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Discretionary Trusts in Divorce Law - Are Your Trust Assets Safe in Divorce?

View profile for John Boon
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A couple of recent cases have repeated the assertion that the concept of “judicious encouragement” should be consigned to the history books.

Judicious encouragement was the practice of a family court judge ordering a potential beneficiary of a discretionary trust to pay income or capital to his or her spouse even though they did not have any absolute entitlement to it. Such an order would be made even if the beneficiary did not actually have the money to satisfy the order.

The order would be made on the assumption that the trustees would be “judiciously encouraged” to exercise their discretion and release income or capital to the beneficiary so they could then meet the obligations placed upon him or her by the court order.

This strategy has been steadily falling out of favour. The courts have, instead, had to recognise that if the trustees are adamant that they would not have their arms twisted in this fashion, the court orders are unenforceable. The alternative is that the beneficiary would be at risk of enforcement proceedings for failure to meet the court order obligations through no fault of their own.

In the case of Daga v Bangur in 2018, the court heard evidence from the wife’s father who had provided the funds constituting the largest part of the trust funds.

The trust had been settled or created by the wife herself, but she had letters of wishes stating that the trustees, in exercising any discretion, would “act on the advice of my Father in regards to all matters concerning the Trust including its administration and distribution of the Trust property, to the exclusion of all other persons including me.”

The husband’s advisers tried to discredit the father’s evidence on the basis of “He would say that, wouldn’t he?” but they were unsuccessful.

Mr Justice Holman (the judge) found the father’s evidence regarding his likely recommendations and advice to the trustees, and the trustees’ subsequent exercise of their discretion, to be reliable and clear.  In addition, there had been no distributions from the trust funds. The judge agreed that the trustees were likely to take their lead from the father’s stated position.

The evidence available to the court, therefore, failed to establish that the wife would have had additional resources made available to her from the trust “in the foreseeable future.”  Courts need to find this likelihood before being able to make orders relying upon the receipt, and payment out, of such future resources.

The judgment helpfully sets out that the future expectation does not need to be a certainty, but that “there must be a likelihood” before going on to explain, rather pointedly, “This very important requirement is, in my experience, often overlooked by over-optimistic applicants in cases of this kind”.

This is not to say that the courts will not make orders against beneficiaries of discretionary trusts if they are satisfied that it is more likely than not that the beneficiary in question has access to the resources within the trust, either immediately or in the foreseeable future. Cases involving assets held within discretionary trusts are, generally, very fact specific and outcomes can, therefore, vary widely from case to case. They are also influenced by the fact that trustees exist for the benefit of their beneficiaries, so reasonable requests for financial assistance by a discretionary beneficiary will often be considered sympathetically unless there are compelling reasons why financial assistance is not appropriate, or possible.

The court can therefore still find that a husband or wife or civil partner, is likely to receive future distributions against which orders can be made.

In the more recent case of Ipekḉi v McConnell the judge – this time Mr Justice Mostyn - explicitly reiterated that the concept of judicious encouragement should be consigned to the history books even though he then went on to make an order that might have looked like judicious encouragement.

The judge made a finding against the beneficiary wife that: “I am further satisfied on the balance of probabilities that the trustees would make those funds available to the wife for the purposes of satisfying a judgment against her. This is not an exercise in "Judiciously encouraging" anybody. It is a judgment based on a finding of a future fact.”

The distinction is that the court was reassured on the likelihood of future expectation. 

The trusts were already making distributions both of an income and capital nature to the wife and to the wife alone. There was also argument as to whether the trust was discretionary at all or whether any discretionary elements only applied to the main trust that had, in turn, settled this particular sub-trust.

Discretionary trusts may therefore protect trust assets and income from distribution within divorce proceedings

The key elements will continue to be, therefore, consideration of previous history of distributions by the trustees – how have they exercised their discretion in the past, if at all? – and any evidence of the settlor’s stated and preferably written and up to date intent.