Separation where a Trust is involved: Why the Work doesn’t end with the Separation Agreement

Key Takeaways

When a relationship ends and a trust is involved, a separation agreement alone is rarely enough. Whether the trust is retained or wound up, further steps, in addition to the separation agreement, are usually required to properly implement the agreed outcome.

If those required steps are not addressed, matters may be left incomplete and the trust exposed to future challenge – this is why specialist trust advice is essential.

A Separation Agreement records the Deal — It does not implement it

Trusts are governed by their trust deed and by trust law. Trustees cannot be parties to a separation agreement under the Property (Relationships) Act 1976 in their capacity as trustees.

A separation agreement records what the parties have agreed should happen between them, but does not, of itself, change the governance or operation of a trust. This is why further steps are required.

Retaining the Trust or Winding It Up

It is not always the case that one party will retain the trust following separation. Depending on the circumstances, the agreed outcome could for example be the trust being wound up, its assets realised, and distributions made as part of the separation.

All those scenarios require careful implementation, and the steps involved will depend on the wording of the trust deed and the powers available to the trustees.

Transferring or vesting Settlor Powers

Where one party is to retain the trust, it is critical that the appropriate settlor and control powers are properly vested in that person.

These powers often include the power to vary the trust deed; appoint or remove discretionary beneficiaries; and appoint or remove trustees.

How these powers can be transferred depends entirely on the wording of the trust deed. In some cases, the deed allows for assignment of settlor powers, while in others, the only available mechanism is to vary the trust deed itself, assuming a valid power of variation exists. If the correct mechanism is not used, the transfer of powers may be ineffective.

Each trust deed is different. Some allow broad variations, while others are tightly constrained. A careful analysis is required to determine which powers exist; who currently holds them; and

how (and whether) they can be assigned or varied.

Trustee ratification Is required

Although trustees cannot be parties to a separation agreement under the PRA, they often need to formally ratify and give effect to the agreed outcome set out in the separation agreement.

This is typically done by way of a separate deed of ratification, confirming that the trustees:

• Have considered the terms of the separation agreement;
• Have considered the interests of the discretionary beneficiaries of the trust;
• Are satisfied the arrangements are consistent with their duties and comply with the terms of the trust deed; and
• Agree to take the necessary steps within their powers.

Without this step, trustees may later be exposed to allegations that they failed to properly exercise their duties.

Exiting Trustee or Settlor liabilities

Where a trust has borrowings, it is common for one or both parties to have given personal guarantees.

If a party is exiting the trust, those guarantees will usually need to be released or replaced. This typically requires engagement with the lender and the exiting party being released from those guarantees. If guarantees are not properly addressed, the exiting party may remain exposed to ongoing liability.

Dealing with Current Accounts

Many family trusts operate with current accounts reflecting advances made by one or both parties. As part of a separation, these accounts often need to be forgiven, assigned or otherwise restructured. If current accounts are not dealt with clearly, they can undermine the intended outcome and create ongoing financial entanglement.

New Wills are usually required

Changes to trust control or the winding up of a trust will usually require new wills.

Existing wills, in terms of how they relate to a trust, are often drafted on the basis of circumstances that no longer apply following separation.

The Risk of inadequate Trust Expertise

In practice, we often see separation agreements that correctly identify what should happen to a trust but fail to address how or who will implement these steps.

Without sufficient trust expertise, important steps can be missed, leaving powers incorrectly vested, guarantees still in place, trustees exposed and trusts vulnerable to challenge.

This can create significant issues years later, often at far greater cost than getting it right at the outset.

Getting the right Advice early

Where a trust is involved, separation is not just a relationship property exercise, it is also a trust restructuring exercise.

Early advice from a lawyer with strong trust law experience can help ensure the separation agreement is workable in practice, the trust and associated steps are properly dealt with, and loose ends are not left behind.