Financial Planning

Does a trust protect assets at divorce?

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. 

Joint ownership – 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 of Jordaan 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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