UK: High Tide For The Yardstick

Last Updated: 24 January 2008
Article by Henry Hood

This article was first publised in Trust and Estates Law & Tax Journal.

Henry Hood reviews the present state of the law relating to financial claims in divorce, the galvanic changes it has witnessed over the last 7 years and the role that might be played by trusts in the light of the recent judgment in Charman v Charman.

Large divorce cases have been making the news recently, with the award in Charman v Charman at £48m (left untouched by the Court of Appeal in May this year) presently leading the field - perhaps not for long. But the recipients of these awards owe a considerable debt to Mrs White, whose claims were considered by the House of Lords in 2000. The amount awarded was unremarkable by today's standards, but the approach Mrs White persuaded the House of Lords to take was revolutionary. It is possible to identify various themes in relation to capital division from the way in which this approach has been developed in the intervening period, reaching (arguably) its high point in the cases of Miller and McFarlane in 2006.

Belying the reality that applies to most divorces which is that the need to provide two of everything usually means that there is not enough money to go around, the new law in this area is invariably made in the so called "big money" cases. Accordingly, for my purposes in this article, it is necessary to make two assumptions: that the husband earns, while the wife looks after him, the home and the children; and secondly that there is ample money to go around.

Strange though it now seems, until 2000 the Court's approach after even the longest marriage, was to give the wife only what she needed to house and maintain herself (capitalized if possible), with everything else (sometimes huge amounts) staying with the husband. The House of Lords in White held this approach was discriminatory (and it certainly looks it now). Instead, the Court ruled that the respective contributions towards the creation of the parties' wealth (by the husband in the workplace and the wife in the home) were to be seen as equal. The Court coined the phrase "the yardstick of equality" against which all capital awards were to be assessed, with good reasons being required for any unequal capital division. The search for such reasons has been the focus of much of the litigation since.

Many approaches have been tried, and some have found temporary favour, as a means of limiting a wife's share. It was thought for a while that a wife would become entitled to her full share only after many years of marriage, but the House of Lords tells us that this is quite irrelevant now, despite the duration of the marriage being one of the criteria that the Court has to consider. Trying a different tack, many a husband has argued that his particular contribution to the creation of the wealth was so remarkable that he deserved to receive a greater share (the "Stellar contribution" argument); but the Courts have endeavoured to raise the bar so high that really only a Paul MaCartney might expect to clear it. As it happened, Mr Charman did so, and with something to spare, such was his vigour and brilliance in the insurance field, and it was this which principally accounted for the 63%-37% split in his favour – one he still regarded as iniquitously generous to his wife, so much so that he tried (but was refused leave) to take the case to the House of Lords.

The position reached in the cases of McFarlane and Miller last year, is that equality of division of all "matrimonial assets" is the starting point for all marriages, even the very shortest.

What, then, are "matrimonial assets"? The answer is everything except assets that predated the marriage, those received at any stage by one of the parties by way of gift or inheritance, and perhaps assets created during the marriage where the parties obviously wanted to keep their affairs separate (as to which their LordsJustices were not unanimous). They considered matrimonial homes to be matrimonial assets "whatever their source" although it may be that their lead on this is not always being followed. A key question in this context is whether assets in a trust can remain outside a divorce, and is one which I address below.

In capital terms, the matrimonial regime in this country is now amongst the most generous in the world. This trend extends to pensions and spousal maintenance: the Courts acquired the power to split pensions in 2000, which is now standard fare in divorce settlements. In relation to spousal maintenance, the new concept of "compensation" (coined in McFarlane) allows the Court to correct economic disadvantage suffered by a wife where her career has been sacrificed to her family, by assessing it as a proportion of her husband's income rather than the size of her need. (Having said that, such compensation has proved to be a very rare beast in practice – the district judges who do most of the work, do not like it- and it is likely to be seen only in a handful of cases)

The divorce regime is to an extent tidal, and judgments since Miller and MacFarlane perhaps suggest that the high water mark has now been reached, and the tide may even be ebbing a bit.

