Will a trust protect my assets during divorce?
Yolande Wessels Even in 2019, prior to the pandemic, StatsSA revealed that almost one in five South African marriages end in divorce. While it will take some time for StatsSA to officially announce the divorce statistics between 2020 and 2021, South African family lawyers have acknowledged a rise in the divorce cases they have seen since lockdown regulations began. With this, comes the increased likelihood of trusts being involved in the distribution of estates, so careful estate planning could not be more important. Often during divorce litigation, the issue arises of whether trust assets should be included or excluded to determine the estate of a party. The position in South African law is that a trustee (in their capacity as trustee) does not become the owner of trust property, but merely holds such property for the benefit of the beneficiaries. For this reason, trust property cannot be considered as part of a persons estate for the purposes of determining the value of his or her estate during divorce cases. However, a mistake that often occurs is that the requirement that trust assets be kept, owned, and administrated separately from the trustees personal assets is not met. This is despite the fact that such assets should be regarded and legally acknowledged as belonging to the trust (and not as part of the estate of the founder or trustees). This lack of good governance can come back to bite in divorce cases, as one of the factors that the South African courts may consider is whether assets were held in trust by one of the parties who can also be deemed to have used the trust as his or her alter ego. Well-known case law in South Africa has established that if it is found that a trust is being operated as the alter ego of one party, and is therefore deemed an alter ego trust, then the assets within the trust may be included in the determination of the financial means of such party and the assets may then be considered in the divorce settlement. It is therefore important to do two things: Firstly, before you get married, take advice on the best matrimonial property regime for your circumstances. Your antenuptial contract should record your respective rights to any assets, including any interests in or potential benefits from trusts. Secondly, as a trustee, ensure that the trustees manage the trust strictly as required by law. Pay special attention to the requirement that control of the trusts assets be clearly separated from enjoyment of those assets and ensure that this is achieved by good governance. How to spot an alter ego trust: The trust is set up with the specific purpose of cheating or prejudicing a spouse, particularly to avoid the legal workings of their matrimonial property system. The trust assets 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 from that person. The trust is not properly administered, and accounting records, minutes and resolutions are not properly drawn or attended to. The de facto management and administration of the trust assets are handled as if they still form part of the trustee/founders personal estate. The founder did not have the intention to establish a trust for the benefit of the beneficiaries, but rather to keep assets outside of his estate to avoid the legal consequences of the matrimonial property system. The founder has more rights than his co-trustees, for example he has the sole right to replace his co-trustee(s) (the so-called power to hire and fire trustees), veto decisions or change beneficiaries. There is no independent trustee. Whether a court regards a trust as an alter ego trust will depend on the facts. But, if it is found to be considered an alter ego of one of the parties, the assets of the trust will be dealt with as if there had been no trust for the purposes of the divorce proceedings and can be regarded as part of the founders estate. It is essential to agree on how to deal with the family trust during a divorce process, even if there is no suspicion of a trust being an alter ego trust. Citadels Fiduciary experts have previously assisted clients to rectify situations where a trust was not considered in the divorce and no agreement was reached regarding, for example, the terms of the resignation of the estranged spouse as a trustee and his/her removal by consent as a beneficiary, etc. When a trust is not properly governed, this can be overlooked and then, often years later, when the governance is being brought up to the required standard the ex-spouse can be un-cooperative and refuse to sign documents or exit the trust without again involving attorneys and reaching a further settlement agreement. If you suspect your estranged spouse of operating an alter ego trust, it is of utmost importance that you seek a separate declaratory order to have the trust declared an alter ego trust before the divorce proceedings are finalised, as this is the only way the trust assets will be taken into consideration before dividing the estates. If you are a co-trustee on a family trust established by your spouse, ensure from the outset that you actively participate in the administration of the trust, understand the operations of the trust, and do not blindly sign documents without ensuring that you are aware of the legal and other ramifications of doing so. You must never be a passive trustee merely rubber-stamping documents.