TRUST BUT VERIFY: NAVIGATING ACCRUAL AND TRUSTS IN DIVORCES
Getting Started – What is a Trust?
In South Africa, a Trust is essentially a legal arrangement where someone (“the settlor”) transfers assets to a Trustee (“the trustee/s”) to hold for the benefit of others (“the beneficiaries”). The Trustee has a duty to manage the assets in line with the Trust Deed’s terms, separate from their personal estate.
South African law stipulates that Trustees are obligated to keep trust property separate from their own affairs and estate. Furthermore, trustees are required to be impartial when administering the trust. Where there is only one trustee in control of a trust or where a trustee abuses their powers in respect of the Trust, then the trust can be considered the Trustee’s alter ego and there are legal avenues that can then be followed to set the Trust aside as is more fully detailed hereunder.
Navigating accrual and trusts can be incredibly difficult. Divorces can cast long shadows over meticulously crafted financial plans. In South Africa, where the accrual system plays a significant role in dividing marital assets, the presence of trusts adds another layer of complexity.
The Sanctuary of Trusts: Separate Estates, Separate Calculations?
South Africa recognizes trusts as legal entities isolated from the trustee's individual domain. This rule, cherished within the Trust Property Control Act 57 of 1988 (TPCA), recommends that, Trust assets ought to be excluded from the accrual calculation. After all, they belong to the trust, not the spouse who happens to be a trustee. This creates a seemingly safe haven for assets intended for beneficiaries, shielding them from the division of marital wealth.
However, the law, like an astute judge, understands the potential for manipulation.
Piercing the Veil: When Trusts Become Facades
If a court finds that a trust is a facade designed to conceal marital assets from the accrual calculation, it can disregard the trust entirely. This is known as "piercing the veil" of the trust. The court essentially exposes the hidden marital assets and includes them in the accrual, ensuring a fair division.
In order for a court to pierce the veil, there must be compelling evidence that the trust was created with the specific intention of defrauding a spouse. This could include:
Suspicious Timing: A trust established shortly before or during marital difficulties raises alarms.
Funding with Marital Assets: If marital funds were used to establish the trust, it weakens the argument for its complete separation.
Lack of Proper Records: Poor record-keeping regarding the trust's formation and operation can raise doubts about its legitimacy.
The recent case of MJ K v II K (360/2021) demonstrates this concept. The husband, a trustee of several trusts, argued for the exclusion of their assets from the accrual calculation. However, the court found insufficient evidence to establish a clear distinction between the trust assets and his personal estate. This lack of clarity ultimately resulted in the potential inclusion of those assets in the marital pool.
Beyond The Sham: Scrutinizing Transfers to Trusts
The law also scrutinizes the transfer of marital property to a trust, particularly during a troubled marriage. Without proper justification, such a transfer might be seen as an attempt to manipulate the accrual calculation. Here, the court considers factors like:
Reason for Transfer: Was the transfer done for legitimate reasons, such as estate planning for children from a previous marriage?
Fairness to Both Spouses: Does the transfer leave one spouse significantly disadvantaged in terms of asset division?
If the transfer is deemed an attempt to manipulate the accrual system, the court might include the transferred assets in the marital pool.
Conclusion
While trusts offer a degree of asset protection in South Africa, navigating their interplay with the accrual system in a divorce requires careful planning and transparency. Consulting a qualified family lawyer is paramount. By ensuring the trust is established with legitimate purposes and proper documentation, you can minimize the risk of legal challenges during a potential divorce. Remember, in the complex world of marital dissolutions, a well-crafted trust can be a haven, but only if it is built on a foundation of good faith and sound legal advice.
Written by Garion Malherbe
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This article is provided for informational purposes only and should not be substituted for legal advice on any specific matter. Any opinions expressed herein are subject to the law as at the time of writing and will change in accordance with any change in the law. We recommend that you contact HJW Attorneys & Conveyancers at info@hjwattorneys.co.za directly for advice applicable to your specific matter.