Estate planning and trusts in the divorce context

The creation of trusts for estate planning purposes or for tax purposes

In terms of South African statutory provisions, trust assets vest in a trustee of a trust in his/her capacity as trustee – held separately from his/her personal estate.  In divorce matters, in particular where one deals with larger estates, we often find that some, or all, matrimonial assets are held in trusts, created for estate planning purposes or for tax purposes.  It is however not unusual for the only substantial asset, such as the matrimonial home, to have been placed in trust by one of the spouses during the course of the marriage.  Usually the children of the parties will be the beneficiaries and one of the parties the trustee together with an accountant.  Often, the party/spouse who has created the trust will ensure that he/she retains effective control of the trust assets and controls the decision-making process of the trust.  This is done by, for example, retaining the power to remove and substitute trustees.

The “sting in the tail” when using trusts as your alter ego

Commercially, using a trust merely to protect or shield assets from creditors in your estate invites risks of a court finding that the trust was used as the founder’s alter ego.  In such an instance, and in order to satisfy the claim of creditors, a court may declare the assets held in a trust to be the personal assets of the founder of the trust, thereby exposing the assets to attachment and rendering the assets executable.  [(First National Bank v Britz and Others [2011] ZAGPPHC 119; 54742/09 (20 July 2011)].  The leading South African case on the subject of “lifting the corporate veil” in a commercial context is Cape Pacific Limited v Lubner Controlling Investment (Pty) Limited & Others 1995 (4) SA 790 (A).  While in commercial cases it seems clear that our courts in certain circumstances are prepared to look at the substance of commercial entities and not merely their form, the corporate veil is, on the facts, rarely lifted.  In the divorce context, the approach of our courts has been similarly conservative, and the courts will not readily assail trust assets when dividing or distributing matrimonial assets.  On the other hand, there are instances where interests in trusts are taken into account without the necessity of lifting the trust veil.

Trust assets in South African law

There are no express specific statutory provisions which allow courts in South Africa to automatically treat trust assets as matrimonial assets in a divorce context or for that matter to make orders against a trust to transfer trust assets to a spouse.  The question which arises is: how to deal with a spouse’s interest in a trust when dividing the matrimonial assets or in the context of determining a maintenance claim?

Broadly, trust assets in South African law can be taken into account in certain instances such as where the trust is a sham and it is proved that the trust is not a genuine arm’s length entity, where a spouse has a claim for a redistribution of assets in terms of S7(3) of the Divorce Act 70 of 1979, or where the spouse has a claim against the trust as a loan creditor. A spouse’s interest in a genuine trust may also be relevant in determining a maintenance claim.

In the judgment of Badenhorst v Badenhorst (07/2005) [2005] ZASCA 116; [2006] 2 ALL SA 363 (SCA) (29 November 2005), the rule was laid down that in order to succeed with a claim that trust assets are to be included in a party’s personal estate, it must be proved that such a person actually controlled the trust and, but for the trust, would have acquired and owned the relevant assets in his or her own name.  The control which is exercised by the party must be de facto (in practice) and not de iure (in law).  In order to determine whether a party has de facto control, it is necessary to have regard to the terms of the trust deed and also to consider evidence of how the affairs of the trust were conducted and managed historically.  Accordingly, it may be easier to challenge the authenticity of a trust which was established by a spouse to frustrate the other spouse’s claim in circumstances where a divorce is pending or is contemplated.  It will be more difficult to challenge the genuineness of the trust there the trust was established during the course of the marriage well before the parties contemplated divorce proceedings for estate duty planning purposes or for tax purposes.

The provisions of the trust deed and an examination of past financial transactions of the trust, how the trust was conducted and managed, and determining whether the spouse in effect treated the trust assets as his own – with complete control over the assets – is essential.

In maintenance enquiries, income derived from a trust entity by a party, can be taken into account as part of a spouse’s resources.  It would be necessary to prove that the relevant spouse, historically, had access to capital and/or income from the trust.  In the unreported decision of Senior v Senior WLD Case Nol 98/22297 it was held that when making an order for personal maintenance it would be “proper and realistic to take into account all the parties’ resources, including the potential ability to receive or the likelihood of the receipt of benefits from discretionary family trusts.”