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Vulnerability of trust structures in divorce cases

Date: 18 Sep 2015

Citywealth

Paul Hewitt, partner at Withers, and Sarah Aughwane, associate at Withers, ask how can the choice of jurisdiction affect the outcome of a trust litigation.

What trends do you see in trustee litigation?

There has been plenty of concern about the efficacy of jurisdiction clauses. One example was the case Crociani v Crociani that involves a dispute as to whether Jersey or Mauritius is the appropriate jurisdiction to hear a challenge to an appointment of assets from one trust to another. It has seen hearings in Jersey before the Privy Council and the substance of the dispute rumbles on.

The potential vulnerability of trust structures in divorce cases is another controversial issue. However, decisions such as Li Quan v William Bray last year and Joy v Joy-Morancho last month, show signs that family court judges are recognising that there must be limits as to how easily a trust can be identified and then attacked as a ‘nuptial settlement’ for dividing assets between spouses.

What are the other trends?

Trustee contractual liability was a hot topic following the Investec v Glenalla case, where Investec Trust (Guernsey) Limited found itself on the receiving end of a demand for repayments of loans totalling over ¬£100 million, in circumstances where the trust funds were insufficient to pay the debt and there was uncertainty as to whether Investec’s liability was limited to the value of the trust assets. Perhaps the moral of the story is to think carefully before structuring payments as loans, even if tax advantageous, or, if it really is necessary to make loans, ensure these stay at underlying company level not trust level.

What cases of litigation do you see in relation to investments?

One of the big difficulties in making investment decisions is getting the right balance where there are different classes of beneficiaries, such as income or capital, or beneficiaries with very different tax profiles. It’s often difficult for trustees to act in the best interests of the beneficiaries as a whole when some are US citizens. Sometimes the only answer is to exclude certain beneficiaries or to partition or appoint out assets to separate sub-funds or trusts.

What would you like to add about the current issues of trustee litigation?

Prevention is better than cure and a priority for many clients is to identify and address potential vulnerabilities in trust structures. It’s good to ‘stress test’ structures so that steps can be taken to protect against or minimise risks, for instance attacks on the structure by fiscal authorities, government bodies, disappointed heirs, or divorcing spouses. Also, existing structures may no longer be fit for purpose, particularly when a family’s goals change, or there is a shift in the political situation, treaties, legislation, or case law.

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