Death and divorce with a trust

Divorce

Upon divorce, the impact on the trust depends on the type of marital regime the couple had.

  • Marriage in community of property: If you create a trust then you, as the estate planner, require the consent of your spouse to sell or encumber to a trust any assets that are not excluded from your joint estate. 
  • Out of community of property excluding accrual: Each spouse retains the assets in his/her own estate, and the transfer of assets into a trust by one spouse will not affect the estate of the other spouse. Thus, if divorce occurs, one spouse should not have a claim against the assets held in trust by the other spouse.
  • Out of community of property with accrual: In this case, a spouse may also transfer assets to a trust. Usually, assets are sold by the estate planner to the trust on a loan account. The trust is unlikely to have the means to pay for the assets transferred. The loan or the cash, including the growth thereon, will be include in the estate of the spouse who sold his/her assets to the trust.

It’s important that future spouses timeously gather the necessary legal advice to prevent or limit the future abuse of trusts and the application thereof on their chosen matrimonial property system.

Death

Many people make revocable living (inter-vivos) trusts to hold assets while they’re alive. These trusts then become irrevocable upon their death. The purpose of this is to avoid the time and expense of probate (i.e. your family will not have to go to court to authenticate your will after your death in order to access your assets).

A testamentary trust, on the other hand, doesn’t become effective until after your death. Testamentary trusts are often created within wills and are generally funded only after your death often with the assets of your estate. To fund a testamentary trust, language in the will must explicitly state that all estate assets should be moved into the trust upon death. The estate assets can then be distributed and managed according to the terms of the trust.

A main reason founders choose to transfer assets into trust is for succession planning. Once the asset forms part of the trust, it will be owned by the trust itself; the death of the founder, trustee, or any of the main beneficiaries does not affect the ownership of the asset.

It is important that the trust deed is specific about what should happen to the assets in the event of the death of any of the main beneficiaries.