Trusting your trust

Amy Dedekind, an Estates Practitioner at Garlicke & Bousfield Inc.

Sham trusts are again occupying centre stage in the courts, and correctly so, says Amy Dedekind.

In a recent Eastern Cape judgment, a trust had been created by the husband during his marriage and the issue was whether the wife’s application to join the trustees of that trust as parties in the divorce proceedings could be entertained. The wife alleged that the issue to be determined by the trial court was whether the assets of the trust were true trust assets or whether they were her husband’s own personal assets, hidden in the guise of trust property. To determine this issue, the trustees of the trust had to be parties in the litigation.

The court compared a trust to a company and whether the principle of “lifting or piercing the corporate veil”, applicable in company law, could be extended to trusts, despite them not being separate legal entities. To determine whether trust assets do indeed belong to the trust or are personal assets of the trustees, the court looks at the terms of the trust deed, the control of the trustees over the trust property, the nature of the assets and the management of the trust. Where a trust is used to build personal wealth for the trustees and is not being administered for the benefit of the wider group of defined beneficiaries, the “trust veil” may be pierced in terms of common law principles.

Applying the provisions of the Matrimonial Property Act, trust assets are not included in an accrual claim because they are not legally owned by either party. The wife in this case alleged that the assets of the trust should be treated as if they were de facto owned by her husband because they were acquired pursuant to a simulated transaction. Setting aside the simulation would result in the assets being regarded as what they truly were, namely personal assets of the husband.

The court held that the wife was entitled to join the trustees in the litigation in order that her allegations could be investigated by the trial court. The effect of a finding by the court in her favour would be that the trust veil would be pierced and the court would refuse to recognise the separateness of trust assets from the husband’s personal assets.