Should trust assets in the instance of a divorce be included in the estate of a spouse?

Trusts are excellent asset protection, succession planning and estate duty planning vehicles, but to enjoy protection from a spouse, creditors and the South African Revenue Service (Sars), the trust must be properly drawn up; the trust deed must contain no pitfalls; and the minutes, resolutions, administration, accounting and tax affairs of the trust must be in order. It is important that the trust is seen to be legally and factually independent from all individuals (including yourself) if the assets held within the trust are to be protected while you are happily married.

It often happens during divorce litigation that an issue arises concerning whether assets held in trust should be included or excluded when determining the estate of a party. South African law dictates that a trustee does not become the owner of trust property. Instead, the trustee merely holds such property for the benefit of third parties (beneficiaries). For this reason, in principle, trust property cannot be considered part of an individual’s estate for the purpose of determining the value of an estate in the case of divorce (Braun v Blann and Botha case of 1984). 

Although the above is the position in terms of South African law, it does not mean that trust property should be entirely irrelevant or should always be excluded. Considerations may apply to indicate the contrary, where the mere transfer of assets to a trust does not necessarily exclude these assets from division upon divorce. 

What should you do?

When establishing a trust, the founder should indicate his/her intention to create a trust by handing over funds or assets to the trustees, with the instruction to take control of and administer such funds or assets on behalf of the beneficiaries of the trust. Ensure your wishes are well captured in the trust deed. If you are not a beneficiary, you cannot receive anything from the trust, and you cannot take the trustees to Court. You should therefore ensure that you are both a beneficiary, and preferably also a trustee. There are no restrictions preventing the founder from also being a trustee and a beneficiary (Goodricke and Son (Pty) Ltd v Registrar of Deeds case of 1974), but the key is that the benefits must only accrue to him/her at the discretion of the trustees. He/she cannot be in any position to exert pressure on the trustees to pass a benefit on to him/her.

If a discretionary trust is involved, the following overarching principles should be taken into account:

• Regardless of the fact that a trust generally forms an integral part of one or both spouses’ estate planning, neither party has a claim on assets held in the trust, unless the trust form has been abused by a spouse, in which case the spouse could be accused of an alter ego scenario, should his/her actions demonstrate that he/she believes that he/she can do as he/she wishes with "his/her" assets in the trust.
• The trust is and should always be regarded as a separate entity; legally, factually, operationally and administratively.
• The spouses cannot act independently without the involvement of the other trustees, and sometimes the beneficiaries. You may require permission from beneficiaries who have already received benefits from the trust, or who have merely accepted benefits through written communication with the trustees. If you need protection, understand the position of the beneficiary well, especially in relation to the terms of the actual trust deed. 
• Should the spouses agree to an arrangement to either distribute some or all of the assets to the beneficiaries (including the spouses), or to dissolve the trust upon divorce, the following provisions of the trust deed should typically be observed:
  • Trustee decision making powers
  • Trustee decision making processes
  • Distribution provisions
  • Trust termination provisions
  • Dispute resolution mechanisms
• Should one of the spouses wish to remove the other spouse as trustee, the provisions of the trust deed must be observed.
• Should one of the spouses wish to remove the other spouse as a beneficiary, the provisions of the trust deed should also be observed. This process can be made difficult, especially in the event that the beneficiary has already accepted benefits from the trust (including in the form of a letter to the trustees), thus requiring the consent of such beneficiary to be removed. If you need protection, understand the position of the beneficiary well, especially in relation to the terms of the actual trust deed. 
• If one of the spouses is not a trustee or a beneficiary, he/she has no right to access the financial reports or the asset register; to request any actions; demand any distributions; or dictate the operations of the trust, even in the event of a divorce. Where the spouse is a beneficiary, but not a trustee, the same applies, except that he/she is entitled to view the financial statements (Doyle v Board of Executors case of 1999) and demand proper administration of the trust (Gross v Pentz case of 1996). 
• By way of Court action, a spouse, as beneficiary, can seek relief if he/she can prove that the trustees have breached their fiduciary duties, have acted contrary to the purpose of the trust, or have behaved in a manner that would prejudice the trust and its beneficiaries. The onus of proving such actions is on the beneficiary. Such a trustee can be removed on application of a beneficiary (Ras v Van der Meulen case of 2010, and Section 20 of the Trust Property Control Act).
• Where a spouse is not a trustee or a beneficiary, he/she will, in all likelihood, subpoena the trust for information, if it is not produced on request. The spouse may seek to convince the Court that the trust is a sham or an alter ego of the other spouse, and that the trust assets are, in effect, the assets of the other spouse, and should therefore be deemed to be part of the estate, thereby making these assets subject to the divorce proceedings. This may be proven if any, or a combination of, the following facts apply:
  • 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 over the assets by one of the trustees, typically the spouse 
  • There is no independent trustee

If the Court finds that the trust is a sham or an alter ego of the spouse, it may in certain cases, order that the assets of the trust be taken into account when dividing them between the spouses and the trust’s creditors. To date the only success was achieved where people got married before 1984 and were married out of community of property. The Courts, in these situations, take the trust assets into account for the determination of the redistribution amount under the Divorce Act.