Does a Trust protect assets at divorce?
01 November 2012 | Magazine Archives FAnews & FAnuus | Life | Nokuzola Cossie, Glacier by Sanlam
Recently a client asked whether transferring assets to a Trust in the anticipation of a divorce would preclude said assets from being subject to division upon divorce. Would this tactic stand up to scrutiny in a court of law?
Divorces are often acrimonious affairs, fraught with emotion. An asset as insignificant as a silver cutlery set gifted to the couple by a distant relative can become an issue of contention.
It is therefore not surprising that one party might consider a Trust as a suitable vehicle to ‘protect’ his or her share of the assets in the event of a divorce. The real question is whether the transfer of the assets to a Trust will achieve the desired purpose.
Funding a Trust
There are two ways in which a Trust can be funded. One is by donation, in which case the founder of the Trust will have to pay 20% donations tax on any amount above R100 000. The other is by making an interest free loan to the Trust. This article will deal with the second method.
In an in community of property marriage the assets in the estate are owned jointly, regardless of who purchased them. The converse also applies in that a husband and a wife are jointly liable for the debts in the 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…. Assets may be excluded if, for example, they were inherited by a spouse where the bequest specified the exclusion of such assets from the joint estate.
Joint assets can be divided
Assuming that the assets form part of the joint estate – and that the spouse grants consent for the sale – then upon such sale the value of the loan account will be an asset in the joint estate, 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.
In the event of an out of community of property marriage that 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.
Sharing the loan account
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.
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.
In each case the Court held that the Trusts were the founders’ alter ego in that the founders treated the Trust assets as their own. These assets were therefore subject to division at divorce.
No place to hide
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, then we believe the courts should will not hesitate to take a similar view.
Trusts have various uses and benefits including pegging the value of your estate, providing for minor children, tax planning, protecting your assets and preserving wealth for future generations. But 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 needs.
