Insolvency and Trusts

By Ronel du Preez

Once a trust has been set up and registered, the process of transferring assets into that trust can begin. The process of transferring assets will be either by way of donation or sale, and where necessary the transfer will be registered ( for instance your house). The “trusts property” must always be clearly identifiable. In terms of section 12 of the Trust Property Control Act, 57 of 1988, the trust property does not form part of the personal estate of the founder or trustees and thus are beyond the reach of creditors. However the assets are not immediately safeguarded from the issues of insolvency. There is a time period during which the court could determine that the assets transferred can be deemed to be the assets in your estate upon insolvency.

In terms of Section 8, 26 and 29 of the Insolvency Act, 24 of 1936, a period of 6 months must elapse, if you were solvent at the time of the transfer, or up to 24 months (2 years) in the case of insolvency.

Six (6) Months:
You are determined by law to be solvent if the value of your assets exceeds the value of your debts. Note that all debts are taken into consideration e.g. bonds, loans, hire-purchase, credit cards, outstanding taxes etc. If this is the case after the expiry of 6 months the assets transferred into a trust will be protected from attachment during insolvency.

Twenty-four (24) Months:
Conversely you are determined by law to be insolvent if the value of your debts exceeds the value of your assets. In this instance the ‘waiting time’ is the expiry of 2 years before the assets transferred into a trust will be protected from insolvency. A common error made is that a person only considers themselves “insolvent” if there has been a court order specifying same. However as seen above you can in fact be held to be insolvent in law if the above criteria applies.

It is also a common misconception that an asset owned by a spouse, where the marriage was out of community of property, is protected from the issues of insolvency. In terms of section 21 of the Insolvency Act all the property of the solvent spouse will be included in the estate of the insolvent spouse. The onus to prove that the property must be excluded falls on the solvent spouse and is not automatic. A way of avoiding this is to ensure that all assets of both spouses are placed in a trust before there are any concerns of insolvency.

We all need to protect our assets from creditors, personal claims, sureties we signed and from businesses going sour. However the trust ‘veil’ can be penetrated should assets be transferred into a trust with the sole purpose of avoiding the creditors at the door. The Insolvency Law protects all parties including the creditors from the unscrupulous debtors who move their assets into a trust to avoid the creditors.