CONCEALING TRUST ASSETS TO REDUCE ACCRUAL

There are various advantages and disadvantages when creating a trust, with one advantage being the protection of assets against creditors.

In marriages out of community of property without the application of the accrual system, the spouses, on dissolution, do not share in their respective profits and losses. However, where the accrual system is applicable to the marriage, then on dissolution the spouse with the smaller accrual is entitled to share in the accrual of the spouse with the higher value estate.

Generally, assets donated to a Trust do not form part of the donor’s estate, and will therefore not form part of an accrual claim during divorce proceedings. However, depending on the circumstances a court may decide otherwise as found by the Supreme Court of Appeal, in the case of PAF V SCF (788/2020) [2022] ZA SCA 101.

This case, where the spouses were married out of community of property with the application of the accrual system, has set a precedent regarding the court’s discretionary powers in cases where judges must go behind the Trust’s veneer. This is a principle as set out in accordance with the common law widely known as “piercing the corporate veil”.

Shortly before the divorce trial was to take place, the husband donated a large amount of funds to a new Trust where the spouses’ daughter was the beneficiary, with his brother appointed as trustee.

The wife included an accrual claim for half of the Trust funds as she contended that the husband was transferring these funds into a Trust so as to reduce the value of his personal estate and thereby reducing the wife’s accrual claim.

In deciding the matter the court initially considered whether:

1. The Trust was a disguise; and
2. Whether there was an abuse of the Trust form?

As it could not be established that the newly created Trust was not a legitimate Trust, as it was correctly created, the court had to look further to make a ruling and posed the question, “but for the husband not controlling the Trust, would the Trust exist?”

In deciding this, the court raised the following questions:

1. The timing of the creation of the Trust and trust donation: The court found the timing questionable, i.e. to create the Trust a mere 20 days before the divorce trial;
2. Where the Trust was created: The court found that as the Trust was created in the British Virgin Islands it seemed to have the intention to be out of the wife’s reach and control;
3. Whether the husband in creating the Trust communicated his intention to his estranged wife: here it found that even though they were married out of community of property and owned separate assets, the creation of a trust was a major financial decision and one that had to do with their daughter, therefore in a marriage such a decision should have been communicated;
4. The immediate need to provide maintenance for the child: in the eyes of the court the husband would have been liable for maintenance of the child either way and same was to be decided at the trial.

Although the court found that the Trust was a legitimate entity, it also concluded that the husband was indeed attempting to reduce his personal estate so as to reduce the accrual claim by his wife. It was ordered that half of the funds placed into the Trust were to be paid over to the wife upon the divorce.

In conclusion, it is not usual for a court to involve itself in determining the purpose of a Trust, it will do so where a clear abuse of the law and the legal process has taken place.