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In South Africa, Courts Have the Ability to Pierce the Trust Veil in Divorce Cases, But When Can They Actually Do This?
REM v VM (2017) provides a key example. In this case, the Supreme Court of Appeal (SCA) faced the question of whether one spouse could use a Trust structure to shield assets from the other during a divorce.
This matter involved six different claims, with the main issue being whether or not the Court could disregard the legal separation between the Trust and the controlling individual. It involved treating the assets of the Trust as personal assets, a principle known as “piercing the Trust Veil.”
The Respondent in this case sought an Order declaring that the Trusts established by the Appellant were simply an extension of his personal estate—essentially, that they were “Alter-Ego Trusts.”
An Alter-Ego Trust is when all the necessary requirements for a valid Trust are present and the Trust is established, but the Trustees act as puppets, mainly under the instruction of the creator or another Trustee.
It is also present when the Trust property is treated by the creator or a Trustee as if it is personally owned by him, instead of belonging to the Trust. Where a Trust is created without the genuine intention of creating a Trust, it is probable that the Trust can be attacked and labelled a sham Trust which never actually comes into existence as a Trust.
Where a Trust was created with the intention of creating a Trust, but the assets are dealt with as if they are a Trustee’s personal property, creditors of the Trust, as well as SARS and soon-to-be ex-spouses of Trustees, can attack the Trust and have it labelled an Alter-Ego Trust. The result of this can be that Courts disregard the Trust and treat the Trust assets as assets of the Trustee in his or her personal capacity.
In South African law, the Alter Ego Principle allows a Court to disregard the distinct legal personality of a Trust or company if it is used as a mere facade for fraudulent or improper purposes.
This principle essentially suggests that the assets held by the Trust are not truly separate from the personal assets of the individual controlling the Trust, particularly if the individual has maintained actual control over the assets and has used the Trust to conceal or shield these assets.
In REM v VM, the Appellant (REM) was accused of transferring assets to a Trust to shield them from the Respondent (VM), who was seeking a fair share of the marital estate during divorce proceedings as they were married out of community of property, with the inclusion of the accrual system.
This means that the Matrimonial Property Act 88 of 1984 was used to govern this Antenuptial Contract.
The question was whether or not certain Trust assets could form part of the Appellant’s estate.
It was alleged that three Trusts were simply the Alter Ego of the Appellant, and that in reality, the assets of the Trust belonged to the Appellant – not the Trust.
It is interesting to note that two of the three Trusts were not excluded from the Antenuptial Contract. It had, however, not been proved by the Appellant that there was any causal connection between the initial assets excluded in terms of the ANC and these assets. It was held that these two Trusts were the Alter Egos of the Appellant, due to the improper way the Trusts were managed.
Whether or not the Trust structure had been abused was examined by the Court. Specifically, it scrutinised if the Appellant had treated Trust assets as his own personal property, transferring personal assets into the Trust and administering them without respect to the fiduciary duties owed to the Trust beneficiaries or other parties.
This conduct led the Court to question whether the Trust was a mere extension of the Appellant’s personal estate, and, thus, whether the Trust Veil should be pierced.
The Court’s reasoning in this case focused on the key issue of unconscionable abuse of the Trust structure. It was clear that the Appellant had used the Trust in a way that was inconsistent with the core principles of Trust law. A Trust is intended to separate control (held by the Trustees) from enjoyment (held by the beneficiaries), but in this case, the Appellant was found to have used the Trust as a vehicle to retain control over the assets while not fulfilling the obligations that would have been owed in the absence of the Trust.
The Court emphasised that the Appellant’s behavior indicated that the Trusts were not functioning as independent entities but were being used to shield assets from the Respondent’s accrual claim.
There was evidence suggesting that the Appellant had treated the assets within the Trust as his own personal property.
The Appellant’s failure to properly manage the Trust, and to respect the fiduciary duties owed to the beneficiaries, indicated an abuse of the Trust structure for personal gain.
The Court found that the use of the Trust structure in this instance was to avoid the Appellant’s financial responsibilities, particularly his obligations under the divorce proceedings. As such, the Trust’s legal form was ignored because it was being used for fraudulent purposes.
By piercing the Trust Veil, the Court made a declaration that the assets within the Trust should be considered in the calculation of the Appellant’s accrual estate, which had previously been shielded from the Respondent’s claims.
The REM v VM case establishes a clear precedent for future divorce proceedings involving Trusts in South Africa. It emphasises that, while Trusts are generally respected as separate legal entities, Courts have the power to pierce the Trust Veil if it can be shown that the Trust has been used to frustrate or evade rightful claims.
Trusts are not immune from scrutiny in divorce cases, and Courts will not hesitate to look behind the formal structure of a Trust if there is evidence that it is being used to evade financial obligations, such as in divorce settlements. If assets are transferred to Trusts in a fraudulent or dishonest manner, the Court is likely to pierce the Trust veil.
The Appellant’s control over the Trust’s assets and the failure to respect the fiduciary duties owed to the Trust’s beneficiaries were key factors in the Court’s decision. Future litigants should be aware that the mere form of a Trust does not protect assets if they are being controlled and used by one individual in an unconscionable manner.
The Court’s ruling demonstrates the flexibility of Piercing the Veil remedy in equity, as it can be applied to address the unfair consequences of Trust abuse. The remedy is aimed at ensuring that dishonest actions do not thwart justice, especially when they involve financial obligations owed during divorce proceedings.
As demonstrated in REM v VM, the interpretation of Trust property in the context of the accrual system of an antenuptial contract (ANC) will continue to be an important consideration. Trusts should not be used to deliberately shield assets that would otherwise be subject to the accrual system, and Courts will likely take a broader view of what constitutes a “contribution” to a spouse’s estate.
It highlights that Trusts can be pierced when used for fraudulent or dishonest purposes, particularly in cases where the Trust is used to conceal assets or avoid financial responsibilities.
Divorcees and legal professionals must be mindful of this ruling, as it strengthens the Court’s ability to ensure equitable distribution of assets, even in the presence of a Trust structure designed to shield those assets.
Future divorce cases involving Trusts will likely follow this reasoning, emphasising fairness and the true nature of asset ownership over mere legal form.
The Trust Property Control Act 57 of 1988 will always be an important part of legislation when dealing with Trust Property. Section 1 deals with the transfer of interests or ownership in property or assets to a designated person or class of persons.
Section 12 provides that the Trust property does not form part of the personal property, except to the extent that a Trustee is entitled to such Trust property as a beneficiary.
The Court concluded that while the Appellant managed the Trusts with a lack of regard for his fiduciary duties, he failed to uphold the essential separation between control and enjoyment of the Trust’s assets.
There was insufficient evidence to show that he transferred personal assets to the Trusts with the fraudulent or dishonest intent of evading his obligation to properly account to the Respondent for the accrual of his estate.
Although his conduct may have warranted his removal as Trustee or the appointment of an independent co-Trustee in terms of Section 7(2) of the Trust Property Control Act, the evidence did not prove that the Appellant intentionally transferred personal assets to the Trusts to avoid financial obligations.
This is significant because, for a Court to disregard the Trust’s legal structure or pierce the Trust Veil, clear evidence of fraudulent intent in the transfer of assets is necessary.
In this case, while the Appellant’s behavior raised concerns about his management of the Trusts, the lack of concrete evidence of fraudulent intent meant the Court could not make such a ruling.
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