By: Nicola Mawson
Every modern Godfather, it seems, has a trust fund located in the Cayman Islands allowing them to sock away cash from the Revenue Service – or creditors with baseball bats.
Trusts can legitimately be set up to preserve assets. Perhaps the most common one, leading to the term “Trust Baby” in the United States, is for estate planning, such as making provision for children (or animals) in the event of the testator’s death.
A worrying reason, though, is when it comes to one spouse transferring assets in a trust before a divorce to decrease the value of their estate, sometimes to nil.
This is what Professor Bradley Smith, a senior researcher at the IIE’s Varsity College and an Extraordinary Professor of Private Law at the University of the Free State, calls “divorce planning”.
Referring to a case from 2014, heard in the Supreme Court of Appeal (SCA), Smith highlighted that part of the ruling read: “The attitude of many divorce parties, particularly in relation to money claims where they control the money, can be characterised as ‘catch me if you can’.”
Speaking at the 2024 FISA conference this week, Smith pointed out the inconsistencies in judgments dealing with these sorts of trusts, with several SCA cases having created confusion.
There are typically two forms of trust abuse that have come through from case law, Smith said. One is when they are set up to avoid a liability, and the other is when the golden rules of trusteeship such as exercising an “independent discretion”, and acting with care, diligence and skill in giving effect to the trust deed – are thrown out of the window.
This, the professor said, is when the founder, trustee or beneficiary treats the trust as if it is their own personal property – making it their “alter ego”. The defining case in this regard is the Badenhorst matter from 2006, said Smith.
In Badenhorst vs Badenhorst, the estranged wife, as the appellant, wanted her almost ex husband’s trust to be considered as part of his estate in a redistribution of assets claim. This case, explains a website called divorcelaws.co.za, was a classic one in which the almost-ex husband had full control over the trust, which he used as a vehicle for his business activities. Even though there was another trustee – his brother – he could be fired at any point.
The SCA determined that the soon-to-be ex husband had control over the trust because he rarely, if ever, consulted his co-trustee, among other aspects. Because the respondent “paid scant regard to the difference between trust assets and his own assets”, the court ruled that the trust was effectively part of his estate.
This led to what has become known in legal circles as the “control test”. Smith explained that there are two factors to consider to determine whether a spouse exercises factual control:
- The terms of the trust deed, and,
- Evidence of how the affairs of the trust were conducted during the marriage,
But, Badenhorst created confusion, said Smith, because it was unclear whether the “control test” was confined to marriages involving a redistribution order
Badenhorst dealt with a matter in which the parties were married out of community of property without the accrual system. In 2017, the SCA dealt with a case in which accrual was involved in the matter of REM vs VM.
This led to a different test being developed for marriages under the accrual regime, that of the aggrieved spouse having to prove that the other spouse “transferred personal assets to [the trust] and dealt with them as if they were assets of [the trust] with the fraudulent or dishonest purpose of avoiding his obligation to properly account to the [aggrieved spouse] for the accrual of his estate and thereby evade payment of what was due to [her], in accordance with her accrual claim”.
Basically, hiding assets in the trust specifically so they don’t accrue to an estate.
Smith explained that this case was hailed as a victory in legal circles as it removed doubt as to whether the value of the assets of an abused trust could, in principle, be considered for the purposes of an accrual claim at divorce.
That left the legal system with one of two tests to follow. Either the Badenhorst control rule, when dealing with redistribution orders, or the more arduous REM test, when it comes to accrual.
And then there was the 2022 PAF v SCF case, in which a trust was created by one party to a divorce, three weeks before the proceedings, who deposited R2.2 million into it, but his brother was the trustee, and his daughter the sole beneficiary. The soon-to-be-ex wife claimed he was trying to diminish the value of his estate to limit her accrual claim.
Smith said that this SCA judgment didn’t apply to either of the two previous case laws - because no control was present. However, the SCA decided that if control was present, the less complex control test in Badenhorst could be applied to accrual marriages too. But because no control was evident in PAF, the SCA created a new test: Were the assets transferred to the trust with the intention of frustrating the other spouse’s accrual claim?
In 2023, the SCA’s judgment in MJK v IIK ignored crucial aspects of the PAF ruling, and actually criticised the lower court for applying the control test in a marriage involving accrual sharing.
While progress has been made in combating unscrupulous “divorce planning”, Smith feels that furthe litigation is needed to confirm the actual test to be used given these confusing rulings.
Frankly, if all of this was a Facebook relationship, its status would be “it’s complicated”.
PERSONAL FINANCE