Case tests limits of farm trusts’ protection from divorce courts

16 August 2012

Two new analyses of recent case RK v RK have helped clarify the question of whether a farm held within a trust structure protects against a divorce in the family.

In the case, the family owned a large estate through a company and various trusts. The family member who was getting the divorce did not own any shares in the company, but was a beneficiary of some discretionary family trusts that together owned 15 per cent of the company. These trusts had combined assets of nearly GBP13 million.

When the couple divorced after an eight-year marriage they had no assets. But they had borrowed extensively from the trusts and from other family members, and now had debts adding up to more than half a million pounds. Of this, the wife’s personal debts amounted to GBP245,000, of which more than GBP200,000 were legal fees incurred in this very dispute.

Nevertheless, she claimed a capital fund of GBP425,000 from the family’s assets, plus GBP30,000 a year maintenance and a share of her husband’s pension, as well as cash to pay her debts and legal costs.
The central issue was the extent to which the trustees would be willing to fund the wife’s claim out of the trust resources, which were long on illiquid assets but short on cash. The trustees offered to provide GBP400,000, but baulked at paying off the wife’s debts as well.

In his judgment, Moylan J assessed the wife’s needs at GBP475,000, of which GBP50,000 was to repay some of her debts. But instead of making an order to that effect, he had the judgment sent to the trustees, in the expectation that they would agree to it (RK v RK, 2011 EWHC 3910 Fam).

This doctrine of so-called ‘judicial encouragement’ has been evolving since Thomas v Thomas in 1995, with the later judgments in Charman v Charman 2006, Esteem Settlement in 2004 and Whaley v Whaley in 2011. In Esteem it even received some support from the Jersey Royal Court.

John Darnton of Bircham Dyson Bell said: ‘The trustees will be expected to respond positively because the court will have concluded that the trustees would, in the exercise of their duties, respond in a reasonable manner to a reasonable request from the husband.’ However, the trustees are also entitled to take into account the effect on the other beneficiaries before deciding what resources to release to the wife.

Sources

Bircham Dyson Bell

Family Law Week (analysis by Mills & Reeve)

Family Law Week (text of judgment)

 


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