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Split decision

What was the background to the Charman case and the judgment?

Thompson: Mr and Mrs Charman had been married for 30 years, were both aged 53 and had two adult sons. A judge found that the family’s assets amounted to £131m, which included the assets of the Bermuda-based dragon trust. Although the wife worked until the first child was born, the wealth had been generated through the husband’s business activities as a high-risk insurer. The judge ordered a split of the assets – 37 per cent to the wife, 63 per cent to the husband – on the basis that the husband had made a stellar contribution to the family’s wealth that was so “gross and obvious” that to disregard it would have been unfair. This follows the House of Lords’ decision in the Miller and McFarlane cases where the test was said to be whether the extent of the contribution made by one party was so great that it would be inequitable to disregard it.

Ballard Scott: Mr and Mrs Charman had been married for 30 years. They had adult children. When they married, neither of them had any assets. However, during the marriage, the husband generated wealth of £150-£160m. On divorce, the wife sought 45 per cent of the assets. The husband argued that this was not appropriate given his exceptional contri-bution to the generation of the wealth, that his wife had failed to support his business endeavours and that a trust he had set up was a dynastic trust for the benefit of unborn family members and should not be taken into account on settlement. The court held that:
1: The husband’s contribution was exceptional so it was fair to depart from an equal division, However, 2: The court also found that the wife had supported her husband’s business venture
3: It did not uphold the husband’s argument that the trust was dynastic and therefore said that the total trust assets should be taken into account. The judge awarded the wife 37 per cent of the total assets.

Gordon-Smith: The Charmans were divorced after a long marriage during which they built up assets of over £130m. The husband argued that the assets should not be divided equally because a large proportion had been placed, during the marriage, in an offshore trust, and should therefore be excluded from division. He also contended that his stellar contribution to the assets warranted a special bonus in his favour.The court refused to ignore the trust in its calculations but departed from equality by awarding the wife £48m to reflect the husband’s “extraordinary talent” in creating the wealth.

What is the significance of the judgment for private clients?

Thompson: Although it has been another headline-grabbing case, the decision will only be of relevance in really big money cases and where all the wealth has been built up by one party. It is of limited general application. The reality – post-Miller and McFarlane – for the majority of private clients is that on divorce, the court will consider the needs of both parties and any minor children sharing of the matrimonial assets, and an element of compensation for earning capacity lost as a result of bringing up children. Only where the assets vastly exceed the needs of both parties will any arguments as to stellar contributions be entertained.

Ballard Scott:M When assessing whether a trust should be included on divorce, the court looks beyond the wording of the trust and consider how it is being used. The significance of Charman concerns the comments made by the judge that Mr Charman’s intention to create a dynastic trust was not clear. Clients should be advised to make their intentions explicitly clear so there can be no room for doubt. They should also consider the proportion of the assets held in the trust as the court is less likely to exclude trust assets from any settlement if they form a large proportion of the overall assets, as they did in Charman.

Gordon-Smith: The case confirms yet again that after a long marriage there should be no discrimination between gender roles of breadwinner and homemaker and that assets should be divided equally. The significance is that in some truly exceptional cases, wealth creation by one party may point away from equality of division, but only where it would be inequitable to proceed otherwise. The case also confirms that private clients cannot transfer assets into a trust and expect such assets to be ignored on any divorce, whether that trust is offshore or on.

Why was the offshore trust in Bermuda included in the judgment, given that Bermuda has exclusion of foreign law legislation?

Thompson: The husband tried to argue that the dragon trust should be excluded as it was a dynastic trust (that is, for the benefit of descendants not yet born) and thus was different to the other matrimonial assets. Quite simply, the judge did not believe the husband’s evidence. Therefore, the assets of the dragon trust were assets which the husband had control of, and therefore fell for division. The assets were held in a discretionary trust which could be made available to the husband on demand, without legally being his money.
It is important to realise that the order was made against the husband and not the offshore trust, so the question of Bermuda’s exclusion of foreign law legislation was not considered. The court looked at whether the assets were under the husband’s control, and found that they were.
It is interesting to note that at a earlier hearing in this case the same judge granted the wife’s application for letters of request to be issued to the trustees of the Bermuda-based trust requesting information and documents. The Bermudian court refused to enforce the English court’s order and refused to order or permit production of the documents requested by the trustees.

Ballard Scott: The English divorce courts are entitled to take into account assets of a party whether in this country or overseas. The court in Charman was not therefore concerned that the trust was based in Bermuda. The court held that this was a matrimonial asset to be divided upon divorce. Clients need to be aware that, simply by putting assets overseas, they do not exclude the jurisdiction of the English court. There may be problems in enforcing the order if the Bermudan trustees do not act upon that order.

