Divorce: Can a Trust Be Declared an Asset in a Spouse’s Estate?

By Candice Eve-Friis, Partner in the Child & Family Law department

In the recent decision of Mills v Mills (“Mills”), handed down on 9 March 2017, the Supreme Court of Appeal upheld the ruling of the Gauteng High Court. In this case, a husband was alleged to have deliberately concealed assets by establishing trusts and placing assets and funds into trusts for the sole purpose of defeating the wife’s accrual claim. The wife lost the matter in the High Court and again on appeal as she was unable establish any evidence to prove such conduct on the part of her husband.

In Mills, the court held that the ambit of a claim of this nature must be considered with due regard for the provisions of the Trust Property Control Act 57 of 1988 (“the TPCA”).     Section 1 of the TPCA provides for the transfer of interest or ownership in property or assets to a designated person or class of persons, as well as control of those assets by a trustee in accordance with the provisions of the governing trust instrument. Section 12 of the TPCA provides that trust property does not form part of the personal property of the trustee except to the extent that a trustee is entitled to such trust property as a beneficiary in terms of the trust instrument.

When penetrating a trust in a divorce action, a spouse has two alternatives:

• Firstly to allege that the trust itself is a ‘sham trust’. In this case the spouse has to prove that that a valid trust does not exist. A ‘sham trust’ involves neither the person who set the trust up, nor the chosen trustees, having any intention for the trust to be a trust. The court will look at various factors when deciding if the trust is a ‘sham trust’, including the control of the trust property and whether property is being unilaterally vested in the spouse’s name while the trustees exercise no independent discretion or take any actions consistent with the terms of the trust deed. The court will also look at whether there is paperwork justifying trustee decisions. Unfortunately, this can often be very hard to prove.

• Secondly to allege that the trust is in fact the spouse’s “alter ego” and, like piercing the corporate veil of a company, the court must then pierce the veneer of the trust to determine if the trust instrument has been abused and if the existence of the trust is merely a veil for a personal asset of the spouse to evade liability or an obligation to a spouse.

In Mills, when it came to advancing a claim to pierce the veil of a trust, the court held that there is no distinction to be drawn between the legal standing of a third party who transacts with a trust and a spouse who seeks to advance a patrimonial claim.

The court found that a breach committed by the spouse in terms of the trust is not a determining factor on its own. There will be a claim against the trust or the errant trustee (in this case the spouse) on the basis that the unconscionable abuse of the trust form by the trustee, in his or her administration of the trust through fraud, dishonesty or an improper purpose, prejudices the enforcement of the obligation owed to a third party or, in this case, a spouse. If this can be established, then a declaration could be made that the trust assets must be included in the spouses assets for purposes of calculating the accrual.

For more information on the above, please contact:

Candice Eve-Friis,
Partner in the Child & Family Law department
eve@wylie.co.za
+27 31 575 7506