This week we look at an interesting court case I came across recently which deals with trust assets and divorce. The case of Miller and others v Miller [2014] JOL 32176 (KZP) (as discussed in detail below) again highlights that one must be careful of assuming trust assets will never be taken into account when dividing assets upon divorce.
Married out of community of property – with or without accrual
We all know that, when married out of community of property with the inclusion of accrual, the spouses will, at divorce, share equally in the growth of the spouses’ estates during the marriage. There is, however, no sharing of the assets which each party already owned at the time of the marriage (those assets will remain separate). This is set out in Section 3(1) of the Matrimonial Property Act No. 88 of 1984 which provides that, at the dissolution of a marriage subject to the accrual system, the spouse whose estate shows a smaller accrual than the estate of the other spouse acquires a claim against the other spouse for an amount equal to half of the difference between the accrual of their respective estates. Simply put: the party whose estate accrued by the smaller amount will then have a claim against the other party’s estate for half of the difference in accrual.
If you are, however, married out of community of property without accrual there is no sharing of any assets at divorce, whether accumulated before or during the marriage.
Claim for accrual vs redistribution order
When married out of community of property with inclusion of the accrual, you will rely on section 3(1) of the Matrimonial Property Act as quoted above to claim for the difference in accrual.
However, if you got married out of community of property without accrual before the enactment of the Matrimonial Property Act (in other words, before 1 November 1984) there is a way you can still claim from your spouse’s estate at divorce. This is called a redistribution order and is dealt with in section 7(3) of the Divorce Act No. 70 of 1979.
Section 7(3) of the Divorce Act states that a court granting a decree of divorce in respect of a marriage out of community of property without accrual, entered into before the commencement of the Matrimonial Property Act may on application by one of the spouses (in the absence of any agreement between them regarding the division of their assets) order that such assets (or part thereof) of the other party as the Court may deem just be transferred to the first-mentioned spouse. Section 7(4) goes on to state that such an order will only be granted if the Court is satisfied that it is equitable and just by reason of the fact that the party in whose favour the order is granted contributed directly or indirectly to the maintenance or increase of the estate of the other party during the subsistence of the marriage. Section 7(5) then goes on to list other factors the court will take into account when determining the assets to be transferred.
Why is there such a remedy as “redistribution”?
It’s a fair question to ask why the law makes provision for redistribution orders. Surely, when getting married and CHOOSING to be married out of community of property without accrual, it was the parties’ desire to keep their estates separate.
One would think so, but it must be borne in mind that the accrual system only came into operation on 1 November 1984, being when the Matrimonial Property Act was enacted. Before 1 November 1984 spouses either married in community of property (sharing everything equally) or out of community of property (keeping their estates completely separate). The Divorce Act was therefore amended by including “redistribution of assets” in section 7(3) (quoted above) which is aimed at restoring the financial imbalance often suffered by the wife at divorce.
Please bear in mind this section only applies to marriages out of community of property without accrual entered into before the enactment of the Matrimonial Property Act and to black people married out of community of property in terms of the old Black Administration Act 38 of 1927, and the relief must be specifically asked for by one of the spouses.
Trust assets
As far as the assets of the spouses are concerned: even trust assets may be taken into account for the purposes of making a redistribution order, if it is just and equitable to do so, provided there is evidence that the party controlled the trust and that, but for the trust, he/she would have acquired or controlled the assets in his/her own name.
This principle has been tested in court quite a few times. In the supreme court of appeal case of Badenhorst v Badenhorst 2006 (2) SA 255 (SCA) the respondent sued his wife, the appellant, for divorce and she counter-claimed for an order in terms of section 7(3) of the Divorce Act that 50% of her husband’s estate be transferred to her. The issue in the case was whether the value of the assets of a discretionary inter vivos trust founded by her husband’s father should, for the purposes of a section 7(3) redistribution order, be added to the value of his estate.
The court held:
“[9] The mere fact that the assets vested in the trustees and did not form part of the respondent’s estate does not per se exclude them from consideration when determining what must be taken into account when making a redistribution order. A trust is administered and controlled by trustees, much as the affairs of a close corporation are controlled by its members and a company by its shareholders. To succeed in a claim that trust assets be included in the estate of one of the parties to a marriage there needs to be evidence that such party controlled the trust and but for the trust would have acquired and owned the assets in his own name...”
(my emphasis)
The Court found that the husband had full control of the assets of the trust and used the trust as a vehicle for his business activities. The court thus ordered that the value of the trust assets had to be added to the value of the husband's estate in order to determine what a just and equitable redistribution would be (having regard to the factors referred to in section 7(5) of the Divorce Act).
In Brunette v Brunette and Another NO (2009 (5) SA 81 (SE) the applicant intended to amend her particulars of claim so as to include a prayer that the assets of two inter vivos trusts be regarded as the assets of two businesses conducted in partnership by the parties. The court held that if the applicants’ contentions were correct then the manner in which the trusts had been administered in the past became highly relevant in determining whether or not they should be regarded as constituting partnership assets to be taken into account in any distribution order in terms of section 7(3).
Miller and others v Miller [2014] JOL 32176 (KZP)
Judgment in the Miller case was delivered in February 2014. The dispute related to the assets of a family trust. Mrs Miller pleaded that the trust was the alter ego of her husband and that its assets should be deemed to form part of his assets for the purpose of determining the accrual of his estate. She, however, did not aver that the trust assets were in fact his property or part of his estate, nor did she claim that the trust was not a genuine one. Her case was simply that the trust assets should be taken into account in determining the accrual of his estate because he had the power and the ability to use those assets for his sole benefit.
At trial, her advocate supported his argument with numerous cases where the court held that the assets of a trust can be taken into account when a redistribution order is made in terms of the Divorce Act.
What the advocate failed to consider was the fact that there is a fundamental difference between a redistribution order in terms of section 7(3) of the Divorce Act and an accrual claim in terms of section 3 of the Matrimonial Property Act:
• As stated above, a court will not grant a redistribution order unless it’s satisfied that it would be just and equitable by reason of the fact that the party in whose favour the order is granted, contributed directly or indirectly to the maintenance or increase of the estate of the other party during the subsistence of the marriage (section 7(4)).
• However, in the case of an accrual claim, the court is not required to make an assessment of what it deems to be just and equitable (as is the case of a redistribution order). It is simply required to determine, on the evidence before it, the amount equal to half of the difference between the accrual of the respective estates of the spouses. What a spouse’s estate consists of, is therefore a factual enquiry – it is not a matter of discretion.
The court therefore held that there is no warrant in the Matrimonial Property Act to have regard to assets which do not form part of his estate on the basis that it would be “just to do so” (as in the case of a redistribution order in terms of the Divorce Act). The court stated:
“[18] The excipients before me accept that if Mrs Miller pleaded that the assets of the trust are in truth her husband's property then her claim that those assets must be taken into account in determining the accrual of her estate would have been in order. ..”
The exception to this claim was therefore upheld.
Conclusion
The above court decisions should sound alarm bells for spouses who transfer assets to a trust in the hope of evading accrual and then continue to control the trust assets as though nothing has changed. If the trust becomes/is seen as the alter ego of the settlor the trust can and will be attacked by creditors or anyone else claiming an interest in the trust property.
These court cases cited above all state in clear terms (albeit in relation to section 7(3) of the Divorce Act) that they will attach considerable significance to the degree of the founder’s de facto control of trust assets in assessing whether, in substance, a trust exists.
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