Trust shown by spouses in family trust often exposed as deceit during divorce

In this article, one of a series on trusts, Phia van der Spuy looks at how trust assets are treated on the divorce of couples under different marital regimes.

TRUSTS are frequently used (and abused) by spouses as a vehicle into which they transfer their assets, using the trust for their own benefit and not for the benefit of third parties (the beneficiaries). There have been a number of court judgments where it was held that one of the factors a court may consider is when certain substantial assets were held in trust by one of the parties who used the trust as his/her “alter ego”. It is important to note that the marriage regime is a determining factor in the judgments.

In 2006, in the Badenhorst case, the parties were married out of community of property (before 1984) with a discretionary trust, with Mr Badenhorst being a trustee, but not the founder or a beneficiary.

The court found if it was proved that a trust was the “alter ego” of a party, the trust assets would be included in the determination of the means of such party. Proof was therefore required there was actual control of the trust assets.

The court held that while it appeared the assets were held in trust, they were, in fact, under the control of Mr Badenhorst, who was also one of the trustees and who made all the decisions concerning the trust, despite the appointment of co-trustees.

The court held that all the assets were deemed to be owned by Mr Badenhorst personally, and therefore had to be shared with his wife in their divorce.

In this case, the court set out two vital elements that are required to be proved by a spouse who claims that a trust is being used as an “alter ego” of his/her spouse:

That such spouse controlled the trust, irrespective of the terms of the trust deed; and

That, without the trust, such spouse would still have acquired and owned assets in his/her own name.

In the WT and Others v KT case in 2015, a husband and wife had married in community of property and had a discretionary trust.

On their divorce, the wife claimed a 50% share in their matrimonial home on the basis that it fell into the joint estate.

The husband denied this, and pleaded the house belonged to a discretionary family trust, of which he and his brother were the trustees, and that the beneficiaries were the parties’ children.

The wife’s legal team argued that the trust’s assets fell into the joint estate because her husband had deceived her regarding the reason the trust was established and that the trust was his “alter ego”.

The High Court agreed with the wife and ordered the trust’s assets fall into the joint estate, regardless whether she was a beneficiary or not.

The case was overturned on appeal on the basis that there was no evidence to support any of the wife’s assertions of deceit, and that even if the trust was the husband’s “alter ego”, the wife was neither a beneficiary nor a transacting third party, and she therefore had no standing to challenge her husband’s management of the trust.

The court held the spouses never owned the property in equal shares prior to the marriage, nor was it established on the probabilities that they ever concluded any agreement relating to the purchase of the property.

This decision reaffirms that property held by a trust does not form part of the personal property of its trustees, and that the courts may not grant an order stating otherwise, unless there is substantial evidence to indicate the trust is being used for improper motives by the trustees.

Because the wife had not contracted with the trust and was not a beneficiary of the trust, the court found she had no standing to challenge the administration of the trust. The result was that the trust would retain the house, leaving the ex-wife to pay the husband’s legal costs.

With a marriage in community of property, the court is generally limited to directing that the assets of the joint estate be divided in equal shares, and accordingly has no discretion to include the assets of a third party in the joint estate.

The Divorce Act specifically recognises – in this context – that trust assets held by a trustee in trust do not form part of the personal property of such trustee as a matter of law.

The distinguishing factor between the two cases is that the former case concerned the determination of a redistribution of assets in terms of the Divorce Act in relation to a marriage out of community of property, while the latter case dealt with a marriage in community of property.

Although both cases related to discretionary family trusts, it is evident from the Badenhorst case that, with a marriage out of community of property, a court has wide discretion to redistribute assets between the parties, and to order that a particular asset (including an asset of a third party such as a trust) belongs to one or more of the parties, which the courts are unable to do in the case of a marriage in community of property.

For couples married out of community of property with accrual, although the court cannot physically divide assets that are not in the estate of a spouse (being in a trust), it can, however, include them in the accrual calculation for distribution purposes.

To this end the Divorce Act was amended to provide for the redistribution of assets between spouses married out of community of property before November

1984, because they did not have the opportunity to make accrual of property applicable to their marriages. (An amendment to the Divorce Act in 1984 introduced the accrual principle.)

In the case of a marriage in community of property, a court has no comparable discretion, as envisaged in the Divorce Act, to include the assets of a third party (such as a trust) in the joint estate. All the court can do is to order a 50/50 split between the spouses of assets owned by the parties directly.

In the Mills case in 2017, a husband was alleged to have deliberately concealed assets by establishing trusts and placing assets and funds into trusts for the sole purpose of defeating the wife’s accrual claim. The wife lost the matter in the High Court, and again on appeal, because she was unable to establish any evidence to prove such conduct on the part of her husband.

The court held that the ambit of a claim of this nature must be considered with due regard for the provisions of the Trust Property Control Act.

Section 1 of this Act provides for the transfer of interest or ownership in property or assets to a designated person or class of persons, as well as control of those assets by a trustee in accordance with the provisions of the governing trust instrument. Section 12 of the Act provides that trust property does not form part of the personal property of the trustee except to the extent that a trustee is entitled to such trust property as a beneficiary in terms of the trust instrument.

Property held by a trust does not form part of the personal property of its trustees, and the courts may not grant an order stating otherwise, unless there is substantial evidence

Phia van der Spuy is a registered Fiduciary Practitioner of South Africa® and the founder of Trusteeze, which specialises in trust administration. She is author of the book “Demystifying Trusts in South Africa” published by Createspace.