How to Protect an Intended Beneficiary's Inheritance From Divorce
8 minute read
Divorce can put inherited assets at risk—this guide explains how to plan ahead with confidence
For many people, one of the most important reasons to make a will is to provide for their children or grandchildren in a meaningful and lasting way. But what happens when the person you have provided for goes through a divorce? In England and Wales, assets belonging to either spouse can be taken into account when a court considers how to divide finances on separation. Without careful planning, an inheritance that was meant to give your child financial security could find itself absorbed into the financial settlement of a marriage that has broken down.
This is not an uncommon concern, and it is one that focused Will planning can address directly. With the right structure in place, you can provide generously for the people you love whilst significantly reducing the risk that what you leave them will be lost in a divorce.
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Why an Outright Gift Can Be Risky
When you leave money or property directly to a beneficiary in your will, it passes to them as their own asset. In most circumstances, that is exactly what you intend. But in the context of divorce proceedings, inherited assets can sometimes be included in the financial assessment that the courts conduct.
How English Courts Approach Inherited Assets in Divorce
In England and Wales, divorcing spouses can apply to the court for what is known as ancillary relief, or a financial remedy order. The court has wide discretion to redistribute assets between the parties, and in doing so, it takes into account all of the financial resources available to each spouse. Inherited assets are not automatically excluded from this exercise.
While courts do sometimes treat inherited wealth differently from assets built up jointly during a marriage, this is far from guaranteed. If an inheritance has been mingled with matrimonial assets, used to fund the family home, or if the other spouse has a significant need, the court may well bring inherited funds into the equation. The larger the inheritance, the more likely it is to be scrutinised.
An outright gift in your will, therefore, carries a real risk. The asset passes to your child or grandchild free and clear, but from the moment they receive it, it sits in their name and may be visible to a divorcing spouse’s legal team.
How a Trust Changes the Picture
The most effective way to reduce the risk of an inheritance being drawn into divorce proceedings is to avoid making an outright gift at all. Instead, the assets can be left in a discretionary trust.
Under a discretionary trust, the assets do not pass directly into the beneficiary’s ownership. Instead, they are held by a group of trustees, who manage and apply them for the benefit of the named beneficiaries in accordance with the terms of the trust. The beneficiary does not own the trust fund. They are simply a potential recipient of distributions that the trustees may, in their discretion, choose to make.
This distinction is legally significant. Because the beneficiary has no fixed entitlement to the trust assets, there is no clearly defined “inheritance” sitting in their name for a divorcing spouse’s legal team to point to. The trust fund belongs to the trustees, who hold it on trust for a class of potential beneficiaries. Whether and to what extent a court would treat the trust assets as a resource available to the beneficiary depends on the specific facts and how the trust is drafted and administered, but a well-structured discretionary trust is considerably harder to attack than an outright gift.
Our specialist will-drafting service includes carefully drafted discretionary trust provisions designed to protect beneficiaries in a range of circumstances. Contact us to find out more.
Keeping the Beneficiary as a Potential Beneficiary, Not an Absolute One
The protective value of a discretionary trust depends heavily on its drafting. The structure only works if the beneficiary genuinely has no automatic entitlement to any part of the trust fund.
This means avoiding certain features that, whilst common in some trust arrangements, would weaken the protection you are trying to achieve.
Avoid Fixed Income Rights
If the trust requires the trustees to pay a fixed income to the beneficiary, that income stream may itself be treated as a financial resource available to the beneficiary in divorce proceedings. A divorcing spouse could argue that the right to receive a regular fixed payment is an asset, or at least a resource that should be factored into the financial settlement.
To avoid this, the trust should give the trustees the discretion to pay or accumulate income as they see fit, without any obligation to make regular payments to the beneficiary. If income is paid, it should be at the trustees’ discretion, not as a matter of contractual or legal entitlement.
Avoid Mandatory Capital Distributions
Similarly, the trust should not include provisions requiring the trustees to distribute capital to the beneficiary upon reaching a certain age or upon the occurrence of a specified event. Mandatory capital distributions create a fixed entitlement that could be identified and assessed in divorce proceedings.
The trustees should retain full discretion over capital distributions at all times, with no predetermined schedule or trigger that creates an automatic right in the beneficiary.
Keeping the trust fully discretionary in both income and capital means that the beneficiary has nothing more than a hope that the trustees will exercise their discretion in their favour, which is a far weaker position for a divorcing spouse to build on than a fixed legal entitlement.
