Knowledge

Guernsey’s position as a leading international finance centre makes its trust law a cornerstone of wealth management. But what happens when divorce proceedings intersect with Guernsey trusts? The answer lies in understanding the interplay between asset protection, disclosure obligations, and cross-border enforcement. This briefing aims to provide an overview of trusts and divorce proceedings in the Bailiwick.

Introduction

Guernsey, as a leading offshore financial centre, is renowned for its robust trust law framework. Trusts are frequently used for wealth management, succession planning, and asset protection. However, when divorce proceedings intersect with trusts, particularly those established in Guernsey, the legal and practical challenges can be significant. Courts in other jurisdictions may seek to include trust assets in the matrimonial estate if they are deemed nuptial settlements, which can quickly create tension between offshore asset protection and onshore fairness.

The role of trusts in divorce proceedings

Trusts are often focal points in divorces where partners are unable to agree mutually on the division of assets. While Guernsey trusts are designed to provide confidentiality and asset protection, courts in other jurisdictions, such as England and Wales, may seek to include trust assets in the matrimonial estate if they are deemed nuptial settlements. A nuptial settlement is one that provides continuing benefit to spouses in their capacity as husband and wife, such as a trust that owns the matrimonial home or funds family expenses.

Guernsey’s firewall advantage

The Trusts (Guernsey) Law, 2007 (the "Trusts Law") provides robust firewall provisions, ensuring that questions of trust validity and the disposition of trust property are governed exclusively by Guernsey law. This also helps to insulate Guernsey trusts from external interference, such as a court in another jurisdiction seeking to treat a Guernsey trust as a nuptial settlement.

Under section 14 of the Trusts Law, any question concerning the validity of a Guernsey trust or the disposition of property into such a trust must be determined exclusively under Guernsey law, without reference to foreign legal systems or matrimonial property regimes. This means that concepts like community property or forced heirship, common in civil law jurisdictions, cannot override Guernsey's trust framework. These provisions are particularly significant in divorce scenarios, where foreign courts, such as those in England, may seek to vary nuptial settlements or include trust assets in the matrimonial estate. Guernsey's firewall acts as a shield against such claims, ensuring that Guernsey law remains that which governs.

However, this protection is not absolute. The firewall contains a critical carve-out - if assets were transferred into the trust "improperly", such as where the settlor did not own the property or lacked authority to dispose of it, the Guernsey courts may recognise foreign law to determine ownership rights.

For example, if a husband settles jointly owned matrimonial property into a Guernsey trust without his spouse’s consent, the court may allow matrimonial law from an alternative jurisdiction to establish whether the transfer was valid in the first place. This ensures that the firewall cannot be used as a tool to legitimise unlawful or inequitable transfers.

What steps can a Guernsey trustee take to minimise an English court’s reach over a Guernsey trust?

Ultimately, an English court’s power to vary a settlement is not restricted by the location of its assets. If an asset held on trust in Guernsey is considered by an English court to form part of the joint matrimonial estate, there is little preventing the English court from making an order that conflicts with the trust instrument.

The power to do this is set out in Section 24(1)(c) of the Matrimonial Causes Act 1973 (the "MCA") which states the court may make "an order varying for the benefit of the parties to the marriage and of the children of the family or either or any of them any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage".

This rule exists to ensure a spouse, or their children, are not cut out of shared assets by the other spouse. If a trust is considered nuptial, an English court can change its terms to achieve a fair outcome in the divorce proceedings.

A trust is considered nuptial if it is connected to the divorcing parties, as husband and wife, and provides ongoing benefits for one or both, or their children (see Brooks v Brooks [1996] AC 375). Examples of nuptial settlements upheld by the courts include trusts that purchased a property for the couple, made loans to a spouse’s business, or held properties managed exclusively by the spouses.

Where assets are located outside the jurisdiction of the English courts, such as assets held on trust in Guernsey, the spouse in whose favour the variation order is made may face challenges enforcing that order in the offshore jurisdiction.

Section 14(4) of the Trusts Law incorporates firewall provisions that prevent an order of a foreign court from being enforced or given effect to if it is inconsistent with the local legislation. In the matter of the A Limited Funded Unapproved Retirement Benefits Scheme and the B Employee Benefit Trust [2017] 21/2017 provides helpful commentary on the likely approach of the Royal Court of Guernsey and, in turn, guidance for Guernsey trustees.

