To prevent an unintended divorce settlement, have a look the Deeds and administration of family trusts. The general nature of a discretionary trust is to exist separately from the donor,with the trustees owning and managing the trust assets to the benefit of the beneficiaries of the said trust The assets that have been donated or sold to the trust are legally owned separately from the donor and the trustees’ personal estate and accordingly do not form part of the personal estates of the donor or trustees. These assets are kept, owned and managed on behalf of the discretionary beneficiaries and these are mostly the core of many trusts.
With estate planning becoming more sophisticated more and more trusts are being established and with the increase in divorces being around 8.6% per year, there is a huge possibility of a trust being involved in divorce settlement agreements. If a trust is legally established and correctly managed, its assets will fall outside the estates of the respective parties. However it often occurs that trusts are in fact not managed and administered correctly.
In various court cases it has been decided that the founder and/or trustees with the formation of the trust, only had the intention to keep the assets outside of their estate in order to elude creditors, including spousal claims arising from, for example, the spouse’s matrimonial property system. In these cases the courts looked through the trust as if legally it didn’t even exist., as it was clear that it was in existence for this reason only.
In above instances where the courts effectively did not legally acknowledge the existence of the trust and did not give consequence to the trust, the trustees typically managed the trust in such a way that it was nothing other than an ‘alter ego’ of the founder or trustee. In such instance no real disctinction is made between the trustee’s personal assets and the trust assets, and everything is managed as though it’s the trustee’s personal estate . The trustee would then for example use the trust assets for his own, unilateral benefit, just as he would have if it were his own assets.
This is in conflict with the principles of a trust which requires that the trustee ought to clearly distinguish between assets kept in his own, personal capacity, and assets kept in his capacity as trustee – and that they should also be clearly kept and managed separately. If that is not done, the trust will lose its independence and consequently be regarded as a‘sham’ trust. While the fact of each case must be considered separately, characteristics such as the following will typically be found in case of a sham trust:
- The trust is established or assets are transferred to the trust with the specific purpose of cheating or prejudicing a spouse, especially in order to avoid the legal workings of their particular matrimonial property system.
- The purpose of the trust is vague, indeterminable or unlawful/illegal.
- The trust assests are not kept or managed independently from the personal estate of the trustee or donor, with the result that the trust does not really function separately.
- The de facto management and administration of the trust assets are handled as if it still forms part of the trustee/founder’s personal estate.
- The founder dit not really have the intention to establish a trust on behalf of the beneficiaries, but rather to keep assets outside of his estate in order to, for example, avoid the legal consequences of the matrimonial property system in terms of which he/she is married.
- In terms of the trust deed the donor has the sole right to replace his co-trustee(s) or change beneficiaries.
Whether a court will regard a trust as a sham trust will depend on the facts, but if so, the assets of the trust will be handled on the basis as if there had been no trust, and consequently it can merely be regarded as part of the founder or trustee’s assets or estate.Such assets will then also be taken into consideration at the distribution of estates in terms of the relevant matrimonial property system applicable to the spouses’ marriage.
It is extremely important though that a declaratory order be sought by the plaintiff to have the trust declared as a sham trust before the divorce proceedings takes place, so that the assets of such trust can be taken into account at the distribution of the respective parties’estates. The reason for this is that these are two completely different legal proceedings.
Always however bear in mind that there are also various arguments to be raised in favour of a decision that a trust is not a sham trust. These arguments will typically deal with the intention of the trust, namely that the trust was established to for example protect the children, and will centre around the fact that the assets in fact has to be acknowledged as trust assets, separate from the spouses’ personal estates, and therefore does not form part of the estates which in terms of the matrimonial property system has to be divided in the event of divorce. Do your homework carefully.
It is rather common for both spouses to also be trustees of a family trust. In such a case,especially where the plaintiff has acted as a trustee of the trust for quite some time before divorce proceedings began, the burden of proof to have the particular trust be declared a sham trust (in order to have the assets declared as part of the other or both spouses’estates) will possibly be hard to prove.
Spouses or prospective spouses must remember that trust assets in principle fall outside the spouses’ personal estates, and therefore won’t be taken into account in case of divorce when it comes to the division of the spouses’ estates with regards to their matrimonial property system.
If there is any suspicion of the intention of the trust not being adhered to, a spouse would be able to approach a court, with a separate lawsuit, to have a trust declared as an ‘alter ego’ or ‘sham trust’, which would effectively entail that the trust would not be legally acknowledged, as indicated in the cases above.
In addition the Divorce Act grants a discretion to courts to redistribute the assets in the case of divorce of a marriage concluded out of community of property before 1 November 1984. In such cases, a court can grant a more penalising division- or maintenance order than it would normally do, if the court is of the view that one spouse is in control of significantly more trust assets. Take note that the court does not grant an order towards the division of trust assets, but takes it into account when the division order is made.
It’s therefore important that prospective spouses timeously gather the necessary legal advice to eliminate or limit the future abuse of trusts and the application thereof on their chosen matrimonial property system.