Excluding the Spouse From the Trust
A well-drafted discretionary trust for the protection of a beneficiary should specifically exclude the beneficiary’s spouse or civil partner from the class of potential beneficiaries.
This is a straightforward drafting point, but it is one that is easy to overlook. If the trust simply names “the children of [name] and their families” as potential beneficiaries, a spouse or civil partner could arguably fall within that class. If they are potential beneficiaries, the trustees could, in theory, make distributions to them, thereby weakening the argument that the trust fund is entirely independent of the matrimonial finances.
A clear exclusion of spouses, civil partners, and former spouses from the class of beneficiaries removes any ambiguity. It makes the position explicit: the trust is for the named individual and other specified family members, and it does not extend to their current or future spouse.
This exclusion can be drafted in general terms to cover any future spouse or partner, not just a known current one, so it provides ongoing protection across the beneficiary’s lifetime regardless of how their personal circumstances change.
The Question of Trustees
It ought to go without saying, but the beneficiary’s spouse should never be appointed as a trustee of a trust that is intended to protect the beneficiary’s inheritance from divorce proceedings.
A trustee has significant powers over the trust fund, including the power to make or withhold distributions. If a divorcing spouse is also a trustee, those powers could be exercised in ways that are not in the beneficiary’s best interests, or conversely, a court might take a dim view of a trust structure in which the very person who stands to benefit from the matrimonial settlement also holds the keys to the trust fund.
More broadly, the trustees of a protective trust should be genuinely independent of the matrimonial relationship and be able to be relied upon to act solely in accordance with the terms of the trust and the best interests of the intended beneficiaries. Close family members who have no connection to the beneficiary’s spouse are usually a good starting point. A professional co-trustee, such as a solicitor or specialist trust company, adds an additional layer of independence and continuity.
Pausing Distributions During Divorce Proceedings
Where a trust has been making regular discretionary distributions to a beneficiary, for example, to supplement their income or assist with housing costs, the trustees face a particular challenge when divorce proceedings begin. Any distribution made from the trust during that period could be taken into account by the court as income or capital received by the beneficiary, and could influence the financial settlement.
For this reason, a well-structured trust should give trustees the explicit power to pause or suspend distributions during divorce proceedings, and to accumulate income within the trust rather than paying it out.
If the trustees are aware that a beneficiary’s marriage is in difficulty, they may wish to take legal advice on whether to continue making distributions, and on how to document their decision-making process. A decision to pause distributions during proceedings is not a reflection on the beneficiary and does not mean the funds are being withheld permanently. It is a prudent protective measure designed to ensure that the trust fund remains as insulated as possible from the matrimonial proceedings.
This power to accumulate income and withhold distributions should be clearly set out in the trust provisions of the will, so that the trustees have unambiguous authority to act in this way when the circumstances require it.
The Role of the Letter of Wishes
A letter of wishes is a personal document, written by you, addressed to your trustees. It sits alongside your will and trust, and whilst it is not legally binding, it provides your trustees with an invaluable insight into your intentions, your concerns, and the way you would like the trust to be managed.
In the context of protecting an inheritance from divorce, your letter of wishes might explain the reasoning behind the discretionary structure, express your hope that the trust will be used to benefit the named beneficiary throughout their life, and set out the kinds of situations in which you would like the trustees to exercise particular caution, including the possibility of divorce or financial difficulty.
You might also use the letter to identify specific trusted advisers you would like the trustees to consult, to explain any particular family circumstances the trustees should be aware of, and to give a sense of the values and priorities that lie behind your estate planning.
A letter of wishes will not legally bind the trustees, but a thoughtful, well-considered letter is enormously useful in practice. It ensures that the people managing your estate after your death understand exactly what you were trying to achieve, and why. Over the course of what may be a very long trust administration, that clarity can make a significant difference.
Thinking about how to protect what you leave behind? Our specialist Will-drafting team can help you put the right structure in place.
Putting It All Together: A Structure That Works
A discretionary trust in a will, combined with a carefully considered letter of wishes, is not a guarantee that the trust fund will be entirely immune from divorce proceedings. Family courts in England and Wales have wide powers, and in the right circumstances, they can and do look behind trust structures. However, a properly drafted and administered discretionary trust makes it considerably harder for a divorcing spouse to access the funds, and considerably easier for trustees to protect the estate against that possibility.
The key features of a trust designed for this purpose are that the beneficiary has no fixed entitlement to income or capital, the spouse is explicitly excluded from the class of beneficiaries, the trustees are independent people who are not connected to the matrimonial relationship, the trustees have clear powers to pause distributions if divorce proceedings arise, and the trust is supported by a letter of wishes that sets out the testator’s intentions clearly.
