When a spouse hides assets away in a trust…

In a divorce, it may transpire that one spouse has during the marriage transferred assets to a trust. This raises the question of whether such trust assets are excluded from the calculation of accrual where the parties are married out of community with the accrual system. In this article, we take a look at what has been termed ‘alter ego’ trusts and how our courts treat these when it comes to divorce proceedings.

A trust is defined as the arrangement through which ownership in property belonging to one person is by virtue of a trust instrument made over or bequeathed, to another person, namely the trustee, in whole or in part, to be administered or disposed of according to the provisions of the trust instrument for the benefit of the person or class of persons designated in the trust instrument or for the achievement of the object stated in the trust instrument.

The Trust Property Control Act 57 of 1988 governs trusts in South Africa and provides that trust property is separate from the trust founder or trustee’s private property. This means that the property belonging to the trust does not form part of the founder or trustee’s personal estate.

Where a spouse therefore creates a trust often under the guise of protecting assets from creditors and moves assets into a trust, this results in those assets no longer potentially being recognised as the property of the spouse and relevant to establishing the value of the spouse’s estate for calculating accrual. 

In divorce matters where the spouses are married out of community of property subject to the accrual system, the Matrimonial Property Act 88 of 1984 is used to determine which assets need to be included when calculating the value of each spouse’s estate.

In instances where a spouse has created a trust with the intent of depriving a financially weaker spouse of the matrimonial claim for which they are entitled when their joint estate is divided (in marriages in community of property) or their accrual claim is calculated, a court can decide that there was abuse of the trust and that in effect the trust remains an extension of the spouse’s estate i.e. that the trust should be regarded as an alter ego trust. In such an instance the Court can pierce the trust veil and regard the trust assets as part of the trust founder or trustee’s personal estate when dividing the joint estate or calculating the accrual.

However, the spouse claiming that there was abuse of the trust, will have to prove that their spouse transferred assets to the trust, is also a trustee or beneficiary of the trust, has control over and manages the trust assets, and is a beneficial owner of the trust assets. Further, it must be shown that if it had not been for the creation of the trust, the assets would have formed part of the personal estate of the trust founder or trustee. Should the court be satisfied that an alter ego trust exists, it may pierce the trust veil.

The exercise of this common law power by our courts was confirmed by the Supreme Court of Appeal in PAF v SCF 2022 (6) SA 162 (SCA), where the court held that “where the trust form is abused to prejudice an aggrieved spouse’s accrual claim, a court should exercise its wider power in terms of the common law to prevent such prejudice.” This was motivated by the lack of legal remedies available to the financially weaker spouse to claim the value of their financially stronger spouse’s assets which they concealed in trusts and because the Matrimonial Property Act and Divorce Act 70 of 1979 does not make provision for claims where the value of matrimonial assets are held in a trust created with a fraudulent purpose.

Importantly, assets held in a trust are not automatically considered to form part of a spouse’s personal estate for purposes of the division of a matrimonial joint estate or accrual calculation. A spouse who wishes to claim that an alter ego trust exists would need to apply to the court for the inclusion of the trust assets in the calculation of accrual or division of matrimonial assets and would require legal advice on the merits of such a claim by a family law specialist as well as assistance in applying to court.

Disclaimer: This article is the personal opinion/view of the author(s) and is not necessarily that of the firm. The content is provided for information only and should not be seen as an exact or complete exposition of the law. Accordingly, no reliance should be placed on the content for any reason whatsoever and no action should be taken on the basis thereof unless its application and accuracy have been confirmed by a legal advisor. The firm and author(s) cannot be held liable for any prejudice or damage resulting from action taken on the basis of this content without further written confirmation by the author(s). 

January 16, 2024
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