Trusts and Divorce
Trusts and Divorce - Navigating Complex Asset Division with VDM Attorneys
In South African divorce law, the interplay between trusts and marital property can be exceptionally complex. While trusts are commonly used for legitimate purposes like estate planning and asset protection, their assets are not automatically considered part of a spouse's personal estate for division during divorce. However, courts have the power to scrutinise trusts, particularly if there's a suspicion of abuse.
In South Africa, assets held within a trust are generally not automatically considered part of a spouse's personal estate for division during a divorce. A trustee holds trust property for the benefit of beneficiaries, not as their personal assets. However, courts may "pierce the trust veil" (or deem the trust an "alter ego") if it's proven that a spouse effectively controlled the trust and used it to manipulate or hide assets that would otherwise have formed part of the marital estate. This assessment is discretionary and based on the specific facts and intentions surrounding the trust's creation and operation.
The General Rule - Trusts as Separate Legal Entities
A trust is a distinct legal arrangement where assets are held by trustees for the benefit of designated beneficiaries. The trustees, not the founder or beneficiaries, are the legal owners of the trust property. For this reason, trust assets are typically excluded when determining the value of a divorcing spouse's personal estate.
When the Veil May Be Pierced - The "Alter Ego" Doctrine and "Sham Trusts"
Despite the general rule, South African courts can, and often do, investigate trusts in divorce proceedings. If it is found that a trust is not genuinely independent but rather serves as the "alter ego" of one of the spouses, or if it is deemed a "sham trust," the court may "pierce the veil" of the trust. This means the court will disregard the trust's legal form and treat its assets as part of the spouse's personal estate, subject to division.
Key Factors Courts Consider in Piercing the Veil:
To establish that a trust is an "alter ego" or a "sham," the claimant spouse generally needs to prove two vital elements, as highlighted in cases like Badenhorst v Badenhorst (2006):
- De Facto Control - That the spouse effectively controlled the trust, irrespective of the terms of the trust deed, by examining how the trust's affairs were managed during the marriage. This often involves demonstrating that the trustees did not act independently but merely as instruments of the controlling spouse.
- Hypothetical Ownership - That, but for the existence of the trust, the spouse would have acquired and owned the assets in their personal name.
Other crucial factors examined by the court include:
- Timing of Trust Creation/Asset Transfer If assets were transferred to a trust shortly before or during divorce proceedings with an apparent intention to defraud or deceive a spouse of potential claims, the trust's legitimacy may be questioned.
- Intention of the Founder/Donor Was the trust established for genuine estate planning, beneficiary provision, or asset protection, or was its primary purpose to hide assets from a divorce claim?
- Misuse or Abuse of Trust Assets Evidence of the spouse treating trust assets as their own personal property, commingling funds, or using the trust for personal benefit inconsistent with its legitimate purpose.
- Conflict of Interest Where a spouse is both a trustee and a beneficiary, or where their actions as a trustee create a conflict with other beneficiaries' interests.
- Transparency and Documentation Lack of proper administration, clear delineation between personal and trust assets, or inadequate documentation can raise suspicion.
- Trustees' Independence The extent to which trustees act independently, rather than merely following the instructions of the controlling spouse.
Impact on Marital Property Regimes
The way a trust is treated can also be influenced by the marital property regime:
- In Community of Property - The court may scrutinise trust assets to ensure a fair and equal division of the joint estate if there's evidence of trust abuse.
- Out of Community of Property (with/without accrual) - While assets outside the joint estate are generally excluded, the court may still pierce the veil if the trust was used to intentionally avoid a fair division of accrual or to defraud a spouse.
Protecting Trust Assets (and Defending Against Sham Claims)
To minimise the risk of a trust's veil being pierced in a divorce:
- Ensure Genuine Independence Appoint independent trustees who genuinely exercise their fiduciary duties.
- Adhere to Trust Deed Strictly follow the terms and conditions of the trust deed.
- Maintain Transparency Ensure transparent operations, clear separation between personal and trust assets, and meticulous record-keeping.
- Legitimate Purpose Establish the trust for clear, legitimate reasons beyond merely avoiding divorce claims.
- Avoid Unilateral Control Ensure no single individual has absolute control over the trust's decisions and assets.
The Value of Expert Legal Advice
As demonstrated in cases like WT and Others v KT, proving or defending against a "sham trust" claim in divorce can be incredibly complex, fact-specific, and costly. The outcome can significantly impact the final division of assets.
Whether you are seeking to include trust assets in your divorce settlement or are a trustee or beneficiary aiming to protect trust assets, expert legal guidance is essential. Our team at VDM Attorneys has extensive experience in both family law and trust law. We can help you:
- Assess the true nature and control of trust assets.
- Advise on the likelihood of a court piercing the trust veil.
- Develop strategies for challenging or defending trust claims.
- Navigate the intricate legal processes involved in divorce litigation involving trusts.
Contact VDM Attorneys today for comprehensive legal advice on trusts and divorce, and safeguard your financial future.