Estate planning and divorce: Making a spousal donation

October 24th, 2016
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By Edrick Roux

‘Usually, there should be substance to any “void” movement so that you won’t be defeated. It will amount to useless adventure if there is no solid backing’ (Tao Hanzhang (author) Yuan Shibing (translator) Sun Tzu’s Art of War the Modern Chinese Interpretation (New York: Sterling Publishing Company Inc 2007 at 142). Thus any action which is undertaken, should have a foundation built on reason behind it and no action should be taken simply on a whim or without any thought.

Although Sun Tzu was referring to the movement of military forces in a conflict situation, the principle, which lies behind them should resonate with any professional assisting their clients with their estate planning.

Estate planning is a comprehensive exercise and should generally incorporate an investigation into the bequests of the assets of an estate planner in order to ensure that they accomplish their personal goals (usually catering for their family) while also ensuring that the estate will be left solvent.

It is a common misconception that estate planning only relates to the situation which arises once the estate planner has passed away, however, in reality this process must be instituted as early as possible as it will often involve regular amendments to Wills and Trust Deeds, as well as the transfer of assets.

This is particularly the case where there is a fear that an estate will be insolvent in future or where an estate planner is involved in a risk intensive industry and would like to ensure that his family will be protected should his creditors come knocking on the door one day.

From time to time the situation may arise where an estate planner may wish to transfer some of their assets from their personal name to that of their spouse by way of a donation.

As alluded to above, this is usually done as part of an estate planning exercise and is generally used to provide some protection for assets.

Of course in a world where one is constantly confronted by the threat of creditors looming on the horizon, particularly in high risk professions, donations may also be made for the purpose of simply ensuring that assets are kept safely out of the estate planners name and thus safe from creditors – provided of course that these donations are made well before any such risk actually manifests in order to ensure that it does not run the risk of being seen as a voidable disposition in terms of the Insolvency Act 24 of 1936 (the relevant provisions dealing with dispositions are covered in ss 26 – 31 of the Insolvency Act). This is only beneficial to the estate planner when it is done in the context of a marriage out of community of property.

Donations as a method of protecting assets and accrual claims

This could then lead to a much more complicated problem, however – although we generally want to believe the best of our respective spouses, there is always a risk that the marriage will fall apart.

Take the following example – X, a business man who is in a high risk profession, has recently inherited an extremely valuable property and decides – on advice to – donate the asset to his wife Y to whom he is married out of community of property, subject to the accrual system, instead of transferring this asset to a trust to remove it from his personal estate in order to avoid incurring unnecessary taxes. After this donation has occurred Y decides to file for divorce.

The property has now been excluded from the accrual claim as it is a donation made to a spouse in terms of the provisions contained in s 5 of the Matrimonial Property Act 88 of 1984, and furthermore there is still the possibility that X, assuming he is the breadwinner between the two spouses, would still have to pay an amount to Y in terms of the accrual system.

Therefore, Y would have received the property and could potentially claim additional assets by way of the accrual claim.

As the saying goes ‘a divorce is like an amputation; you survive, but there’s less of you.’ (Margaret Atwood Time 19-3-1973).

The scenario above clearly illustrates the potential pitfall of using a donation to ones’ spouse to keep assets safe – since the protection provided by using this method of safeguarding assets is only as strong as the conviction of the parties to the marriage.

Irrevocability of donations

Donations – which now include donations which are made between spouses which were originally revocable by nature – as a general rule are not revocable. The author Voet, however, expressly provides that there are certain instances which, should they arise, would allow the revocation of a donation (LAWSA vol 8(1) 2ed (Durban: LexisNexis) at 310).

These are exceptional circumstances and, as such, will not generally be applicable to a donation; however, one of these instances, namely the showing of gross ingratitude towards the donor will allow for the donor to revoke any donation which had been made.

Voet goes as far as to say that the donor is allowed to revoke the donation on the strength of any act of ingratitude shown towards the donor (LAWSA (op cit)).

Exception to the rule of irrevocability of donations

Allowing for the revocation of a donation on the basis of nothing more than gross ingratitude would, however, defeat the purposes of rendering such transactions irrevocable in the first place.

As such there are certain requirements, which must be met in order to justify the revocation of the donation on the strength of an act of ingratitude (LAWSA (op cit)). The donor would need to show the following in order to be able to successfully claim for the revocation of a donation:

  • The alleged act of ingratitude shown must be of a sufficiently serious nature.
  • The act must also be accompanied by dolus.

