Trust-to-Trust: When trust assets are at risk during divorce
The reality is that almost half of all marriages end in divorce. It is also a reality that future-to-be-ex-spouses usually attack trust structures set up by their spouses in an attempt to maximise their claims.
Aside from being an emotionally traumatic life event, divorce can often have a severe impact on a person’s financial security and quality of life. Divorce generally goes hand in hand with a great deal of distress over the manner in which the assets that have been built up during the marriage are to be divided.
The following questions can be used as guidelines when determining whether the assets in trust are at risk to any one of the spouses upon divorce:
Is the trust a trust in the real sense, or merely a “corporate veil”?
This is a relatively new common law notion for trusts in South Africa, where the Courts disregard the separate corporate identity of a company when the legislature disregards it in instances of non-compliance with statutory provisions.
It has been described in other ways, for example, that a Court can “disregard the veneer of the trust”; or “disregard the trust”; or treat the trust as the “alter ego” of one or more of the trustees; “pierce the veil of the trust” and “go behind the trust form”.
This began when the Courts would “look through” and “pierce” a company if it was deemed to have been set up to (mainly) mislead or defraud creditors. This concept has now been extended to include trusts. If there is any form of misuse or abuse of trust assets, a Court may likely pierce the corporate veil to establish whether the trust is simply an alter ego of a person.
When was the trust created?
If a party transfers assets into a trust with the intention of deceiving or defrauding a spouse of their potential claims in an approaching divorce action, the validity of the trust may be deemed suspicious, due to the lack of bona fides on the part of the founder or trustees of the trust.
What was the intention of the founder of the trust?
If, for example, parties married in community of property agree to transfer assets belonging to the joint estate into a trust for their and their children’s benefit, one of the parties may apply to Court to set such trust aside upon divorce, with the assets likely forming part of the communal estate. Otherwise, the rules applicable to the division of the joint estate upon divorce cannot be applied because the assets are stuck in a trust, while the parties should, in fact, each be receiving 50 percent of the joint estate.
Is there a conflict of interest?
Where one spouse is a trustee, and the other spouse a beneficiary, a conflict of interest may arise in a divorce action, where the latter spouse may approach the Court for an order of dissolution of the trust or a substitution of trustees. Of course, the Court should be satisfied that it would be in the best interests of the beneficiaries as a whole to grant such relief. The structuring of a trust like this, for the sake of making the trust appear more “legitimate” (often due to advice offered by incompetent trust practitioners) generally places the person who was not appointed as a beneficiary in a compromising situation.
How were the assets moved into the trust?
When property is transferred into a trust, it is usually either done through a donation or a sale. If it is a donation, Donations Tax is payable. In the event of a sale, the purchase is often reflected as a loan account in favour of the seller, which creates an asset in the estate of the transferor. This asset will be taken into account in a divorce.
Precautionary and recommended steps to take
Before declaring “I do”, take advice on whether being married in community of property is a wise option. For many couples, marriage out of community of property (with or without accrual) is likely to be the smarter choice.
Your antenuptial contract should record your respective rights to any assets (including any interests in trusts, companies, etc.) in the event of divorce.
Should you purchase property during your marriage, the transaction should be carefully discussed and documented, so that both parties are in a position to gain, should the marriage end in divorce. Careful consideration should be given to transferring the property into a trust.
It is recommended that both spouses should be trustees and beneficiaries.
The terms of the trust instrument are critical in order to ensure that no one party can steer the decisions of trustees to benefit himself or herself, to the detriment of the other spouse.
As a trustee, ensure that the trust is established and strictly managed as required by law. The control over the trust’s assets should be clearly separated from their enjoyment. Failure to do so increases the possibility of an attack on the trust by a spouse upon divorce.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa®, a Master Tax Practitioner (SA)™, a Trust and Estate Practitioner (TEP) and the founder of Trusteeze®, a professional trust practitioner