A recent Court of Session judgement has been described as “groundbreaking”, as appearing to have “upset Scottish legal doctrine” and as “potentially opening the floodgates on those seeking to get their hands on trust assets”. On close inspection of the judgement, it is clear that this case was extremely complex and involved a unique set of circumstances. However, those with an existing trust or those considering setting up a trust should take note of the judgement and seek further advice on the effect it may have.

The Case

The case concerned a claim for financial provision on divorce. The couple (hereinafter referred to as Mr M & Mrs M) were married for 21 years until they divorced last year. Despite this, Mrs M had little knowledge and involvement in her husband’s business and personal life. During the course of the marriage, Mr M built up a successful business and became a multi-millionaire. There were no children of the marriage, but unbeknown to his wife, he had 5 children as a result of two extra marital relationships. While at his most wealthy, Mr M set up an accumulation and maintenance Trust for the benefit of his children. There was no provision in the Trust deed for Mrs M. It was estimated that Mr M paid over £4.5 million into the Trust over a period of time. Mr M’s business since collapsed and his resources by the time of the court action were very limited.

A copy of the full judgement (all 67 pages!) can be found here.

The Law

Broadly speaking, in deciding how much to award a spouse on divorce, the Court must first work out the net value of the matrimonial property (the assets accumulated by the parties through their own efforts between the dates of marriage and separation) and share it fairly (usually equally) between the couple.

The Decision

The judge valued the matrimonial property in this case at approximately £3 million and determined that Mrs M would receive £1.6 million. The difficulty here was that this money no longer existed. The property which Mrs M held did not amount to the full £1.6 million to which she was entitled. Therefore, the Judge used section 18 of the Family Law (Scotland) 1985 Act to partially set aside Mr M’s transfers to the Trust to the extent of the sum of £789,000 which would then be available for Mrs M.

What is the effect of this?

Section 18 of the Family Law (Scotland) Act 1985 can come into play in instances where a spouse has disposed of his/her property within five years of a claim being made for financial provision on divorce. The statutory provision allows the court to set aside (or vary) any transfer of property if it has the effect of defeating a claim for financial provision on divorce.

Essentially this case has clarified the scope of this provision. Specifically, the Judge stated that it is not necessary that the transaction by Mr M (to the Trust in this instance) was made with the intention of defeating his wife’s claim for financial provision, only that this was the effect it had.

What should I do?

Those who have concerns about an existing trust or those considering setting up a trust should take note of the judgement and seek further advice on the implications it may have. However, it should be remembered that in the vast majority of cases Scottish trusts continue to be an effective and secure way of holding and protecting assets.

Further information

For further information on the issues raised in this article, please contact Susan MacLeod or your usual contact at Anderson Strathern.
 

This bulletin is for general information only and does not constitute legal, investment or other professional advice. Please contact us should you require advice on any particular legal issue. Anderson Strathern LLP accepts no responsibility for any loss that may arise if reliance is placed on any information or opinions expressed in this bulletin.