Till trust do us part: Navigating the complexities of trusts in divorce proceedings

trusts
23 Mar 2023

In South Africa, the division of assets in a divorce can be a contentious issue, particularly regarding trust assets. Trusts are often used to preserve wealth, and as a result, they are becoming an increasingly popular way to protect assets in the event of a divorce – resulting in extensive legal disputes.

Often, there is confusion regarding the lawfulness of two types of trusts, namely sham trusts and “alter ego” trusts.

A sham trust is a guise that purports itself to be a trust (for example, by a trust deed) but is not a trust at all. Effectively, elements required to validate a trust are absent; therefore, the “trust” is another institution entirely. Such could either be a fraudulent scheme that is established to deceive others, often to avoid tax, or alternately an innocent failure to understand the law regarding establishing a trust.

In contrast, an alter ego trust is a legitimate trust that an individual creates for their own benefit. The trust is validly established but the trustees/beneficiaries/founders abuse their powers by using the trust assets as they would have had the trust not come into existence. This type of trust is accordingly dubbed an “alter ego” trust as there is a general disregard for the trust itself, and the trust assets continue to be used as they were before the trust was established.

The case of WT and others v KT (2015) shed some light on the issue of trust assets in divorce proceedings. In this case, the husband had set up a trust before the marriage and had transferred a substantial amount of his wealth into the trust. During the divorce proceedings, the wife argued that the trust should be considered part of the joint estate and that she was entitled to a portion of the assets held in the trust. She claimed that the husband had set up the trust to hoard his wealth and not to shield his assets from creditors arising from his business arrangements as he alleged.

The court ruled that the trust was not an alter ego and that the assets held in the trust did not form part of the joint estate.

Alter ego trusts were discussed in the case of PAF v SCF (2022) which involved divorce proceedings where the couple was married out of community of property with the inclusion of the accrual system. Prior to the start of the trial, P set up a trust in the British Virgin Islands, with their minor daughter as the only beneficiary and P’s brother (a Queen’s Council in the BVI) as the sole trustee. P made a donation of GBP 115,000.00, which S argued was created to make it difficult for her to monitor the trustee or take action, and to frustrate her accrual claim. The KwaZulu-Natal High Court found that the donation to the trust was made with fraudulent intent to deprive S of her rightful accrual claim. P’s late application for special leave to appeal to the Supreme Court of Appeal (SCA) was dismissed with costs by the SCA, which held there was no legitimate reason to condone the late appeal, and that the timing of the trust’s creation and donation lead to the conclusion that it was done to frustrate S’s accrual claim. The SCA held that the trust assets in the British Virgin Islands should be included in the calculation of the accrual claim.

In conclusion, the issue of trust assets in a divorce is a complex one, and it is important to seek legal advice when setting up a trust or when going through a divorce.

If you would like to establish a trust or need further information on the subject, please do not hesitate to contact our offices.

Article sourced from Eversheds Sutherland.

See also:

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)
Donovan Avenant

Donovan Avenant is a partner at Eversheds Sutherland (KZN) and heads up the litigation department. His focus is on commercial litigation for corporates. He also deals with alternative dispute resolution.... Read more about Donovan Avenant

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