TRUST TO TRUST
Many spouses, and unfortunately to date a lot of women, get the short end of the stick when their marriages break up and there are trusts involved.
The following questions can be used as guidelines when determining whether the assets in trust are at risk to any one of the spouses upon divorce:
Is the trust a trust in the real sense, or merely a “corporate veil”?
This is a new common law notion for trusts in South Africa, where the courts disregard the separate corporate identity of a company when the legislature disregards it in instances of non-compliance with statutory provisions.
It has been described in other ways, for example that a court can “disregard the veneer of the trust”; or “disregard the trust”; or treat the trust as the “alter ego” of one or more of the trustees; “pierce the veil of the trust” and “go behind the trust form”.
This began when the courts would “look through” and “pierce” a company if it was deemed to have been set up to (mainly) mislead or defraud creditors. This concept has now been extended to include trusts.
If there is any form of misuse or abuse of trust assets, a court may likely pierce the corporate veil to establish whether the trust is 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 spouse of his/her potential claims in an approaching divorce action, the validity of the trust may be deemed suspicious, due to the lack of bona fides on the part of the founder or trustees of the trust.
What was the intention of the founder of the trust?
If, for example, parties married in community of property agree to transfer assets belonging to the joint estate into a trust for their and their children’s benefit, one of the parties may apply to court to set such trust aside upon divorce, with the assets likely forming part of the communal estate.
Otherwise, the rules applicable to the division of the joint estate upon divorce cannot be applied because the assets are stuck in a trust, while the parties should, in fact, each be receiving 50 percent of the joint estate.
Is there a conflict of interest?
Where one spouse is a trustee, and the other spouse a beneficiary, a conflict of interest may arise in a divorce action, where the latter spouse may approach the court for an order of dissolution of the trust, or a substitution of trustees.
Of course, the court should be satisfied that it would be in the best interests of the beneficiaries as a whole to grant such relief. The structuring of a trust like this, for the sake of making the trust appear more “legitimate” (often due to advice offered by incompetent trust practitioners) generally places the person who was not appointed as a beneficiary in a compromising situation.
How were the assets moved into the trust?
When property is transferred into a trust, it is usually either done through a donation, or a sale. If it is a donation, Donations Tax is payable.
In the event of a sale, the purchase is often reflected as a loan account in favour of the seller, which creates an asset in the estate of the transferor. This asset will be taken into account in a divorce.
Be prepared and informed to not be caught off-guard in the event of a divorce.
Phia van der Spuy is a registered Fiduciary Practitioner of South Africa, a Master Tax Practitioner (SA), a Trust and Estate Practitioner (TEP) and the founder of Trusteeze, a professional trust practitioner.