It is a common occurrence on many trusts that spouses either act as co-trustees, or one spouse acts as a trustee while the other is merely a beneficiary.
These 2 scenarios share some similarities when it comes to the parties divorcing, but there are important differences which must be addressed:
a. When both spouses are trustees
In the case of divorce where both spouses are trustees, the one who made the majority of the contributions toward the trust would often feel that they deserve to have control over the trust assets and expect the other spouse to resign as trustee. Although this might seem “fair” to the party who made the majority of the contributions, this is the reasoning of a trustee who considers the trust assets their own (i.e., the trust is seen as an extension of themselves). Section 12 of the Trust Property Control Act provides that the trust property does not form part of the personal property of the trustee, except to the extent that a trustee is entitled to such trust property as a beneficiary in terms of the trust instrument. Any funds or assets received by the trust have been sold or donated to the trust and are legally owned separately from the donor or trustee. This is the principle that the trustees rely on when it comes to estate planning and tax benefits. Therefore, it cannot be deemed to differ in reason with divorce.
In the case where both parties are trustees, one possibility could be that the trustees come to an arrangement where the assets of the trust are distributed in accordance to an agreement between the parties. In the case where the parties cannot come to an amicable agreement regarding the assets of the trust, the clauses contained in the trust with regards to disputes would then be applicable. It is advisable to familiarize oneself with the content of the trust deed – especially the clauses that come in to play when there are disagreements.
Another option is that the parties can, by agreement, decide to include a clause in their divorce settlement that specifically deals with the dissolution of the trust. However, as the trust does not fall within the estate(s) of the parties, it is essential that both are in agreement. The intention here is not to allege or imply in any way that the trust assets form part of the personal estates of the parties, but to emphasize the fact that the trust enjoys independence from the personal estates of the trustees and isn’t merely a sham or ‘alter ego’ of the parties. However, it is not the clause in the decree of divorce itself that is of most significance in this case, but the resolutions of the trust referred to in this clause, signed by all of the trustees, that would be binding on the trust, as it retains its separate identity.
b. When one spouse is a trustee, and the other a beneficiary
When one spouse is a beneficiary, or where they’re not but it is alleged that an intention of the trust was to specifically exclude the estate assets of that spouse to avoid them being considered for any accrual or division of property, a likely recourse in this scenario would be that they, the non-trustee spouse, attempt to have the trust declared a sham, or an alter ego, In short, a sham trust would be when neither the founder nor the trustees had the intention to create the trust. The court will take various considerations into account, including, but not limited to, the control of the assets of the trust or whether the actions of the trust are in line with the content of the trust deed. If they succeed in declaring it a sham, the assets of the trust will, in turn, form part of the personal estate of the parties and will then be subjected to The Divorce Act 70 of 1979 and the Matrimonial Property Act 88 of 1984, as the Trust Property Control Act is no longer applicable since there is no real trust. In the case where both of the parties are acting as trustees, the same remedy could be sought after, however, this would be harder to prove as the alleged aggrieved party played the role of trustee. To ensure that the above is of no concern, it is imperative that the trustees ensure that the administration of the trust is done correctly. If you have an independent trustee, annual financials, a proper record kept of the independence of the trust and act under advisement of the appropriate service providers, the trust will not be seen as a sham or alter ego.
In the case of a valid trust, the court does not have the authority to order that a trustee allocates trust property to a spouse. However, in practice, courts have previously taken into account the fact that one party has effective control of certain trust assets and the court has ordered heavier divisions, for example, increased maintenance.
Should none of the above options be suitable, the last option would be to, as an interested party, take the matter to court and argue that the trustees are not acting in the best interest of the beneficiaries. In the case of a beneficiary of a discretionary trust and also in the case where both trustees are discretionary beneficiaries, this could be a very difficult allegation to prove, however.
Save for the above, there is always the possibility that, regardless of divorce, the parties to the trust continue to act in the best interest of the beneficiaries, and separate their personal affairs from their role as trustee. Unfortunately however, this is rarely the case.
Please bear in mind that the above is a very compacted summary of possible outcomes and recourses when spouses divorce and a trust is involved, and should not be considered as comprehensive legal advice. It should, however, be taken into account when forming a trust and appointing trustees. The intention of the trust, including the assets and source of funds, must be an influencing factor.