Can your Trust Survive a Divorce?

Divorce statistics are staggering and the dissolution of a marriage is rarely a simple and amicable affair. A trust can provide excellent protection for assets provided that it is set up and administered correctly.

There are a number of statutes which pertain to marriage and determine the legal standing of the spouses and their rights to any benefits. However, irrespective of the marital regime which governs the relationship or marriage, on the dissolution thereof, a demand will be made for a share of assets, investments and/or maintenance. Where a Discretionary Trust is dragged into the fray, a number of interesting scenarios arise.

Scenario 1: While the Trust and all Trust assets are not part of either spouse’s estate and accordingly the Trust has no role in the divorce proceedings, the spouses, who in this scenario are both Trustees, will want to part ways. The Trust could be unbundled or the assets could be distributed according to an agreement between the parties. If the parties cannot reach an agreement, the dispute resolution mechanism as detailed in the Trust Deed will be set into motion.

Scenario 2: The parties by agreement choose to include in their divorce settlement agreement a clause or paragraph which deals with the unbundling or dissolution of the Trust or distribution of assets.

Scenario 3: If one of the parties is not a Trustee or a beneficiary, he or she has no right to see the financials or asset registers, request any actions, demand any distributions or dictate the operations of the Trust. Where the spouse is a beneficiary but not a Trustee, the same applies, except for an entitlement to see the financial statements. By way of court action, a beneficiary can also seek relief if he or she can prove that the Trustees have breached their fiduciary duties or have acted contrary to the purpose of the Trust or in a manner which will prejudice the Trust and beneficiaries. The onus of proving such actions is on the beneficiary. The hapless spouse in this type of scenario does not have much recourse against the Trust in obtaining assets.

Scenario 4: Where a spouse is not a Trustee or a beneficiary, he or she will in all likelihood subpoena the trust for information if it is not produced on request. The spouse will seek to convince the Court that the Trust is nothing but a sham or an alter-ego of the other spouse, and that the Trust assets are in effect the assets of the said person and should therefore be deemed to be part of their estate, which would make them subject to the divorce proceedings.

This may be proven if:
•the Trust is not properly drawn up,
•clauses in the Trust Deed undermine the fact that the Trust is separate from the Trustees,
•the Trust is not properly administered,
•accounting records, minutes and resolutions are not properly drawn or attended to,
•it is evident that the Trustees do not meet,
•there is control by one of the Trustees over the assets,
•there is no independent Trustee.
If the Court finds that the Trust is nothing but a sham or can be considered an alter-ego of the spouse, it will order that the assets of the Trust be taken into account in dividing the assets between the spouses.

Trusts are excellent asset protection, succession planning and estate duty planning vehicles, but to enjoy protection from a spouse, creditors and SARS on your death, the Trust must be properly drawn up, the Trust Deed must contain no pitfalls and all the minutes, resolutions, administration, accounting and tax affairs of the Trust must be in order. It is imperative that the Trust is seen to be legally and factually independent from all individuals, to protect the assets held within it.