Nevertheless, Mrs Dart, who in 1996 was awarded £9m out of her husband's fortune of £400m, could expect to receive at least 10 times that figure now, and perhaps much more – a fact which can do nothing for her sleep patterns. Increasingly, however, parties approaching marriage are endeavouring to make arrangements that suit them rather than remaining prey to the shifting sands of divorce litigation. Is this possible? The answer is a qualified "yes" and Pre Nuptial Agreements (PNA) are one way of doing so. They are not binding on the Court, but if certain conditions are met they are increasingly being taken into account. The Court will want to see that the couple entered the agreement willingly and were aware of the finances at issue and what rights they may be relinquishing, and it always retains the right to ignore a PNA if it does not think it fair. Within these parameters, a PNA can be very useful in setting out what the parties themselves want to happen if the marriage collapses, and we recommend them frequently.

Where do trusts fit into all this? Trusts, of course, have a separate legal identity; an asset owned by a trust cannot also be owned by the divorcing party, and therein lies the possibility that such assets can be kept out of the whole process. As Mr Justice Coleridge observed in JvV in 2004, nothing sets off a family lawyer's alarm bells quicker than the discovery of a raft of trusts, (and the more complicated they are, the louder they ring). However, stripped to its essentials there are two broad types of trust situation to consider in relation to which the Court's powers and its approach differ: first, there is the longstanding settlement from which one of the couple can benefit, which predated the marriage (perhaps substantially so). Second, there is the more recent settlement, from which either or both can benefit, which is made by one of the parties themselves before or during the marriage, and to which assets that he or she had owned or had earned are transferred. This was the situation that arose in the Charman: at the time of the trial Dragon Holdings Trust, the discretionary trust which Mr Charman had created in 1987, contained just over 50% (£68m) of the fortune he had made.

With the first of these situations, the longstanding settlement, the Court would consider that it had no powers to vary the trust or to give directions to its trustees. However, the Court will be alive to the reality of the position, and in this context the manner in which the trust has been run in the past is particularly relevant. Where this shows the discretion of the trustees to be a matter of form rather than substance, such that trust assets were effectively those of the beneficiary, or would become so if called for, its approach is likely to be, notionally, to aggregate the trusts assets to those of the beneficiary for the purpose of the divorce proceedings, and to make an order against him or her in the expectation that the necessary requests of the trustees needed to comply with it would be made.

Even the second type of trust situation, the trust created much more recently, might offer opportunities to keep assets which otherwise would be "matrimonial assets" out of the divorce process. However, such a settlement is likely to be an "ante" or "post- nuptial" settlement, a phrase coined in the Matrimonial Causes Act 1973 (MCA) which governs most of our actions in the world of matrimonial finance. An ante or post-nuptial settlement is very loosely, but widely, defined as a settlement capable of making provision for either or both of the parties to the marriage or their children. Its significance is that the Court has power to vary the terms of such a settlement under s. 24 (1) (c) MCA if that is needed to achieve the effect the Court desires. Offshore trusts are not excluded from use of this power, although tussles over jurisdiction do arise which go beyond the scope of this article. It seems certain that the Court in Charman would have varied the Dragon Holdings trust (by the time of the hearing it was based in Bermuda) had there not been ample value in Mr Charman's own free estate to meet the award that the High Court made and the Court of Appeal upheld.

