The Family Court's Treatment of Discretionary Trusts

Browne v Browne was one of the earliest cases I can recall involving the growing tension between trust law and family law and to what extent the family court can treat discretionary trust assets as a financial resource available to a divorcing spouse.

Browne v Browne 

I first became aware of the concept of “judicial encouragement” when the case of Browne v Browne was reported early in my professional career in 1988.  For those with long memories, John Browne was the discredited Member of Parliament for Winchester. His marriage had ended and he was impecunious, wanting money for a new home from his former wife, a wealthy individual with trust funds in both Jersey and Liechtenstein.  To cut a long story short, Mrs Browne and her trustees said they would not provide a capital sum to Mr Browne.  The judge gave Mrs Browne twenty-four hours to provide the funds or he would imprison her, or so goes my recollection.  The funds arrived for Mr Browne and Mrs Browne retained her liberty, but more on this case later.

As advisers to entrepreneurial families and wealthy individuals, this is an issue that should be firmly on the radar of tax and trust practitioners.

Key takeaway 

The courts generally recognise that assets held within a discretionary trust are not owned by any individual beneficiary. However, where the evidence suggests trustees would be more likely than not to make funds available to a beneficiary if asked, the family court may treat those assets as a resource available to that beneficiary when determining financial settlement on divorce. This approach has become known as “judicial encouragement” or, to borrow the phrase used by Butler-Sloss LJ in the Court of Appeal judgment in the Browne case "... it would be wrong to put pressure on discretionary trustees ... nevertheless, one has to look at the reality". 

Why this matters

From a trust and estate planning perspective, many clients assume that placing assets into discretionary trusts provides a degree of protection against matrimonial claims. However, the practical reality can be more nuanced.

The courts will examine factors such as:

• Whether the beneficiary was also the settlor.
• The extent to which trustees have historically complied with the beneficiary's requests.
• Whether the beneficiary has influence or control over trustee decision-making.
• The existence and interests of other beneficiaries.
• The nature and liquidity of the trust assets.

Where trustees routinely accede to requests from a dominant settlor-beneficiary, courts have been willing to conclude that trust assets are effectively accessible and therefore relevant to a financial remedy claim.

A practical lesson for advisers

One of the most useful lessons is that courts often focus less on the legal form of the trust and more on its practical operation. A well-drafted discretionary trust can still be vulnerable if:

• Trustees do not demonstrate genuine independence.
• Beneficiary requests are invariably granted.
• Other beneficiaries’ interests appear secondary.
• The trust operates as though assets remain under the settlor’s control.

Conversely, trusts are less likely to be treated as an available resource where trustees have exercised independent judgement, there is a meaningful class of beneficiaries, and distributions are made with proper regard to the interests of all beneficiaries.

Tax and private client perspective

For private client advisers, this serves as a reminder that trust planning cannot be assessed solely through the lens of Inheritance Tax, Capital Gains Tax and asset succession planning.

Governance matters

Independent trustees, contemporaneous decision-making records, properly documented letters of wishes, and evidence that trustees genuinely balance the interests of all beneficiaries are increasingly important not just for tax efficiency, but also for asset protection and family law resilience.

My view

This raises an interesting question: are the courts simply recognising economic reality, or are they exerting undue pressure on trustees to make distributions they would not otherwise have made?

Whatever one’s view, advisers would be wise to assume that family courts will look beyond trust structures and focus on how those structures operate in practice. For clients with family investment companies, trading businesses held in trust, or substantial dynastic wealth structures, trustee behaviour and governance may ultimately prove just as important as the trust deed itself.

A personal footnote

Sometime after Browne v Browne was reported, I had a conference with Bruce Blair (now a KC and a Deputy Judge) on the matrimonial affairs of a client. Blair took the client through all the leading cases, usually ending with the remark that he acted for the winning party, including the discredited Mr Browne. What I did not know until I recently read the case report was that I had met counsel for the wife. The Browne case obviously did him no harm, as he became a judge of the High Court. 

An interesting read for anyone involved in trusts, succession planning, family offices and private client taxation. If you would like to discuss any of the issues raised in this article, please get in touch. 

Please note: This article provides a general summary and commentary only and is not intended to constitute legal, tax or other professional advice. The application of the law will depend on the particular circumstances of each case, and the law and tax treatment may change over time. No action should be taken, or decision made, in reliance on this article without first obtaining appropriate professional advice.