Monthly Archives: November 2012

HOW DIVORCE WILL AFFECT YOUR TRUSTS

As unpleasant as it may be, divorce is unfortunately a possibility that must be faced and, accordingly it is a factor that we must keep in mind when establishing a trust. One of the benefits of having assets owned by a trust is that these assets will then be protected from divorce proceedings. However it is extremely important that a trust is correctly drafted ab initio, and that the trust is thereafter correctly administered.

I will turn to the rulings of our courts’ in various divorce matters to look at what they took into consideration when determining the redistribution of assets during divorce proceedings.

  • When was the trust formed and by whom?

    In the case of VAN DER MERWE v VAN DER MERWE (2002) the court took into      consideration firstly if the trust was formed whilst divorce proceedings      had been instituted and were pending, and secondly whether the assets were      moved into a trust with the sole purpose/intention of removing assets from      the matrimonial estate. The facts in this case were that the husband had      sold the family home to a trust he had founded, at a value well below      market value. The court held that the family home was still to be      considered part of the husband’s estate for the calculations of the      redistribution of assets.

  • How was the trust administered?

    In the case of BADENHORST v BADENHORST (2001) the husband had retained      full control of the assets of the trust and there was no clear      ‘independence’ in that the trustee had reached all decisions by himself,      the court held that the trust was merely the alter-ego of the founder and      trustee. Once more the assets in the trust were considered part of the      husband’s estate for the calculations of the redistribution of assets.

In summary should a party be in the process of a divorce, that party can not move assets from their estate to a trust for the sole purpose of divesting their estate of assets.

A trust must at all times be carefully drafted by a trust expert to ensure that there are no elements of control that will result in a trust being deemed a “sham” trust which is merely the alter-ego of the founder and trustee.

Lastly, it is of paramount importance that a trust is properly administered so that the independence of a trust is clear to all parties. Not only must there be an independent trustee on the board of trustee of a trust, but that independent trustee must also play an active role on the board of trustees.

In conclusion, be proactive, ensure that your assets are protected from all the unpleasant possibilities, such as divorce, by setting up your trusts before things go wrong.

MARRIAGE and TRUSTS

When determining how to structure your Trust Deed one needs to realise the implications that the marriage system in existence between the Trustees has on how the trust is created.

Marriages are governed by the Matrimonial Property Act 88 of 1984. This Act allows for three different marital systems. One can either marry in community of property, out of community of property with the application of accrual or out of community of property without the application of accrual. If one is married in community of property the two estates are amalgamated into one. If one is married out of community of property then the spouses retain their separate estates. When establishing a trust, however, the assets owned by the trust do not form part of either estate and therefore will not be taken into account in any settlement agreement or winding up of a deceased estate, provided of course that the trust is not a sham Trust. When creating trusts our concern with how you are married, therefore, is only for purposes of determining who will be a Trustee on the Trust and as a result retain control. In most cases the joint household assets will be moved into the Family Trust. By moving the assets of the Trust each spouse is divested of ownership of those assets (whether they were jointly owned in undivided shares or were individually owned). In order to retain management over those assets therefore each spouse will need to be a Trustee on the Trust.

There are circumstances, however, when it is advisable that only one spouse be appointed a Trustee on the Trust. If a trust is created for purposes of investing in property and the Trustees are married out of community of property, it is advisable that only the spouse with the greater income be appointed as Trustee. In this way any exposure attached to the signing of surety lies with only one spouse and the spouse who is not a Trustee is protected against such risk. Should the spouse who is a Trustee then be sequestrated the other spouse can then be appointed a Trustee in his/her place and thus keep control over the assets in the trust within the immediate family unit. Another instance where only one spouse is appointed would be in a Business Trust. Often in an ante-nuptial agreement business interests of the parties are excluded from the accrual. The way in which to exclude your business interests from a claim from your spouse in a trust structure is to not have your spouse appointed as a Trustee.

The trust structure can be an even bigger advantage if one is married in community of property. Due to the two estates being amalgamated into one, the assets of one spouse are the assets of the joint estate and more importantly the debts of one spouse are the debts of the joint estate. It follows therefore that if one spouse goes insolvent then so does the other spouse. By moving ones assets to the trusts they are therefore protected and one spouse, through a bad business decision or just bad luck, cannot influence the joint wealth as it is housed in the Trust. Furthermore, on death the estate is frozen during the winding up process. This process can, if it is a large estate, take up to 2 years to complete. During this period the surviving spouse and children have no or little access to the estate. This is made worse if one is married in community of property as the joint estate is frozen meaning that the surviving spouse’s assets are also frozen! If the estate is in Trusts then, financially, the death of one spouse has no impact on the surviving spouse and children because they have immediate access to the assets and cash held in the Trust.

In summary by moving ones assets into trust does not invalidate the marriage system between the spouses but because there are no assets left in the spouses’ personal capacity the system in which the spouses are married becomes irrelevant as any division of assets on divorce or death will be dealt with through the Trust and therefore governed by the Trust Deed itself and the Trust Property Control Act 57 0f 1988. Keep in mind however, if you are not a Trustee on the Trust you do not have any management over distributions and/or claims to the assets (or the use thereof) from the Trust.