Before delving into the divorce law concerning trusts, let's recap on trust law and the elements of a South African Trust.
The main question concerning trusts and divorce is whether a trust constitutes part of a spouse’s personal assets and therefore their personal estate? i.e. Should the Trust be included or excluded in determining the estate of a spouse when going through divorce proceedings?
The answer is briefly that the South African law holds the position that a trust property cannot be considered a part of a spouses’ estate for the purpose of determining the value of an estate in the case of a divorce.
The reason for this is that a trustee does not become owner of trust property, but merely holds the property for the benefit of third parties or beneficiaries.
Assets which are donated or sold to the trust are legally owned separately from the donor and the trustee’s personal estate, and accordingly do not form part of the personal estates of the donor or trustees.
Although the South African law hold this position, a trust property is not always entirely irrelevant, and should not always be excluded due to certain circumstances which will be explained.
The misuse or abuse of trusts is the main reason for a court to create a ruling whereby the trust assets are included in the personal estate of a spouse and therefore redistributed.
It often occurs that trusts are not in fact managed or administered correctly. The misuse and abuse of trusts is usually used with the intention of eluding creditors (including spousal claims) and can be separated into two main categories: the “alter ego” and “sham trusts”.
If this is not discovered, then the courts would look through the trust as if legally, it didn’t even exist.
One factor that the court may consider is that certain assets (usually quite substantial) may be held in a trust by one spouse who uses this trust as an 'alter ego'.
There are two vital elements that are required to be proved by a spouse who claims the other is using a trust as an ‘alter ego’:
By doing so, the core idea of trust assets is violated, which is to maintain a separation between the control of trust property and the enjoyment of the benefits derived of such control.
A sham trust involves the founder donor of the trust, and / or the chosen trustees, having no intention for the trust to be a trust. Where a trust is held to be a sham, it is due to the non- or simulated- compliance with essential elements for creating a trust.
The courts will examine various factors when deciding if a trust as a ‘sham trust’, including:
Whether trust assets are managed independently from the personal estate or the trustee or donor (resulting in the trust not functioning separately) or not;
Especially if it seems vague, or unlawful;
Each case is different, and whether a court will decide to rule a trust as a sham trust will decide on the facts of the case.
It is extremely important that the declaratory order be sought by the plaintiff to have a trust declared as a sham trust before the divorce proceedings have taken place, so that the assets may be taken into account at the distribution of the spouses estates. The reason for this is that these are two completely different legal proceedings.
However, if the trust is discovered to be a sham trust, then the court will handle the assets of the trust on the basis as if there had been no trust, and consequently it can merely be regarded as part of the donor or trustee’s assets or estate.
In such cases the court effectively denies the existence of a trust and ensures the assets are not acknowledged as trust assets, but merely as part of the personal estate of one or both of the spouses. Such assets will be taken into consideration at the distribution of estates in terms of the relevant marital regime (or matrimonial property system) which is applicable to the spouses’ marriage.
One must consider the following when attempting to determine the ownership of trust assets:
Or is it merely a “corporate veil”?
The ‘corporate veil’ may be pierced if evidence of some form of misuse or abuse of trust assets is found. This may be used to establish whether the trust is simply an alter ego of a spouse.
If a spouse has transferred assets into a trust approaching a divorce action with intention to deceive or defraud their spouse from their potential claim, then the validity of the trust may be suspected due to a lack of bona fides from the founder donor or the trustees of the trust.
Was it the intention of the married spouse to transfer assets of a joint estate (when married in community of property) to benefit themselves and their children?
Then the spouse may apply to set such a trust aside on divorce and the assets may form part of the communal estate.
Where one spouse is a trustee and the other spouse a beneficiary, a conflict of interest may arise during a divorce action. In such cases, the latter spouse may approach the court in order to apply for the dissolution of the trust, or for a substitution of trustees.
In this type of circumstance the court should be satisfied that it would be in the best interest of the beneficiaries to grant such a relief.
When property (assets) is transferred into a trust, the reason given for such a transaction is usually either:
When one makes a donation, tax has to be paid; or
In the event of a sale, the purchase is usually reflected as a loan account in favour of the seller.
However in practice, it is often found that no indication is given as to a reason for the transfer of assets into trusts. Without the proof of a donation, or a purchase consideration, such a transfer would create a loan account which is an asset in the estate of the transferor.
When assessing the proprietary consequences of divorce following this type of marriage, the court is confined to merely to directing that the assets of the joint estate be divided into equal shares.
The court concerned with this type of marital regime accordingly has no discretion to include the assets of a third party (trust fund) in the joint estate.
The Divorce Act specifically states in this context that trust assets held by a trustee, do not form part of the personal property or assets of such trustee as a matter of law.
For this type of marriage, because the spouse did not have the option of making accrual applicable to their marriages (as Act 88 of 1984 first brought accrual of property in), the court has the authority to grant the re-division of assets between spouses.
Generally, the courts will create a ruling whereby the plaintiff spouse will receive 50% (and also generally no more than 50%). This is the way in which the interpretation of the Divorce Act developed from court judgements, although the court does have clear discretion in terms of the Act.
The courts will, in some instances, where one spouse is found to have effective control over various trust assets, order heavier divisions, as for example, an increase of maintenance load.
Van Deventer & Van Deventer Incorporated attorneys in Sandton have the knowledge and determination to give you the best service in terms of the legal facilitation of your divorce, and can provide expert trust law advice.
Contact us today to find out more.
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