In determining whether an act is of a sufficiently serious nature, a factual investigation must be lodged to show what damage, if any, has been caused by such an act in order to determine whether the act is of a serious nature.

Of course, as Goethe once said, ‘Everything is both simpler than we can imagine and more entangled than we can conceive’ (J Lloyd & J Mitchinson Quotes for Quite Interesting Times (London: Bloomsbury House 2010) at 302), thus it is necessary to bear in mind that the term sufficiently serious can be interpreted in a multitude of ways.

Therefore, it does not necessarily refer only to damages being suffered, but rather to any conduct which could reasonably be assumed to have caused undue duress to the donor and this could be used to infer that there has been an act of gross ingratitude, which was shown to the donor.

Take the example where X has given Y a bicycle because of their friendship. In the event where Y is then discovered to have been wooing X’s fiancée and has convinced her to leave X in favor of himself, it is unlikely that there will be any conduct which could justify a claim for damages being instituted, yet the conduct of Y would, in my opinion be sufficient to be seen as being of a sufficiently serious nature to justify the revocation of the bicycle.

Thus it is important to note that it is not necessary to prove any damages, such as financial loss, in order to show that an act is sufficiently serious, however, where there are damages, particularly financial loss, coupled to the act the inference that it is sufficiently serious may well be strengthened.

The second requirement, namely that the conduct must be accompanied by dolus is self-evident and bears no further explanation.

Should these two requirements be present in a given situation, it would theoretically become possible to revoke a donation. It then becomes necessary to determine exactly what would qualify as an act of ingratitude.

Ingratitude

The term ‘ingratitude’ is defined in the Oxford Dictionary as follows:

 ‘[A] discreditable lack of gratitude’ (A Stevenson and M Waite Concise Oxford English Dictionary 12ed (New York: Oxford University Press 2011)).

This definition leads one to conclude that ingratitude is an exceptionally widely defined concept and could include a variable cornucopia of scenarios and actions.

It would not be an easy task, if it were in fact possible at all, to create a comprehensive list of all actions, which could potentially constitute an act of gross ingratitude.

I submit that the question of whether a specific act could in fact qualify as an act of gross ingratitude should be determined by way of a factual investigation into the substantive facts that surround the circumstances, which the donor relies on to try to claim the revocation of a donation.

Revocation of a donation between spouses due to divorce

Where a divorce is based on a mutual decision to bring a marriage to an end, there can be no doubt that the donation will, barring the presence of any unknown circumstances, generally be irrevocable since there could not be any damages caused by any act of ingratitude as both parties mutually consented to dissolving the marriage nor could one justify the statement that there is gross ingratitude for the very same reason.

However, where there is an underlying cause for the divorce linked to a single spouse, which is both intentional and of a sufficiently serious nature, for example the infidelity of such a spouse, the situation may well be very different.

An argument could then be made that this infidelity, being sufficiently serious enough to have caused an irretrievable breakdown of a marriage – the seriousness of which would be even more evident where it is a marriage which has subsisted for some time prior to the infidelity occurring – between the parties and by the very nature of the act could only be an intentional act, should fall well within the confines of the term gross ingratitude.

Therefore, in my opinion this would, theoretically at the very least, justify the revocation of the donation and could then lead to some recourse for the spouse who was not involved in the infidelity.

Although this situation is not likely to arise any time soon, it is never a bad idea to be prepared for whatever could arise.

Conclusion

Ultimately it becomes the weighing of options after having been provided with an informed opinion by a skilled estate planning professional, what is the bigger risk – being at risk from creditors or being at risk of a potential accrual claim.

Although it is theoretically possible to reclaim a donation, which has been made on the grounds of gross in gratitude shown to the donor, it is definite that the assets donated to a spouse are excluded from an accrual claim.

It is true that the risk of having a donation excluded from an accrual calculation could be mitigated, if not entirely extinguished, by having the appropriate clauses included in an antenuptial contract, it may be prudent to think carefully before donating any assets to a spouse as part of an estate planning process in any event as there may be other alternatives available.

A divorce is never a pleasant experience and the last thing that anybody has strength for during that process is solving more problems, particularly problems which have been caused by your own attempts to forestall other problems from arising in the first place.

It becomes a necessity to ensure that your clients are not only aware of the potential problems which could arise, but also that they are aware of all of the possible pitfalls and how they can be dealt with in future.

 

Edrick Roux LLB (UP) is an attorney at PricewaterhouseCoopers Africa in Johannesburg.

 

This article was first published in De Rebus in 2016 (Nov) DR 36.

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