Unfortunately, neither of the Charman judgments (High Court and Court of Appeal) really advance our understanding of this area of the law. This is because, despite the vigour with which it was conducted, Mr Charman's case in relation to the trust was extraordinarily weak (as opposed to his case on Special Contribution where, as noted above, he had more success). When reading the judgments, one has a number of "run that by me again" moments, caused not by the complexity of his arguments, but by the extent to which the facts completely defied the conclusions that he and his representatives sought to draw from them. Mr Charman relentlessly argued that Dragon Holdings Trust was dynastic (ie intended for his children and future Charman generations), that no Court could reasonably find otherwise, and that its assets should accordingly be entirely excluded from the courts consideration. However numerous facts (of which the following are a selection) made this position completely untenable:-

  • The Dragon Holdings Trust deed allowed one beneficiary to be benefited to the exclusion of all others.
  • Mr Charman retained power to remove trustees, and disclosure of documents from the time of the creation of the trust showed that this was done for the specific purpose of ensuring that his wishes as to the running of the trust were followed.
  • Far from there being any express wish to benefit future generations, Mr Charman wrote two Letters of Wishes seeking quite the opposite: first in 1987 on the creation of the trust, he expressed to the Jersey trustees his wish "to have the fullest possible access to the capital and income [of the trust]". Second, in 2004 (with divorce proceedings about to begin) he asked the new Bermudan corporate trustee "to treat me as the primary beneficiary"

The Court of Appeal were dismissive of Mr Charman's trust arguments, as can be judged from a couple of extracts from the approved judgement. On the scale of standard Court of Appeal language, phrases such as

" This is chop-logic of the most specious kind"

or

"The Husband's cynical deployment at different stages of these proceedings of contradictory arguments dictated only by whether they seem to suit his book at that stage..."

can only be classified as extreme. As a result no deeper magic in relation to the use of trusts in divorce was uncovered

However, it is possible to identify from the judgments a number of points to bear in mind when setting up a trust if the purpose is to keep it out of the divorce courts in the future.

  • Make sure that significant assets are left outside the trust to fund normal life. If the settlor is forever dipping into the trust to keep body and soul together it invites the conclusion that that was always what s/he meant to do;
  • Do not make your spouse a beneficiary;
  • Make as few distributions as possible, and preferably none at all;
  • The settlor should consider excluding himself at a point when sufficient assets have been built up elsewhere
  • Do not make a separate settlement for the children. Another reason that the Court were unhappy at Mr Charman's protestations that the Dragon Holdings Trust was for his children and later generations, was that he set up a separate childrens settlement at the same time which also possessed substantial assets
  • Do not, as the settlor, give the Trust a pet name that is particularly associated with you; while not determinative, it invites the suggestion that the settlor will always retain an interest
  • Do not make children's spouses potential beneficiaries.
  • The contemporaneous approval of the other spouse to the creation of the trust and to its broad purpose is useful, and if obtained should be recorded
  • If the size of the assets warrant it, make separate trusts with very different letters of wishes – some dynastic and some not. The fact that the distinction was observed at creation is likely to be a telling point
  • Be aware that Mrs Charman obtained great assistance from the correspondence that existed on her husband's accountants file dating back to the creation of the relevant trust, which on her application, the Court required him/them to disclose.

(The points listed above, and the guidance in the paragraph below were given in a lecture given for Hunters by Martin Pointer QC himself (Counsel for Mrs Charman), to whom I am most grateful.)

If trustees are faced with divorce litigation potentially involving their trust, the worst thing for them to do is to clam up and refuse to disclose anything at all. First of all this might imply to a judge that there was something to hide and increases the possibility that the judge will be persuaded to infer the existence or availability of assets, in the absence of the facts. Secondly it also increases the prospect that the trustees themselves might be joined into the divorce proceedings. This would substantially increase the disclosure obligations on them as well as the means by which such obligations can be enforced. Avoid this at all costs; accordingly trustees should show a degree of cooperation in the disclosure process.

So trusts can certainly be used to keep assets from falling into the matrimonial pot. But the situation has to be real, as must the distance being introduced between the settlor and the assets that he or she once owned. Private thoughts of a settlor that, by such means, he can park assets out of sight for a convenient period, to be followed by a cosy reunion after a respectable interval, are likely to end in disappointment!

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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