Speculating on Future Trusts Interests – C v C

The decision of Mr. Justice Munby in C v C ([2009] EWHC 1491) on 25 June 2009 demonstrates a distinct lack of judicial enthusiasm to deal with trusts and their assets in the context of matrimonial proceedings where the party’s realisation of their interest is at some point in the “dimly visible [future]” (paragraph 63 of the judgment). Throughout this article where I refer to paragraph numbers, these relate to the judgment itself.   

In C v C the wife made a claim in ancillary relief proceedings against a trust fund of which the husband was a firm beneficiary, under the terms of his late father’s Will, who was also the settlor of the trust. The trust fund was held upon trust for his step-mother for life (his father’s second wife, referred to as ‘the widow’ throughout the judgment), and upon her death to the testator’s four children as tenants in common in equal shares. She was seventy-four years old at the date of the hearing. The Trustees had been made Intervenors and the matter had been transferred up to the High Court by the District Judge. It had been set down for a contested hearing to determine whether or not the fund could be ascribed as a resource of the husband.

The trust fund was the single largest relevant asset and was valued between £4m (husband) and £6.2m (wife). The judgment does not disclose the level of the other assets. The trust consisted of quoted securities, land and chattels. It provided an income for the widow and one can see very well why the wife sought to have the trust fund included in the matrimonial pot.

The Matrimonial Causes Act 1973, s25(2)(a) is clear:

“The court has regard to all the circumstances of the case…but in particular it has regard to the following matters:-

“The income, earning capacity, property and other financial resources which each of the parties to the marriage has or is likely to have in the foreseeable future…”

The jurisdiction of the English court to deal with pre and post nuptial settlements is founded upon s24 (1) (c) Matrimonial Causes Act 1973. Trusts assets can be taken into account in the determination of appropriate orders whether or not they are marital/non-marital assets.

There are two main ways in which the English court can approach a trust; by varying it or by treating the fund as a resource of one of the parties. For a successful variation application, the settlement should be ‘on’ the parties to a marriage. The court’s powers of variation are wide, and a party’s interest in a trust may be reduced or even extinguished, although trusts should not be interfered with except to the extent that justice is done.

This grasping of the nettle was robustly exhibited by the High Court in Australia, the full Family Court, in the recent case of Kennon v Spry [2008] 251 ALR 257. By a majority judgment it was decided that trust assets in this case did constitute ‘property of the parties to the marriage’ and therefore very much within the jurisdiction of the family judge in matrimonial proceedings. It was found that the equity lawyer husband had transferred sizeable amounts of money into a discretionary trust that he had settled, primarily to defeat the wife’s claims, and these efforts were ultimately futile.

The English court has declared certain trusts a ‘sham’, such as in Minwalla ([2005] 1 FLR 771), where it was held that in setting up the Jersey trust, the husband had never had the slightest intention of respecting the slightest formalities of the trust and corporate structures. Although he claimed that he could not touch those assets, he himself “pierced the corporate veil as and when it suited him” (per Singer J). However it is by no means an easy task to prove an allegation of sham, and one must be careful to pursue such an application without proper foundation. “The court cannot grant relief merely because the husband’s arrangements appear to be artificial or even ‘dodgy’” (per Munby,J in A v A [2007] 2 FLR 467).

C v C was an unusual case in that there was no pattern of distribution towards which the wife could point in support of her case, although there had been a couple of transactions in the previous ten years. The husband had no ‘immediate access to the funds’, and the trustees had absolutely any discretion over their advances, so no ‘effective control’ (Browne [1989] 1 FLR 291). The trustees were cooperative but the ultimate power did not lie with them; it lay with the widow.

The two trustees were a local solicitor and an accountant; the former’s evidence being lauded by Munby,J as “scrupulous, sensible, sensitive & pragmatic but appropriately cautious…” (Paragraph 4). They had conventional powers of investment and management, but no power themselves to vary the interests of the beneficiaries, or to pay, apply or appoint anything to or for the benefit of any of the children. They could pay the whole or part of the trust fund to the widow, and could advance sums to the children but only if the widow consented in writing to it. Therefore the judge opined that the husband and his siblings were beholden to his widow’s discretion:

“Put bluntly, the widow is entitled to give or withhold her consent whether (so far as concerns the children) her reasons are good, bad or indifferent and even if they are (or appear to be) based upon whim or prejudice, like or dislike” (paragraph 15).

There is nothing in the judgment to suggest that she had acted capriciously in the past, or that she would do in the future. This was not a discretionary trust and there was no question of ‘judicious encouragement’ of the trustees to meet an ancillary relief award, as in Thomas [1995] 2 FLR 668. In that case, having decided that the trust was a resource, and that the trustees should reasonable advance the funds to the spouse to meet the award, the court considered various ways in which to ‘persuade’ the trustees to make payment, such as the threat of the spouse’s bankruptcy. C v C concerned a mere donor, who could essentially do as she liked.

It was clear that the husband was entitled to a one quarter interest in an asset of some not inconsiderable value in the foreseeable future.

So what led Munby J to assert that this case was “at or very close to the outer extremity of what can properly be considered a financial resource” (paragraph 63)? He agreed that the husband’s interest had vested and that he would receive a significant part of the fund, even with inheritance tax taking its 40% slice.

It seems that he was principally troubled about what the court should do now bearing in mind the length of time before the husband would realise his wealth. At the widow’s age, her life expectancy was another fifteen years. He rightly dismissed any argument that she should be required to submit to a medical as “unthinkable” (paragraph 30) and contended that there was no reason to suppose that she would not attain her likely lifespan. It seems that he was being urged to consider an adjournment until such time as the inheritance came in, but he did not consider this appropriate having reviewed the authorities with characteristic thoroughness. An adjournment should only be ordered where the property in question is likely to become available in the near future (Michael v Michael [1986] 2 FLR 389). However the court could make an immediate order in the wife’s favour to come into effect upon the widow’s death.

‘”Without much enthusiasm” (paragraph 63) Munby was persuaded that the trust fund was a resource, but stated that he would not have reached this conclusion had the husband’s interest been less valuable, or the widow’s life expectancy longer than fifteen years as he found. He emphasised to the wife that a judge would exercise his discretion in making any order about the trust, and this could mean that she would achieve a comparatively modest award. He declined to order a valuation of the trust, rightly, as it would seem otiose in today’s market as well as an unjustifiable expenditure.

He concluded by sending the case down to the Principal Registry from the Royal Courts of Justice and admonishing the parties for wasting costs.

The husband’s interest was not speculative and Munby’s reluctance rested on the distance between the date of trial and the vesting of the asset. It is not reported in the judgment how valuable the trust fund was in relation to the other matrimonial assets. If it did represent a significant proportion of the overall pot, our clients might reasonably consider that the fund should be brought into account in any event, however far away in time that may be. From this decision it would appear to be the case that fifteen years is close to the cusp and therefore balanced on a knife edge. Any longer and any lower proportion of the assets may mean that a trust fund would not be considered to be a resource.

©Punam Denley, May 2012

Blanchards have a great deal of experience of trusts, inheritance claims and disputes over Wills.  Please contact us on 0845 658 6639 or by email at pd@blanchards.co.uk