Beyond Borders: How to Protect Offshore Assets in Divorce

Although they can often be demonised as simple tax avoidance schemes, well-ordered offshore trusts can be a valuable form of asset management and protection. However, leading cases in the English courts have highlighted both the benefits and the vulnerabilities of such trusts in the event of divorce.

The experienced Family Law team at Ronald Fletcher Baker LLP examines the detail of one such case and offers guidance on how to minimise any risks to your assets should a family breakdown occur – and why you should take steps to protect yourself sooner rather than being caught off guard later.

Discretionary Trusts: Background

Discretionary offshore trusts can be a vital tool in minimising tax burdens and smoothing the process of inter-family wealth transfer. These are often based in jurisdictions with favourable tax regimes, such as Jersey and Bermuda. The appointment of independent trustees to manage such trusts can also minimise family friction, by putting the management of the trust into disinterested hands.

Will my offshore assets be divided in a divorce?

Useful as they are, offshore trusts can often be the cause of dispute in the event of divorce, particularly around disclosure of assets; should all trusts constitute part of the ‘matrimonial pot’ and be divided accordingly?

Under Section 25 of the Matrimonial Causes Act 1973, the court will consider all the financial assets available to divorcing spouses including trusts. Not all trusts will necessarily fall into this category. It may be the case that a family has multiple trusts, some of which will fall under the category of strictly matrimonial assets, and some that can arguably be excluded.

 

Do overseas trustees have to comply with English courts?

The question arises as to how far overseas trustees should – and can be compelled – to comply with English court proceedings and judgments. Whilst the court does have wide-ranging reach over all available resources in a divorce, to what extent are their powers enforceable?

Trustees may choose not to participate in any proceedings outside their jurisdiction or not to comply with decisions, for instance re: changing the arrangement or distribution of a trust. Accordingly, they may worry that appearing ‘qua witness’ (i.e. giving evidence in relation to the assets in a fund, so in effect acting in the capacity of witness) in an English court may be taken as submission to that jurisdiction and in so doing, agreeing to be bound by its orders.

This is a common dilemma where there are multiple beneficiaries of a trust who are not party to the divorce proceedings.

The question was addressed in the case of BJ v MJ (Financial Remedy Overseas Trusts) [2011]

 

Case Study: BJ v MJ (Financial Remedy Overseas Trusts) [2011] EWHC 2708 (Fam)

This landmark High Court (Family Division) case addresses issues of an English court’s jurisdiction over offshore trusts, including whether it could force offshore-based trustees to comply with its decisions, as well as the adverse impact a lack of compliance could have on the court’s decision to distribute the parties’ wealth. 

Adverse Inferences

The court warned that if trustees didn’t “meaningfully” participate, neither they nor the beneficiaries had the right to complain if the court drew “robust conclusions” – which certainly sounds like a warning shot!

Clients should beware that the court may draw adverse inferences if it believes that assets are being deliberately concealed.

Jurisdiction and Compliance Across Different Trust Locations

The case of BJ v MJ provides authority that the question of trustees’ engagement and compliance depends both on the jurisdiction in question as well as other factors. While it makes sense for the courts to seek input from the trustees themselves and any other interested parties, it recognises this input can be difficult to secure if the trustees are unwilling or unable to engage with court directions.

Ultimately, the decision whether it is appropriate for trustees to do so may vary from one jurisdiction to another. Clients may not be aware when setting up their trust that Jersey trustees for example may take a different approach to those based in Bermuda or Singapore, where local courts may have greater powers to enforce UK judgments. Thus, choosing where to establish your trust may be critical.

Limits of Trust Protection in Divorce Cases

Whilst certain jurisdictions do allow scope for a degree of flexibility, it’s important to note that any protection given is not absolute. The courts will always have discretion – indirectly –  to take account of trusts by other means, e.g by offsetting untouchable trust assets against those assets that they do have actionable jurisdiction over, such as pensions, property, investments or company assets. This could lead to the non-trust beneficiary spouse being awarded a greater share of the other available resources if the court considers this appropriate. 

Third Party Claims of Trust Ownership

At RFB, our Family team brings a wealth of experience in dealing with ‘intervenor’ claims. Coined from the eponymous “interveners”, these represent third party claimants who seek to be joined to private financial remedy proceedings on the grounds that they have a legal and / or beneficial interest in the property or other assets in dispute.

The court will need to consider the true and legal ownership as a preliminary issue before deciding on a fair and equitable division of assets between the principal parties, as per Tebbutt v Haynes [1981] 2 ALL ER 238.

Our Family Law solicitors are experienced at both representing and defending such claims, often an additional facet of complex high-net-worth cases.

 

How to Protect Your Offshore Assets in a Divorce

Offsetting Risks: Protecting Your Assets Strategically

To protect your assets in divorce cases involving offshore trusts, it’s crucial to consider the following points:

Seek Expert Advice: Consult informed and impartial experts who can guide you on trust structuring, establishment, and maintenance. Stay updated with evolving caselaw to ensure the ongoing suitability of your trust.

Choose the Right Jurisdiction: Rely on professional legal and financial advisors to assist you in selecting jurisdictions that align with your specific needs. Evaluate the protective measures offered in the event of divorce and the obligations of trustees within those jurisdictions.

Plan Ahead: Although no one wants to anticipate divorce, proactive planning can mitigate potential loss in the event of relationship breakdown or unforeseen circumstances.

Maintain Ethical Conduct: Courts may react strongly to obstructive behaviour or attempts to play the system. To avoid being penalised, ensure transparency by disclosing all relevant information and avoid actions that could be perceived as dissipation of funds or deceptive practices.

Protecting offshore assets during divorce requires careful consideration and proactive measures. By understanding the complexities surrounding offshore trusts, seeking expert advice, and structuring your assets in the best way, you can skilfully navigate divorce proceedings while safeguarding your hard-earned assets. Act now to secure your financial future.

If you require assistance or advice with any of the issues mentioned in this article, or any other family law related matters, our dedicated team is ready to support you.

Contact Us:

Adam Bowes: Partner & Head of the Family Law Department │ a.bowes@rfblegal.co.uk │ 020 7613 7130

Beth Alexander: Family Law Solicitor │ b.alexander@rfblegal.co.uk │ 020 7613 7130

Additional Info

• News Author:Adam Bowes | Beth Alexander