Love, Marriage, Divorce and Trusts

“Marriage is the leading cause of divorce” - Michael Alberga

With over half of all marriages ending in divorce, it is statistically very likely that there will be a divorce in two generations of any given family.

So, if divorce is potentially on the horizon how do clients, contemplating intergenerational succession planning, accommodate this possible risk?

The question becomes very relevant when you consider that we are at the beginning of ‘the Great Wealth Transfer’ – a situation where “Baby Boomers” (a generation that has accumulated a greater percentage of wealth than any other), are set to transfer an estimated $68 trillion to their children over coming decades - the biggest wealth transfer ever seen.

With all of these variables, there has never been a more important time to consider how estate planning fits in to the equation.  If clients don’t take the necessary precautions now, not only may the state organise their affairs for them, but if a couple does separate, then accumulated and generational family wealth may be subject to court-ordered disposition.  

Where generational succession planning is concerned, there are a myriad of issues to consider and plan for – needing very careful and expert guidance.

Trusts and their role in protecting inter-generational wealth

The principle that non-matrimonial assets remain protected, including those held in trust structures, was confirmed in the overseas case Daga v Bangur [2018] EWFC 91.  However, this does come with certain caveats.

Trust interests can become contentious during the process of a divorce and a trust can still be ‘attacked’ in a number of ways, including claiming that it is a ‘nuptial settlement’, a ‘sham’ or, accepting that the trust exists, its assets are nevertheless to be taken into account on the basis that the trust is a ‘financial resource’ to one of the parties.

As such, when establishing a trust, careful thought should be given not only to protect assets from death and taxes, but separate consideration should be given as to how to establish a trust as a defense against attack from a future partner’s claims (if and when that partnership ends).  

This should include use of a carefully drafted trust deed with appropriate discretionary trustee powers and duties, appointment of an independent trustee, inclusion of only limited classes of beneficiaries, appropriate trustee indemnity provisions and ongoing professional trust management and administration.  

The trust must be established well before the relationship commences between the settlor and a partner, and people should ensure regular consideration is given to the use and management of trust assets.  Careful consideration should also be given to how the powers of appointment are held and to whom they are transferred on the holder’s loss of mental capacity or death.

If a trust is established during the relationship or used in any way for the purposes of the relationship, it will offer limited protection for the settlor in the event of a separation of the de facto partners.  

When considering trusts, the Family Court may assess factors including the original purpose of the trust, the approach of the trustees and their overall administration of the trust. The conduct of the Trustees and their independence will be scrutinised by the Court.

It is crucial to obtain competent and clear advice when dealing with your trust and estate planning matters to ensure all bases are covered and there are no hidden surprises or pitfalls uncovered later - when it is too late.