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The treatment of trusts on divorce

Mr Justice Mostyn's decision in BV v MJ (Financial Remedy Overseas Trusts) 2011 EWHC 2708  concerns the treatment of trust arrangements established during the marriage, principally for tax planning reasons, and determination of whether the trusts were "nuptial" or not (and therefore capable of taxation by the English Court).

In anticipation of a proposed flotation of a company in which the husband had a significant interest, he arranged to mitigate tax on future capital gains that might accrue. The mitigation strategy consisted of creating two Jersey Trusts (No 1 and No 2) and a BVI company, Giloch Limited. The No 1 Trust was a discretionary trust. The beneficiaries included, amongst others, the husband as settlor, the wife as his spouse and their then minor child. 

The husband's letter of wishes stated that the trustees should look to the husband as the principal beneficiary during his lifetime and, in the event of his death, the wife during her lifetime and thereafter their child. The husband, wife and their child were excluded as beneficiaries of the No 2 Trust, which was established for a particular purpose as part of the overall tax planning strategy.

Of total assets of approximately £5.9m, the value of the trust assets amounted to approximately £4.31m (of which £1.87m comprised two properties in England).

The Jersey Trustees did not submit to the jurisdiction of the English Court, although they complied partially with certain orders of the Court and confirmed that they would provide whatever support they reasonably could to the parties.

The Decision

In analysing the trust arrangements, the Judge found that the No 1 Trust was "unquestionably" a nuptial settlement and that whilst the husband, wife and child were all excluded from the No 2 Trust it was an "integral, indeed key, component of the overall scheme". The Judge therefore had no hesitation in finding that the Jersey trusts and BVI company, viewed as whole, constituted a nuptial settlement capable of variation.

The wife was awarded £2.95m which included a half share of a pension fund.  The trusts were varied to provide, amongst other things, a £1.25m fund to be settled onto a new trust for the wife for life, with remainder to her son for housing.

Whilst the order was not to be finalised until the stance of the trustees was known (given their non-submission to the jurisdiction), the trustees were warned that if they did not produce the £1.25m to satisfy the terms of his order, then there were sufficient funds to make available the whole of the wife's entitlement from non-trust assets, namely the sale of the matrimonial home and a greater share of the pension.

This decision highlights that although overseas trustees may decide not to submit to the English Court's jurisdiction (in order to preserve their position as regards any future enforcement proceedings in their local court), the English Court still remains willing to vary what it considers to be a nuptial settlement and to encourage the trustees to comply with the variation ordered.

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