The judgment of Re A Limited FURBS approved the Jersey case In the matter of the H Trust [2006] JRC 057, where the Royal Court of Jersey considered whether a trustee should submit to an English court order joining it to divorce proceedings. The court held that it is generally not in the interests of a Jersey trust for a trustee to submit to the jurisdiction of an overseas court in matrimonial cases. Doing so preserves the ability of both the trustee and the Jersey court to act appropriately after considering the foreign court’s decision.

In Re A Limited FURBS, the court emphasised that voluntary submission would undermine the protection of Jersey’s firewall provisions (particularly Article 9(4) of the Trusts (Jersey) Law 1984). If a trustee submits and participates fully in the foreign proceedings, it may later face significant difficulty arguing against enforcement of that decision in Jersey.

The Royal Court of Jersey clarified in Mubarak v Mubarak [2008] JRC 136 that an English order that purports to alter a trust in terms inconsistent with the trust deed cannot be enforced by the Jersey courts. This is so even if the trustees have submitted to the jurisdiction of the English court. However, if the order falls within the trustee’s existing powers, the Jersey court may, at its discretion, direct trustees to achieve the same result. In doing so, the court must have regard principally to the interests of the beneficiaries.

In Re A Limited FURBS, the court confirmed that, as a general rule, trustees of Guernsey trusts should resist submitting to foreign jurisdiction because of Guernsey’s firewall provisions, which protect local trust law. However, in this case, the trust was a funded unapproved retirement benefits scheme with very limited discretion, operating more like a pension scheme. Given its mechanistic nature and the practical need for disclosure in English proceedings, the court allowed submission on disclosure only. The Deputy Bailiff identified that if the trust in question had been a "standard" family trust (that is, with a class of beneficiaries extending beyond the divorcing couple), he "would probably have followed the reasoning in the H Trust case and concluded that it was best for the trustee not to submit to the jurisdiction".

The decision in Re A Limited FURBS highlights that trustees based in Guernsey should always seek directions from the Royal Court of Guernsey and that submission will only be appropriate in exceptional circumstances, particularly where trustee discretion is minimal. The judgment also provides a helpful indication that the position in Jersey is likely to be followed, which is welcome given the lack of authority in this area in Guernsey.

Practically, trustees may face competing duties. The firewall provisions, and the confirmation of these within case law, have not discouraged the English courts from attempting to interfere with offshore trust structures. As an alternative approach to varying the terms of the trust, the English courts have, on occasion, made what is known as an "encouragement order". Because of the firewall provisions, the court may use this as a tool to attempt to circumvent restrictions by requiring the spouse who is a beneficiary, or who has influence over the trust, to "encourage" the trustee to act in a way that gives effect to a financial settlement (for example, by making a distribution or advancing funds). The result is that the spouse left out may still benefit from assets deemed by an English court to form part of the matrimonial estate.

Guernsey trustees may be forced to make difficult decisions - how can the interests of the beneficiaries be upheld and protected if there is a requirement to submit to a foreign court? The safest route is to seek directions from the Royal Court of Guernsey before acting.

Planning ahead

Trustees should consider steps to avoid or reduce the English court’s interference in the trust’s affairs, for example by taking steps to reduce the risk of the trust being deemed "nuptial" under section 24(1)(c) of the MCA. This includes being clear about the trust’s purpose and considering the extent to which the trustees fund the spouses’ lifestyle. For example, a trustee may choose to grant the spouses a licence to occupy rather than a life tenancy. Other practical steps may include encouraging a pre-marital agreement or ring-fencing certain assets.

Conclusion

In all cases, trustees should seek early, independent advice from both local advocates and lawyers in the relevant foreign jurisdiction (whether that be England and Wales, or further afield).

The intersection of trusts, divorce, and asset recovery in Guernsey is a nuanced area requiring careful navigation. While Guernsey’s firewall provisions provide significant protection, they are not absolute. Exceptions arise where submission aids foreign proceedings without compromising Guernsey law.

Trustees, beneficiaries, and divorcing spouses must balance confidentiality, compliance, and fairness within a multi-jurisdictional legal landscape.

If you have any queries or concerns regarding trusts and divorce in Guernsey, please get in touch with your usual Bedell Cristin contact.