Gordon-Smith: The UK court has a duty to consider all resources, wherever held. The Charman trust was held to be such a resource to be included in the calculation of assets for division. It matters not how Mr Charman will raise the £48m he must pay his wife or that Bermuda disregards foreign legislation. Should he fail to pay the lump sum due, then the wife may have to enforce against the husband’s assets. But that is a separate issue. It may well be that there are sufficient assets outside Bermuda to enforce against, thus avoiding problems with Bermuda’s approach.

Does this mean that offshore trusts cannot protect assets in a UK divorce case?

Thompson: The fact that the trust was offshore, in many respects, is a red herring, and the order was made against the husband. Whether or not the funds can be attacked in court proceedings is not dependent upon where the trust is located. Having said this, there may be practical problems with enforcing an order against trustees in a foreign jurisdiction. The key issue is whether or not the trust is regarded as being nuptial – broadly speaking, one made during the marriage, by one of the parties to the marriage.

Ballard Scott: There can be no guarantee that an offshore trust can protect assets in a UK divorce case. Steps can be taken to gain as much protection as possible; however, the court has wide-ranging discretion as to the assets which are taken into account on divorce. Clients should seek expert advice as early as possible in a relationship to maximise the prospects of any such arrangement protecting their assets from division.

Gordon-Smith: It has become increasingly difficult to hide assets in such a way. They will be regarded as a resource to be taken into account. Furthermore, if the trust is found to be a nuptial settlement (and this is very broadly defined), the UK court has power to vary the terms of the trust. Some offshore jurisdictions (Jersey, for instance) will enforce the UK court’s order to vary a trust, pursuant to the concept of comity. Others will not so enforce, and this will impact on the sort of order that the UK court will make.

What offshore planning can private clients carry out to protect assets in the event of a divorce?

Thompson: If a trust is regarded as nuptial, the court can set the trust aside and take it into account as part of the general marital pot. If the trust is not considered a nuptial settlement – for example, if it was made before the marriage or by a parent of one of the parties, then the court could not directly attack the trust funds. It may treat the trust funds as notional assets, if the trust is providing for one of the parties, and order that a larger proportion of that party’s assets should pass to the spouse. But the trust fund itself would be protected.

Ballard Scott: Those with assets to protect should consider setting up trusts well in advance of marriage.
Clients should: 1: Make the intentions of the trust clear. 2: Ensure that the trust does not hold the majority of the matrimonial assets. 3: Ensure that the person at divorce risk is not a beneficiary of the trust or that there are multiple trusts and that that person is a beneficiary of only one of the trusts.
4: Consider the most appropriate jurisdiction for the trust (recognising that, simply selecting an overseas jurisdiction will not prevent a UK court making an order).

Gordon-Smith: There is little a private client can do to guarantee protection. It is fair to say that the more complex the arrangements, the more difficult it may be to establish the true purpose of it. But this risks, say, the wife receiving a greater share of the onshore liquid-assets by way of set-off. If a discretionary trust is intended to be a genuine dynastic trust for future family members, then this should be recorded in a letter of wishes and the wife should be given the opportunity to take independent legal advice when the trust is set up.

What other planning should private clients consider to protect assets such as prenuptial arrangements?

Thompson: Prenuptial agreements are becoming increasingly popular, particularly in light of the media frenzy surrounding recent big-money divorce cases. Prenuptial agreements (and pre-registration agreements – for prospective civil partners) are an extremely sensible way of protecting assets but certain safeguards must be met. Both parties should give full and frank disclosure of their assets and liabilities; both should be independently legally advised; the agreement must be fair to both parties, and signed not less than 21 days prior to the marriage. There should also be no question of duress or undue influence on one of the parties.
Such agreements are not enforceable at the moment, but, recent case law has shown that a fair prenuptial agreement will carry considerable evidential weight in any later divorce.

Ballard Scott: A wealthy client should consider whether he or she wishes to marry, as cohabitants have very limited rights in the event of relationship breakdown. If the intention is to marry, then advice should be sought at an early stage with regard to prenuptial agreements. These should be entered into well in advance of the marriage and both parties should receive independent legal advice, having provided the other with financial disclosure. Trusts for the benefit of existing children should be considered before the marriage. The key is to obtain advice, as early as possible, from both a private client and a divorce lawyer, to ensure that any arrangements are as effective as possible.

Gordon-Smith: Subject to circumstances, assets brought into the marriage or received by inheritance may be ringfenced from division. It could be prudent to keep such assets separate, rather than pooling them in the family pot. A prenuptial agreement provides evidence of intentions and, although not binding, has to be taken into account by the UK court. A cynic might suggest that if a party really wants to protect his assets, then he should not marry at all. At present (and this may change), a breakdown of mere cohabitation does not result in the significant claims arising on divorce.

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