Getting each of these elements right requires careful and precise drafting. A standard or template will is unlikely to achieve this level of protection. The trust provisions need to be tailored to the specific circumstances of the intended beneficiary and drafted by someone who understands both trust law and how family courts approach these structures.
How We Can Help
At Wise Owl Wills, we have extensive experience drafting wills that include discretionary trust provisions specifically designed to protect beneficiaries in a range of circumstances, including the risk of future divorce.
We understand that this kind of planning is often driven by a very personal concern, and we approach every case with the sensitivity and care it deserves. We take the time to understand your family’s circumstances before advising, and we draft every will with the precision this kind of planning requires.
Whether you are making a will for the first time or reviewing an existing one, we can help you ensure that what you leave behind is structured to genuinely protect the people you care about.
Please contact us today to arrange a convenient time to speak with one of our team. There is no obligation, and all enquiries are handled with complete confidentiality.
Frequently Asked Questions
Can a discretionary trust protect my child's inheritance from their spouse in a divorce?
A properly structured discretionary trust can significantly reduce the risk that your child’s inheritance will be drawn into divorce proceedings. Because the beneficiary has no fixed entitlement to the trust assets, there is no clearly defined inherited sum sitting in their name. Courts do have wide powers to consider all available resources, but a well-drafted and properly administered discretionary trust is much harder for a divorcing spouse to access than an outright inheritance.
Will my child's inheritance be taken into account in a divorce settlement?
It depends on how the inheritance was left and how it has been managed. An outright gift that passes directly to your child becomes their asset and may be considered by the court in ancillary relief proceedings, particularly if it has been mingled with matrimonial assets or if the other spouse has significant financial needs. Inherited assets held in a discretionary trust are in a stronger position because the beneficiary does not legally own them.
What is ancillary relief, and how does it affect inheritance?
Ancillary relief, now more commonly called a financial remedy order, is the process by which a court divides financial assets between divorcing spouses. The court has a wide discretion and can take into account all financial resources available to each party, including, in some circumstances, inherited assets. How inherited assets are treated depends on factors such as whether they have been mixed with matrimonial assets and whether the other spouse has unmet financial needs.
Should I leave money to my child in a trust rather than as an outright gift?
If there is any concern that your child’s inheritance could be affected by a future divorce, leaving assets in a discretionary trust rather than as an outright gift is generally a more protective approach. A discretionary trust means the assets do not pass directly into your child’s ownership, which makes it harder for a divorcing spouse to argue that the funds should form part of the matrimonial settlement.
Can a spouse be excluded from a discretionary trust?
Yes. A well-drafted discretionary trust can, and should, explicitly exclude the beneficiary’s spouse, civil partner, and former spouses from the class of potential beneficiaries. This removes any suggestion that the trust is a family asset that the spouse could access, and reinforces the independence of the trust structure.
Should my child's spouse be a trustee of a trust in my will?
No. A spouse should never be appointed as a trustee of a trust that is intended to protect your child’s inheritance from divorce. Trustees have significant powers over the trust fund, and appointing a spouse as trustee could compromise the independence of the trust and undermine the protection it is designed to provide. Trustees should be independent of the matrimonial relationship.
What is a letter of wishes, and why is it important for a protective trust?
A letter of wishes is a personal document addressed to your trustees that explains your intentions and provides guidance on how you would like the trust managed. In the context of a trust designed to protect against divorce, it is a way of communicating your concerns and preferred approach to the trustees in a clear and personal way. Although it is not legally binding, a well-written letter of wishes is enormously helpful to trustees who will be making decisions on your behalf long after your death.
Can trustees pause trust distributions during divorce proceedings?
Yes, provided the trust is drafted to give them this power. A well-structured discretionary trust should include an explicit power for trustees to pause or withhold distributions during divorce proceedings and to accumulate income within the trust rather than paying it out. This helps to ensure that payments made from the trust during the divorce period do not influence the financial settlement.
Disclaimer
This article is intended as general information only and does not constitute legal advice. The information refers to the law of England and Wales. Tax thresholds and legal rules are correct at the time of writing but are subject to change. We recommend that you seek professional advice regarding your own circumstances.
Bio
This article was written by Stephen Rhodes. Stephen was called to the Bar of England and Wales in 1999 and brings over 25 years of in-house experience working with solicitor firms across the Manchester area, with a specialism in Wills and Probate. He now focuses exclusively on will drafting, helping his clients ensure their loved ones are taken care of exactly as they would wish.