of the 4th Earl of Kimberley who married six times before his death in 2002. Henry Wodehouse separated from his second wife in 2011 and a divorce ruling last year ordered that he pay her a lump sum – with the proviso that if he failed to pay the money himself part of the award should come from a trust set up under the terms of his late father’s Will.

The case attracted media attention, with the lifestyle of the 4th Earl coming under very public scrutiny, but at the heart of the proceedings is the discretionary trust established to benefit a number of members of his family.

Henry Wodehouse argued the judge was wrong to order that any money he could not pay should come from the trust: in September he returned to court and was given leave to appeal.

Since 2000 there has been a general presumption that a couple’s assets should be equally shared on divorce. Although some cases have ruled for an unequal division of assets, based on the ‘exceptional contribution’ of one party to the marriage, the 50:50 split holds good. Both parties must make full disclosure of their respective financial positions, which should include any interest, or potential interest, in a trust.

Assets held in a discretionary trust are historically considered to be protected from divorce because no beneficiary has an automatic right to income or capital, so the final outcome of the Wodehouse case is critical. Are the assets held in a discretionary trust to be taken into account when assessing the financial resources of the parties to the divorce, and can they be included when determining an appropriate financial settlement?

The courts do have a statutory power to vary a discretionary trust, or to encourage the trustees to make an appointment of capital or property in order to satisfy a financial award, and it was this power which the judge used last year in the Wodehouse case.

However, trustees can take some comfort in the fact that the courts will usually consider a number of aspects of a trust: when and why it was created; who controls the trust (for example, is one of the spouses a trustee?) and also whether there is a pattern of the trustees having made payments of income or capital to one of the parties to the divorce.

Take the example of a trust set up by the parent of one of the spouses, with a wide class of discretionary beneficiaries and the intention of providing for future generations (known as a dynastic trust). The court is much less likely to take the trust assets into account in deciding the financial award to the other party than if the trust was created during the course of, or in contemplation of, the marriage.

An alternative scenario is where an individual effectively has control over the assets of a trust (the trustees having historically done anything that the individual asked them). A judge may rule that asking the trustees to release capital as part of a financial award is not placing undue pressure on them to do something they would not ordinarily have done.

The fate of the 4th Earl’s trust is yet to be decided. However, one thing is clear; anyone beginning divorce proceedings should be aware that the courts will look closely at any trust interests which they have, and any distributions which they have received in the past. 

Comment

Heidi Reed

Assistant Director, Private Clients
I am a member of the ATT, CTA and STEP and also authorised to carry out non-contentious probate work. I deal with all aspects of advising individuals, trusts and estates, and particularly enjoy inheritance tax planning and advising trustees and executors.

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