Marital regime may affect divorce claims if you have a trust
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Almost half of all marriages end in divorce. It is also a reality that former-spouses-to-be usually attack trusts set up by their spouses in an attempt to maximise their divorce claims.
Apart from being emotionally traumatic, divorce can often have a severe impact on your financial security and quality of life. Divorce generally goes hand in hand with a great deal of distress over how the assets that have been built up during the marriage are divided.
A significant change in marital regimes was introduced in 1984. Until October 31, 1984, the parties to a divorce had to rely on the Divorce Act, which did not provide for the accrual of property. You were either married in community of property (sharing assets equally) or out of community of property, with no accrual (keeping assets completely separate).
The accrual system was introduced on November 1, 1984 through the introduction of the Matrimonial Property Act. All out-of-community-of-property marriages concluded since this date are subject to the accrual system, unless expressly excluded in the spouses’ prenuptial contracts.
The Divorce Act was amended in November 1984 with the aim of restoring the financial loss often suffered by the wife during divorce. The amendment enables the court to order the redistribution of assets between spouses who are married out of community of property, taking into account that they did not have the opportunity to apply the accrual of property when they married.
The claiming party has to demonstrate that he or she contributed directly or indirectly to the maintenance or increase of the estate of the other party, whose assets were held separately.
The court will take into account the means of both parties and should be satisfied that the redistribution order is just and equitable, taking into consideration the contribution of the claiming party to the estate of the other party.
Marriage in community of property
In terms of this marital contract, both parties are the owners of the joint estate. From the onset of the marriage, all assets and liabilities accumulated by one or both parties before the marriage are incorporated into a single, joint estate, with the exclusion of certain assets, such as assets inherited by one of the parties, under the strict understanding that they will not form part of the joint estate.
The assets in the estate are owned jointly regardless of who purchased them. All the property in the joint estate belongs to the husband and the wife as an equal, indivisible portion, and both parties share in the profits or losses of the estate. Both spouses are also jointly liable for the debts in the estate.
If you create a trust, you, as the estate planner, require the consent of your spouse to sell or encumber to a trust any assets that are not excluded from your joint estate. Assuming that your spouse consents to sell the joint assets on a loan account to the trust, upon such sale the value of the loan account will be an asset in the joint estate and be subject to division upon divorce.
Marriage out of community of property, without accrual
This type of marriage takes effect when the parties enter into an antenuptial contract. An antenuptial contract is a contract entered into by both parties that sets out the rules and conditions in respect of the division of assets during the marriage.
The property owned by a person before the marriage, as well as all the property accumulated during the marriage, belongs only to that person, and the other spouse has no claim to it. The same rule applies to liabilities. Each party’s debt remains his or her own responsibility.
Consequently, each party may deal with his or her estate in a will as he or she wishes, subject to a claim for maintenance by a surviving spouse.
Each spouse retains the assets in his or her own estate, and the transfer of assets into a trust by one spouse will not affect the estate of the other spouse. Consequently, upon divorce, one spouse should not have a claim against the assets held in trust by the other spouse.
Marriage out of community of property, with accrual
In terms of this marital contract, the difference between the net increases in the respective estates during the marriage (the accrual) is divided equally between the spouses when the marriage is terminated. Any assets brought into the marriage will be excluded. The calculation of the accrual can be summarised as follows:
• Assume the value of the estate of one party when the marriage is contracted is R1 million and the value of the estate upon the termination of the marriage is R5m. The value by which the estate has increased (in this case, R4m) is deemed the accrual.
• The same calculation must be performed for the other spouse. If the value of the accrual (as calculated above in the other party’s estate) is R1m, the difference in the accrual between the estates of the two parties is R3m (R4m – R1m).
• The party whose estate accrued by the lesser amount will have a claim against the other party’s estate for half of the difference in the accrual. In this case, the claim will be R1.5m. The accrual (excluding the values upon marriage) will therefore be divided equally: R2.5m (R4m – R1.5m) for the one party and R2.5m (R1m + R1.5m) for the other party.
Certain assets are excluded from the accrual in terms of the Matrimonial Property Act:
• An inheritance received during the marriage;
• Donations made to or gifts between the parties during the marriage; and
• Assets explicitly excluded in terms of the marriage contract.
Although the individual marriage partners may bequeath their separate estates at their discretion, it is important to note that, upon death, the other party may have a claim that will have to be finalised before the testamentary distribution can take place. The testator could be prevented from bequeathing his or her estate as he or she wishes if, after the settlement of all claims, there are insufficient assets or funds in his or her estate to carry out his or her wishes.
A spouse in this type of marriage may also transfer assets to a trust. Usually, assets are sold by the estate planner to the trust on a loan account. The trust is unlikely to have the means to pay for the assets transferred. The loan or the cash, including the growth thereon, will be included in the estate of the spouse who sold his or her assets to the trust.
Upon divorce, the spouse with the smaller estate may share in the growth of the estate of the spouse with the larger estate.
Plan to avoid ruin
It is advisable to plan your life in such a way that you do not suffer financial ruin if your marriage breaks down. In order to do this, it is important to understand how you are married from a legal perspective, and what the implications will be upon divorce if you or your spouse created a trust before or during the marriage.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa and the founder of Trusteeze, which specialises in trust administration.