In Hong Kong, all family assets, including those located offshore, are generally up for division in divorce. This may include assets held by family trusts. Existing trusts may need to be disclosed in divorce proceedings as part of the full and frank disclosure required by the court. This fact surprises many people because the nature of a trust means its assets are not held by family members.
Trusts are regularly set up for estate and succession planning. They may also be established for tax purposes. Previously in Hong Kong, trusts were widely used in relation to estate duty planning. Although estate duty has been abolished in relation to deaths on or after February 11, 2006, many of these structures remain in place.
A trust is an arrangement whereby a person (known as the "settlor" or "grantor") gives away the enjoyment of his assets to a group of people, called the beneficiaries, which often includes the settlor himself. Control of the assets is given to the trustees, who are duty bound to manage the assets for the benefit of the beneficiaries.
The settlor will normally approve the settlement of his assets by a trust deed, which sets out the arrangement and the family philosophy for those assets. Once the trust is set up, the settlor is no longer the legal owner of those assets; ownership has passed to the beneficiaries.
Divorce can have an impact on a trust where proceedings involve either the settlor or a beneficiary of a trust. Often, trusts may hold a significant portion of the family wealth. Whether or not the trust is vulnerable to divorce depends on the circumstances in which it was created, and/or what type of trust it is. If a trust is vulnerable to divorce, this can, in some cases, significantly affect the financial position considered by the court.
There are several ways legislation empowers a Hong Kong court to approach a trust on divorce. The first is the power to vary the trust if it constitutes an "ante-nuptial" or "post-nuptial" settlement. For example, the court can order that provision be made for a spouse who is not a beneficiary. The second approach the court may adopt is to treat the trust as a financial resource of the spouse. If the trust is regarded as a resource of the family, its value will be put into the asset pool. This does not necessarily mean that the trust itself will be affected; just its value will be relevant. Or if the court finds that the spouse has immediate access to those funds, the court may decide to order a payment be made out of the trust. In some cases, the trust may be seen to be a "sham" - the trust is simply a nominee of the settlor set up specifically with the intention of avoiding payment to a spouse, in which case the trust may be set aside.
For a trust to constitute an ante-nuptial or post-nuptial settlement which the court can vary, there must be proof of a connection between the trust and the marriage. The wording in the settlement deed is crucial in determining whether the trust is nuptial or not. Generally, if the trust was set up before the marriage and before the spouses met, it can be argued that the trust is not nuptial in character. If the word "spouse" appears in the trust, however, that will be a complicating factor and may suggest that the trust was set up with a marriage in mind.
Determining whether a trust is nuptial in character involves examination of the drafting and circumstances surrounding its creation. By comparison, deciding the trust is a resource available to one of the parties can be a relatively easy exercise. If the spouse has an interest in the trust assets, an argument for it to be taken into account should be quite straightforward, even if the trust is discretionary and the spouse is a mere discretionary beneficiary. The court will look to see if the trustees are likely to exercise their powers in favour of such a spouse. This involves an examination of the pattern of trustee payouts so far. The trust is more vulnerable to such an attack if the beneficiaries have been able to request payment out of the trust on demand.
In considering the implications of a divorce, not only should family-held assets be considered, but so too assets held in trust. Although trusts may be vulnerable to attack from divorce, with proper drafting and advice, they can protect family wealth.
Stacey Devoy is a partner at international law firm Withers