Valuable trusts are a common financial planning tool for wealthy international families. Whether or not trust funds should be considered an available financial resource to divorcing couples was recently tested in the case of Daga v Bangur  EWFC 91 (11 December 2018).
H (aged 36) and W (aged 34) met at university, began a relationship in 2003 and married in 2007. The parties’ child was born in 2012 and had disabilities. H worked in the financial sector earning an annual salary of £130,000 (net) whilst W worked in advertising and earned an annual salary of £40,000 (net). Throughout the marriage, the parties chose to live in rented accommodation.
The marriage broke down in June 2016. W moved out of the parties’ rented property in October 2016 with the child. Following separation, H and W incurred £380,000 between them in legal fees by litigating over the child arrangements.
Despite the parties’ relatively modest lifestyle during the marriage, W had assets totalling £2.6m. £2.1m of those assets consisted of shares located in India that could not be realised due to an agreement with W’s family. W’s father was a very wealthy businessman in India. In 2015, towards the end of the marriage, W’s father instructed W to set up two discretionary trusts, of which she and the parties’ child would become beneficiaries. W was also to sign letters of wishes stipulating that the trustees should act in accordance with her father’s advice and to her exclusion when distributing the trust funds. W’s father also transferred significant sums of money into a bank account opened in W’s sole name: a total of £17.6m between March and June 2016, which W then transferred to the trusts. Further, in early 2016 (before the parties had separated), W’s father lent W £2.7m to be charged against any home she wished to purchase with it, the intention being for W to purchase a family home for herself, H and their child. W never purchased a property; the parties separated and W’s father requested that W return the money to him, which she did.
H issued financial proceedings, seeking a lump sum of £2.5m from the discretionary trusts to meet his needs (reduced to £1.5m by the time of closing submissions). H, having no significant capital assets of his own, argued that W could meet his needs by either realising her assets in India or persuading the trustees to make a distribution to her from the discretionary trusts she had created on her father’s instruction. W asked the Court to dismiss H’s claim for a lump sum payment and sought child maintenance at £1,800 per calendar month and nominal spousal maintenance until their child was 18 years old.
Key issues for the Court
Trustees of discretionary trusts can make certain decisions about how to use the trust income, and sometimes the capital. Depending on the trust deed, trustees can decide:
- what gets paid out (income or capital)
- which beneficiary to make payments to
- how often payments are made
- any conditions to impose on the beneficiaries
The key word here is discretionary: it is up to the trustees to decide whether, how and when payments should be made from a discretionary trust. The Court can provide what is known as “judicious encouragement” to trustees by making orders that encourage them to act in a particular manner. In this case, H was asking the Court to provide judicious encouragement to the trustees to redistribute the trusts’ funds to W so that she would have the financial means to pay him a lump sum. Before the Court can rely upon judicious encouragement, it must be satisfied that the trustees would be likely to respond to the Court’s encouragement so that funds would actually be made available. H not only needed to persuade the Court that (a) the trust funds were an available financial resource to the parties, which the Court could rely upon when making an award for a lump sum in his favour; but also (b) he needed the lump sum.
The Court’s conclusions
The judgment in this case includes a helpful and detailed analysis of the Section 25 factors. These are the matters set out in Section 25 of the Matrimonial Causes Act 1973 that the Court must consider when making orders for financial provision in connection with divorce. When making, or deciding not to make, any order the Court must consider “all the circumstances of the case”, with the first consideration to be given to the welfare of any minor children of the family.
On the evidence, Mr Justice Holman accepted that W could not realise most of her assets. Having considered the Section 25 factors, Mr Justice Holman dismissed H’s claim against the discretionary trusts for a lump sum for the following reasons:
- H had failed to demonstrate that the discretionary trusts were an available resource upon which the Court could make an award.
W’s involvement in the trusts had been passive and limited to signing documents and transferring money when instructed to do so by her father. The parties themselves had not received any money from the trusts. H had also accepted evidence given in Court by W’s father that the trusts would make no distribution during his lifetime. W’s father told the Court that he had given W a good education, and now she must “fend for herself”, meaning that he did not intend to financially support W. Crucially, W’s father said that he would instruct the trustees not to distribute any funds to W even if there was an order made for a lump sum payment from the trust.
- H had also failed to demonstrate that he had a need for the lump sum payment.
H could afford to sustain a good lifestyle by renting as opposed to purchasing a property, which was consistent with the standard of living enjoyed by the parties throughout the marriage. As to H’s debts, Mr Justice Holman refused to direct W to clear them. At the time of separation, H had approximately £150,000 in savings, which he had spent in its entirety on litigation. Costs orders are rare in family law proceedings; the usual rule is that each party pays their own costs. Mr Justice Holman considered that directing W to pay a lump sum to H in order to pay off his debts would be tantamount to making a costs order against W, which could not be justified.
Mr Justice Holman also dismissed W’s claim for nominal maintenance on the basis that she and her son were beneficiaries of valuable discretionary trusts. W would have to turn to these trusts or her father if she required substantive maintenance in the future.
There was a direction for a clean break between the parties.
Trusts often feature in cases with an international element involving wealthy families. Whilst the Court can, where appropriate, make awards based on a reliance upon funds in a trust, and can give the trustees judicious encouragement to provide the funds to satisfy the order, it will not always do so. In Daga v Bangur, the evidence did not support H’s argument that the trust funds were available, which led the Court to conclude that judicious encouragement was inappropriate. This case therefore serves as a cautionary tale to those wishing to pursue a financial claim against a discretionary trust.
Trusts are a complex element to financial remedy cases. I would strongly recommend that you seek specialist advice from a family lawyer about any of the issues raised in this blog. If you would like to speak to one of our family law specialists about financial orders or other family matters please contact us.