Can a spouse hide assets in a Trust and avoid financial disclosure during divorce? In South African divorce law, the ‘Alter Ego’ principle allows courts to pierce the veil of a trust if it’s found to be a front for personal control.
In this matter on appeal, it was for the Court to decide, that when making a Redistribution Order, whether or not to contemplate the assets held by a Trust in divorce.
The Respondent sought to divorce his wife, the Appellant under South African divorce law.
The Parties to the matter had married in 1981, and the Respondent’s parents, rather than have their son inherit the family farm directly, instead transferred it to a Trust.
The Will creating said Trust, allowed the Trustees to transfer the farm to the Respondent at a time they deemed appropriate, against payment of R200,000.00, which would be loaned to the Respondent, again by the Trust, which shall hereafter be referred to as Trust A.
Said Parties would remain married for over twenty years, with the Appellant performing all the duties traditionally expected of a wife and mother, as well as assisting on the farm in multiple ways.
She was doing the bookkeeping, paying the wages and providing food for the workers to assist directly, and then she was still supporting the Respondent in his efforts to make extensive improvements to the farm.
The Respondent would later form another Trust, hereafter referred to as Trust B, informing the Appellant that this was done to avoid estate duty and protect their assets from creditors. Here the Alter Ego Principle emerges.
The Respondent went on and had buildings and an industrial plot registered in the name of Trust B, as well as a beach cottage. Trust B was valued at R3 534 220 at the time of the trial.
In 2001, the Trust purchased shares in a company, which owned a real estate agency in that part of the country, with the Trust receiving half the shares, and the Appellant receiving the other half of the shares.
This would see the Appellant begin working in the company and becoming successful as a real estate agent.
In this manner, the Appellant was able to create a substantial independent estate, valued at R978 320, at time of trial.
In contrast, the Respondent’s estate was valued at R1 892 093, at time of trial.
When the Divorce Summons was served, the Appellant wisely enough, made a counterclaim for the divorce, seeking a redistribution of assets, transferring 50% of his estate to her, including the assets of Trust B, alleging it to be the Respondent’s alter ego.
The Appellant argued that the Trust assets had been gathered and created by both Parties, but had the Trust not existed, then all assets would have been vested in the Respondent.
Whilst in trial, the Respondent did admit that he had spent time, effort and money in acquiring the Trust assets, but left unanswered the question as to whether or not the Trust acted as his alter ego.
Likewise, at the time of the trial, the Trustees of Trust A had similarly not chosen to transfer the farm to the Respondent.
The judge in the trial concluded that both Parties had grown their estates as though married in community of property, before further concluding that the assets of the Trusts were to be disregarded.
The judge further found that, having over double the net value of the Appellant, the Respondent had benefitted more from their joint labours, and as a result he ordered the Respondent to make a payment of R400 000 to the Appellant, leaving them with personal estates that were roughly equal.
The Appellant would see the matter appealed, obviously, and went on to argue that the Court had made a mistake in not considering the farm and the income derived from it into account, and in disregarding the assets of Trust B as part of the Respondent’s estate, seeking that half of the Trust assets be redistributed to her.
No cross-appeal happened, and consequently, it was not disputed that the Appellant was entitled to a Redistribution Order.
It remained an issue however, that the Trust should be taken into account as part of the Respondent’s estate.
The Trial judge could not discover a way to find that the Trust had been used as a device to protect the Respondent. Instead, he felt it remained its own legal entity, designed to benefit the children of the marriage. However, simultaneously he found that the Appellant had full access to the self-same Trust.
The trial judge continued to state that he did not view the assets owned by the Trust to have been acquired in a manner that harmed the marital estate.
The Appeal judge found otherwise.
It was first stated that a Trust is not truly a separate legal entity, arguing that neither the authorities nor the Courts have considered Trusts to be a distinct entity, and that it is an accepted fact that the assets and liabilities in a Trust vest in the Trustee, as stated in Commissioner for Inland Revenue v MacNeillie’s Estate 1961 (3) SA 833 (A) at 840G-H.
The Appeal judge went on to argue that though these Trust assets may ostensibly belong to the Trust, and vest in the Trustee, that was not necessarily a reason for the assets not to be considered in the case of a Redistribution Order.
The Court found that the Trust assets could be considered in redistribution, however, it would first have to be proven that the Respondent did control the Trust. Secondly, and that if it were not for the Trust’s existence, the Trust assets would have been acquired for the Respondent in his personal capacity.
To summarise, one must determine if the Trust forms an alter ego.
This abovementioned control over the Trust, must be held in fact, rather than merely in law, by way of explaining that whilst many Trustees may have legal control over a Trust, it is generally the founder who has actual factual control over the Trust.
Determining this control means first inspecting the Trust Deed, but thereafter, assessing how the Trust was managed during the marriage period.
The Court went to find that the situation at hand was one where the Trust had been used by the Respondent as a body through which he performed his business.
The provisions of the Trust Deed held that the Trustees were the Respondent and his brother, the founder being their father, who himself made a minimal contribution to the Trust, and the capital beneficiaries are any children of the Respondent. The Appellant was listed as an income beneficiary.
The beneficiaries were only to receive benefits from the Trust at a date to be decided upon by the Trustees, and the Respondent had the ability to remove his brother as co-Trustee and replace him with another person and was able to modify the Trust provisions with the consent of his brother, following his father’s death.
Even with the above provisions showing control, the provisions went further, giving the Trustees free discretion to use the Trust assets and income as they wished. The deed provisions even provided for the Respondent to be compensated for his duties as Trustee, creating a source of income for the Respondent.
The Appellant lead evidence which clearly showed that that not only did the Respondent largely not consult with his brother as co-Trustee in managing the Trust, he made little distinction between his own assets and that of the Trust.
The Court therefore found the Respondent to be in full control of the Trust, and that all Trust assets were vested in the Respondent.
The Appeal Court therefore came to the conclusion that the Trust assets should have been considered in the redistribution, and added to the Respondent’s estate, and the trial Court had erred in not doing so.
The Appeal Court opined that a further error had been held in the trial Court considering the Parties to have begun from a base of zero, where the Respondent did, though it was not in his name, bring a working farm and the necessary movable to provide an income from said farm, into the marriage, allowing them to build their estates and the Trust.
The Court therefore determined that a completely new evaluation must be held to come to a just and fair ruling.
Given that the Trust would be included, but the Respondent had brought the farm and his business acumen into the marriage, meant that it would not have been appropriate to provide the Appellant with 50% of the Trust assets.
That said, the Appellant now had primary residence over the Minor Children as well, and the Respondent had recently purchased another farm, and still stood to inherit the farm of Trust A.
The Court found that a just Order would be that the Respondent be ordered to pay to the Appellant the sum of R1 250 000,00.
This amount was discerned by taking the total of the net assets of the Parties’ and Trust’s estates, calculating a percentage which the Court considered to be just and equitable for the Appellant’s contribution to the joint estate, and thereafter deducting what she already possesses.
From this case to be seen as an Alter Ego, a Trust must fall under the whole, and sole factual and legal control of that spouse, that he had contributed to that Trust, and were it not for the Trust, those assets, would form part of his estate.
This case established the principle that where a Trust is used as an alter ego of one of the spouses, particularly to shield assets from an accrual claim, the Court has the power to include those assets in the accrual calculation to conclude a just and equitable outcome.
This principle has been seen and applied in further cases such as RP v DP 2014 (6) SA 243 (ECP) and MM v JM 2014 (4) SA 384 (KZP).
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