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April 16, 2014updated 11 Jan 2016 2:36pm

How the legalisation of pre-nups will help protect offshore trusts

By Spear's

Offshore trusts can enable family wealth to benefit future generations and remain a popular succession-planning vehicle for wealthy families.

Wherever a trust is located, especially if the trust contains assets situated in the UK, it can be within the remit of the English Courts and therefore potentially vulnerable to attack on divorce or bankruptcy. This article considers how recent developments in family law could lead to the English Courts being less willing to make financial awards against offshore trusts following divorce.

Divorce proceedings brought in England have long been a concern for international families, given the relative ease with which jurisdiction for divorce can be established here and the reputation of our Courts being generous to the financially weaker spouse.

Locating a trust outside the UK does not guarantee protection from the English Courts, but jurisdictions such as Bermuda and the Cayman Islands (pictured top) have enacted legislation that is designed to deter or prevent enforcement of an English Court order against trusts located there.

Read more on tax and trust from Spear’s

The long arm of the English Courts lead to the Royal Court in Jersey, in Re H Trust , freezing the assets of a discretionary Jersey trust settled by a husband whose wife had obtained a freezing injunction against his assets in the English Family Division. In response to this case, Jersey amended its Trusts Law in 2006 to make it more comparable to that of Bermuda and Cayman.

Where trusts are established for a wide class of beneficiaries it is easier to argue that the trust fund should not be treated as for the benefit of any one of those beneficiaries alone. However, the English Court is less willing to accept a trust as a dynastic trust for the benefit of future generations if the trust fund is in practice treated as a financial resource for one individual, as in the case of Charman v Charman.

The Courts will look at the historic behaviour of the trustees towards a beneficiary to determine whether the trustees are likely immediately or in the foreseeable future to exercise their powers in favour of or for the benefit of the relevant beneficiary. This vague test was reiterated in the recent case of Tchenguiz-Imerman v Imerman .

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The latest law commission report (No 343) containing the Nuptial Agreements Bill has been seen as a welcome move towards giving couples more certainty in their ability to preserve their respective family’s wealth.

One of the requirements for a nuptial agreement to be considered binding by the English Courts is for financial disclosure to be made prior to the agreement being entered into. The arduous task of making detailed financial disclosure and deciding which assets should be designated as separate or joint property can be incredibly off-putting for a couple.

For wealthy families, it is not uncommon for financial disclosure to simply refer to the fact that the relevant individual is a beneficiary of an offshore discretionary trust with assets in excess of a certain sum.

Simply specifying this trust interest as the individual’s separate property that is not to form part of the couple’s joint assets can represent a more straightforward option for a couple entering into a nuptial agreement.

While it is inevitable that separating spouses will continue to seek awards against offshore trusts, beneficiaries of offshore trusts who enter into nuptial agreements that meet the criteria set out in the draft legislation are putting such trusts in a better position. It is also clear that well drafted trust documents, together with a well-chosen jurisdiction and trustees, can create a trust that is more robust in the face of this type of challenge.

Dhana Sabanathan is an associate in the international private client department at McDermott Will & Emery

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