Family Trusts and Divorce
Often during divorce litigation an issue that arise is whether assets held in trust should be included or excluded to determine the estate of a party. The position in our law is that a trustee does not become the owner of trust property but merely holds such property for the benefit of third parties (beneficiaries). For this reason trust property cannot be considered as part of a person’s estate for purposes of determining the value of an estate in divorce cases.
Although the above is the position in our law, this does not mean that trust property would be entirely irrelevant or should always be excluded because considerations may apply to indicate the contrary. In a number of court judgements it was held that one of the factors which a court may consider is that certain substantial assets were held in trust by one of the parties who used the trust as his/her “alter ego”.
In 2006 in the matter of Badenhorst v Badenhorst the court found that, if it is proved that the trust is the “alter ego” of a party, the trust assets are to be included in the determination of the means of such party. It must therefore also be proved that there was de facto control of the trust assets. In this case the Court held that while it appeared to be that 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. 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:
The Court held that all the assets were deemed to be owned by Mr Badenhorst personally, and had to be shared with his wife in their divorce.
To determine true ownership of trust assets, the following should be considered:
When property is transferred into a trust, the reason for such transfer is normally either a donation or a sale. If it is a donation tax has to be paid. In the event of a sale the purchase is often reflected as a loan account in favour of the seller. In practise, one often finds that the transfer of assets is effected into trusts without any indication as to the reason thereof. Without proof of a donation, or purchase consideration such transfer would create a loan account which is an asset in the estate of the transferor.
In the recent Supreme Court of Appeal case of WT and Others v KT a husband and wife had married in community of property. 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 refuted this and pleaded that 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 to be chosen by the trustees in their discretion from amongst the husband’s children. Prior to their marriage the parties moved into the house and the trust bought the house some 2 years later. A year later the parties’ married and lived in the house for another 9 years until their divorce. The wife’s legal team argued that the trust’s assets fell into the joint estate because her husband had deceived her, saying that the property was registered in a trust purely to protect it from his business creditors and that upon divorce the house would be sold and the proceeds divided. The wife argued further that the trust was her husband’s “alter ego” in that he controlled it for his personal benefit in order to accumulate his own wealth. The High Court agreed with the wife and ordered that the trust’s assets fall into the joint estate. The Supreme Court of Appeal however allowed the appeal on the basis that there was no evidence on the facts to support any of the wife’s assertions of deceit and 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 end result was that the trust could keep the house, leaving the ex-wife to pay the husband’s legal costs. When assessing the proprietary consequences of a divorce following a marriage in community of property, as in the present case, the court is generally confined merely to directing that the assets of the joint estate be divided in equal shares. The court concerned with a marriage in community of property accordingly has no discretion to include the assets of a third party in the joint estate. In any event the Divorce Act specifically recognizes 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.
Although the above is the position in our law, this does not mean that trust property would be entirely irrelevant or should always be excluded because considerations may apply to indicate the contrary. In a number of court judgements it was held that one of the factors which a court may consider is that certain substantial assets were held in trust by one of the parties who used the trust as his/her “alter ego”.
In 2006 in the matter of Badenhorst v Badenhorst the court found that, if it is proved that the trust is the “alter ego” of a party, the trust assets are to be included in the determination of the means of such party. It must therefore also be proved that there was de facto control of the trust assets. In this case the Court held that while it appeared to be that 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. 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 to consider the evidence of how the affairs of the trust were steered during the marriage;
- that “without” the trust, such spouse would still have acquired and owned assets in his/her own name.
The Court held that all the assets were deemed to be owned by Mr Badenhorst personally, and had to be shared with his wife in their divorce.
To determine true ownership of trust assets, the following should be considered:
- Is the trust a trust in the real sense or merely a “corporate veil”? If there was some form of misuse or abuse of trust assets a court may well pierce the corporate veil in order to establish whether the trust was simply an alter ego of a person.
- When was the trust created? If a party transfers assets into a trust with the intention of deceiving or defrauding a marriage partner of his/her potential claims in an approaching divorce action, the validity of the trust may be suspect due to the lack of bona fides on the part of the founder/donor or trustees of the trust.
- What was the intention of the founder/donor of the trust? If, for instance, the parties married in community of property agree to transfer assets of the joint estate into a trust for their and their children’s benefit a party may apply to set such trust aside on divorce and the assets may well form part of the communal estate.
- Is there a conflict in interest? Where one spouse is a trustee and the other spouse a beneficiary a conflict of interest may arise in a divorce action the latter spouse may approach the court for an order of dissolution of the trust or substitution of trustees. Obviously the court should be satisfied that it will be in the best interest of the beneficiaries as a whole to grant such relief.
When property is transferred into a trust, the reason for such transfer is normally either a donation or a sale. If it is a donation tax has to be paid. In the event of a sale the purchase is often reflected as a loan account in favour of the seller. In practise, one often finds that the transfer of assets is effected into trusts without any indication as to the reason thereof. Without proof of a donation, or purchase consideration such transfer would create a loan account which is an asset in the estate of the transferor.
In the recent Supreme Court of Appeal case of WT and Others v KT a husband and wife had married in community of property. 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 refuted this and pleaded that 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 to be chosen by the trustees in their discretion from amongst the husband’s children. Prior to their marriage the parties moved into the house and the trust bought the house some 2 years later. A year later the parties’ married and lived in the house for another 9 years until their divorce. The wife’s legal team argued that the trust’s assets fell into the joint estate because her husband had deceived her, saying that the property was registered in a trust purely to protect it from his business creditors and that upon divorce the house would be sold and the proceeds divided. The wife argued further that the trust was her husband’s “alter ego” in that he controlled it for his personal benefit in order to accumulate his own wealth. The High Court agreed with the wife and ordered that the trust’s assets fall into the joint estate. The Supreme Court of Appeal however allowed the appeal on the basis that there was no evidence on the facts to support any of the wife’s assertions of deceit and 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 end result was that the trust could keep the house, leaving the ex-wife to pay the husband’s legal costs. When assessing the proprietary consequences of a divorce following a marriage in community of property, as in the present case, the court is generally confined merely to directing that the assets of the joint estate be divided in equal shares. The court concerned with a marriage in community of property accordingly has no discretion to include the assets of a third party in the joint estate. In any event the Divorce Act specifically recognizes 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.
