Can Assets in A trust be protected on divorce
claims
Recently a
client asked whether transferring assets to a Trust in the anticipation of a
divorce will preclude those assets from being subject to division upon divorce?
Divorces are more often than not acrimonious in nature, fraught with emotion
and an asset as insignificant as the silver cutlery that was gifted to the
couple by a distant relative whose name is long forgotten becomes an issue of
contention. It is therefore not surprising that one of the parties looks to a
Trust as a vehicle in which to ‘protect’ his share of the assets at such a
time. The question is whether the transfer of the assets to a trust will
achieve the desired purpose.
There are two
manners in which a trust can be funded, either by donation in which case the
founder of the Trust will have to pay 20% donations tax on any amount above
R100 000-00, and by making an interest free loan to the Trust. This article
will deal with the latter method.
The
consequences of an in community of property marriage is that the assets in an
estate are owned jointly regardless of who purchased such assets. The converse
also applies in that a husband and a wife are jointly liable for the debts in
an estate. The founder of the Trust requires the consent of his spouse to sell
or encumber any assets that are not excluded from their joint estate (e.g.
assets inherited by a spouse in which the bequest specified the exclusion of
the assets as forming part of the joint estate). Assuming that the spouse
grants consent and the assets sold form part of the joint estate, upon such
sale the value of the loan account will be an asset in the joint estate and be
subject to division upon divorce.
Where parties
are married out of community of property, they each retain assets in their own
estates, and the transfer of assets into a trust by one spouse will not affect
the estate of the other spouse. However where such an out of community of
property marriage is subject to accrual, the spouse with the smaller estate may
share in the growth of the estate of the spouse with the larger estate upon the
dissolution of the marriage, in this case by divorce. As discussed above the
assets that are sold by the founder of the Trust will be replaced by a loan
account to the value of the amount of the sale of the assets. Should the founder
have the larger estate the spouse with the smaller estate will be entitled to
share in such growth, which ultimately includes the loan account.
As
illustrated above the transfer of assets to a trust will not exclude those
assets from division upon divorce. The Constitutional Court and Supreme Court
of Appeal dealt with the issue of divorce in relation to trusts in the cases ofJordaan v Jordaan 2001 (3) SA 288 (C) and Badenhorst v Badenhorst
[2006] 2 All SA 363 (SCA) respectively, and held that the trusts in both
cases were the founders’ alter ego in that the founders had treated the trust
assets as their own and were therefore subject to division at divorce. These
cases do not deal with the transfer of assets in anticipation of divorce
however the principle that is common in both cases is that the court will not
allow spouses to ‘hide’ behind a trust. If assets are transferred into a trust
for the sole purpose of ensuring that a spouse does not benefit at divorce I am
sure that the courts will not hesitate to take the same view as that of Jordaan
and Badenhorst. Trusts have various uses and benefits ranging from
pegging the value of your estate, providing for minor children, tax planning,
protecting your assets and preserving wealth for future generations, however
they are not a “quick fix” solution. It is vital that appropriate advice is
sought to determine whether a Trust is suitable for your estate planning
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