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The impact of divorce on a Trust

by Nicci - Posted 16 March 2010

The primary reason why a person forms a Trust is to separate assets from his personal estate.   This could be for estate planning purposes or to keep assets out of the reach of creditors.

There are three different role players in a Trust:  the Founder, the Trustees and the Beneficiaries.  The Founder of the trust divests himself of ownership of assets when they are transferred to a Trust and the assets do not form part of his personal estate.  The status of a Trust in law was confirmed in Land and Agricultural Bank of SA v Parker 2005 (2) SA 77 (SCA), where it was held that a trust  can only act through its Trustees, who have to act independently and in the best interests of the beneficiaries of the Trust.

What happens if the Founder is married and gets divorced?  Can his wife lay a claim to Trust assets which were acquired during the marriage and put into the Trust?

This is exactly what the Court had to consider in Badenhorst v Badenhorst (07/2005) ZASCA 116.  Could the assets belonging to the husband which had been transferred to a Trust during their marriage be taken into account in making a redistribution of assets ito Section 7 of the Divorce Act?  Briefly, Section 7 empowers a Court to award a redistribution of assets accumulated during the marriage as it deems just and equitable (for marriages out of community of property, solemnized before 1984), given the contribution of the parties to the marriage during its subsistence.

The Court held that in order to succeed, the wife would need to prove 1) that the husband controlled the Trust and that  2) but for the creation of the Trust, he would have acquired and owned the assets in his own name.

An investigation would include:

a)The Trust Deed must be examined with regard to who the Trustees are and what their powers are.

b)Each asset transferred to the Trust must be examined as to when and how such asset was acquired and the circumstances surrounding the transfer of that asset to the Trust.

c)How the Trust is administered between the time of its creation and the date of divorce.

A Trust should be managed and controlled as an independent entity.  If it is shown that the founding spouse controlled the Trust and administered it as if it were his own assets, the Court can and will redistribute Trust assets in a divorce.

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Family Trusts vs Testamentary Trusts

by Nicci - Posted 16 March 2010

A Trust can be formed in one of two ways:  either while you are alive (inter vivos) where an individual wants to place assets in a trust for specific beneficiaries or in terms of a Will (mortis causa).

Trusts are used primarily in Wills to protect the inheritance of minors and only come into effect after the death of the testator.  The bequeathed assets are then protected until the beneficiaries are old enough to inherit, i.e. 18 years old.  This is also a useful tool if the testator wants to prolong the time period before the actual asset transfers to the beneficiary, as the testamentary trust can be structured in such a way that the inheritance only passes to the beneficiary at an age older than 18, i.e. when the beneficiary turns 30.

Any asset can be placed in an inter vivos trust - immovable property, cash or shares and the asset, once transferred, belongs to the Trust and will not be taken into account for the purposes of valuing your personal estate.  This type of trust works well when the asset held by the trust is a family beach house or farm.

All trusts have to appoint trustees, who manage the assets of the trust on behalf of the beneficiaries.  In a testamentary trust, the Will itself is the trust deed and contains instructions on how the trust is to be managed and the powers and duties of the trustees.  In an inter vivos trust, a trust deed is drafted and registered with the Master of the High Court and sets out the powers and duties of the trustees.  The trustees can only act on behalf of the trust once the Master has issued Letters of Authority to do so.

It is recommended that at least three trustees are appointed in a family trust and at least one of these trustees should be an independent party, eg. an attorney, accountant or a trust company.  A separate bank account in the name of the trust must be opened and all financial transactions relating to the trust must be recorded through this bank account.   SARS also requires all trusts to be registered for income tax purposes, so careful record keeping is a prerequisite for trustees.

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Happy new financial year

by Steve - Posted 02 March 2009

Happy new financial year to all our clients who end off in Feb. Once the sighs of relief die down, lets hope there is a renewed sense of optimism for the coming 12 months.

Use this time to get your house in order and streamline your operations. Don't cut the marketing budget and keep innovating. This too shall pass.    

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