May 2015: Your House In A Family Trust – What Happens To It On Divorce?
“….. trust assets held by a trustee in trust, do not form part of the personal property of such trustee as a matter of law”
(extract from judgment below)
What happens if your home is registered in the name of a trust and you get divorced? Do you get a share of the house’s value?
A trust attacked
A recent Supreme Court of Appeal (SCA) judgment illustrates –
- A husband and wife had married in community of property.
- On divorce, the wife claimed a 50% share in their matrimonial home on the basis that it fell into the joint estate.
- The husband countered that the house belonged to a discretionary family trust of which he and his brother were the trustees, the beneficiaries to be chosen by them from amongst his children.
- Before they were married, the parties had moved into the house. The trust had bought it 2 years after that.
- The parties married a year later, and lived on in the house for another 9 years until divorce.
- The wife argued that the trust’s assets fell into the joint estate because –
- Her husband had deceived her, saying that the property was registered in a trust purely to protect it from his business creditors, that they would agree on who would be beneficiaries, and that she would get 50% on divorce
- The trust was her husband’s “alter ego” in that he controlled it for his personal benefit in order to amass his own wealth.
- The High Court agreed with the wife and ordered that the trust’s assets fall into the joint estate.
- The SCA however allowed the appeal on the basis that -
- There was on the facts no evidence to support any of the wife’s assertions of deceit
- Even if the trust was the husband’s “alter ego” (the Court made no finding on this) the wife was neither a beneficiary nor a transacting third party – she therefore had no standing to challenge her husband’s management of the trust.
- The end result - the trust keeps its house, leaving the ex-wife to pay some (no doubt substantial) legal costs.
Lessons for trustees and spouses
A critical factor here was that the parties were married in community of property, the court in such a case being as a general rule confined to ordering a 50/50 split between the spouses.
In contrast, with a marriage out of community of property, a divorce court has a wide discretion to redistribute assets between the parties and to order that a particular asset (including an asset of a third party like a trust) belongs to one or other of the parties. Had the parties in this case been married out of community of property, the wife’s allegations of mismanagement of the trust would have been relevant and could have changed the outcome.
Two things to take away from this case –
- Before you get married, take advice on whether being married in community of property is your best option – for many couples, marriage out of community (with or without accrual) is likely to be a better choice. That certainly would have given the wife in this case a much better shot at getting a share in the house. Your ante-nuptial contract should record your respective rights to any assets (including any interests in trusts, companies etc) in the event of divorce.
- As a trustee, ensure that you establish and manage your trust strictly as required by law, with particular reference to the requirement that control of the trust’s assets be clearly separated from enjoyment of them. Failure to do so greatly increases the chance of attack by creditors and ex-spouses.
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