across the bar

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.