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This article discusses the approach adopted by South African courts when deciding whether it is legally permissible to consider the value of trust assets when determining the value of the spouses’ estates for purposes of calculating accrual claims when divorcing parties are married out of community of property subject to the accrual system or the division of the divorcing parties’ joint estate when they are married in community of property. Spouses who are married out of community of property with the accrual system, conclude an antenuptial contract, which may expressly exclude assets they wish not to form part of the growth of their respective estates should the parties divorce. Excluded assets in terms of the antenuptial contract will not form part of the accrual claims during divorce. When trust assets and other matrimonial property lie at the heart of judicial determination of the division of the divorcing parties’ joint estates or the determination of the value of the divorcing parties’ accrued assets during divorce have always been a difficult issue in regard to on which basis the value of trust assets may be considered when determining the values of the spouses’ estates. This article demonstrates that financially stronger spouses tend to create trusts on the eve or during divorce proceedings to prejudice financially weaker spouses.
On the one hand, trust property is intended to be separate from the founder and/or trustee’s personal estate in terms of s 12 of the Trust Property Control Act 57 of 1988 (TPCA). On the other hand, ss 3 and 4 of the Matrimonial Property Act 88 of 1984 (MPA) provides a formula to be adopted when calculating the accrual of divorcing parties. This statutory guideline is adopted to ascertain what needs to be considered when determining the value of the spouses’ estates. Recently, the Supreme Court of Appeal (SCA) was approached to provide much-needed clarity on the issue in Paf v Scf 2022 (6) SA 162 (SCA).
Prior to or during the commencement of divorce procedures, financially stronger spouses tend to create trusts with a view of protecting their assets from creditors. Such spouses transfer their assets into trusts either on the eve of divorce, or during divorce proceedings to render their respective assets unreachable. One of the reasons for doing this is to protect their assets from forming part of the matrimonial assets. Normally, once a trust deed is created and assets are transferred thereto, such assets are separate from the founder’s and trustee’s personal estates. Under such circumstances the other spouse would find it difficult to extend their matrimonial claim to trust assets or portion of the value of the trust assets simply because such assets are separate from the personal estate of either the founder or trustee. To prevent the abuse of the provisions of the trust deed, a founder who creates a trust needs to appoint a trustee who will manage and control trust assets for the benefit of the beneficiaries (see MJK and Others v IiK 2023 (2) SA 158 (SCA) at paras 32-33). This position gives the impression that the founder or trustee cannot enjoy the ownership of or absolute control thereof and to personally benefit in trust assets unless such a trustee or founder is also a beneficiary.
Financially stronger spouses, in most cases, create these trusts with the intention of defeating the claims of creditors or with the fraudulent intention of depriving financially weaker spouses of their rightful matrimonial claims when a joint estate is divided, or accrual is calculated (see Paf at para 5). Put differently, such spouses use trusts as vehicles to accumulate and protect their personal estates. Under such circumstances, when a court can determine that such a trust was abused and used to achieve fraudulent results, a court will find that such a trust is an ‘alter ego trust’. In the persuasive authority of RP v DP and Others 2014 (6) SA 243 (ECP) at para 22, the court held that where a trust has been created to hide personal assets, the courts should, on sufficient evidence, pierce the trust veil and consider the value of trust assets as part of the personal estate assets. This is an illustration that the party who claims accrual, which also includes the value of trust assets, bears the burden of proof to show that the other party –
Where parties consider creating trusts with the intention of hiding their assets, a court, during divorce, should exercise its common law discretion to pierce the trust veil and consider the value of such trust assets when determining the division of joint estates and/or the difference in value of the divorcing parties’ estates for accrual calculations (see Paf at para 37). This position paves the way to allow spouses, whose estates show smaller accruals, to claim accrual against the difference that the estate of the other spouse shows in terms of ss 3 and 4(1)(a) of the MPA and through the court’s common law discretion thus giving effect to the inclusion of the value of trust assets. The purpose of this exercise is to strike a balance between affected matrimonial rights of financially weaker spouses against the rights of spouses who are financially strong. In practice, mostly these events occur in instances where divorcing parties are married out of community of property subject to the accrual system. It must be noted that, previously, it was difficult for financially weaker spouses to establish an available legal tool that they could rely on for the purposes of fair and equitable division of the spouses’ joint estates or accrual claims that would include the value of trust assets (see MM and Others v JM 2014 (4) SA 384 (KZP) at para 18-19). Such spouses suffered serious financial prejudice as they were unable to extend their accrual claims to include the value of the defaulting spouses’ trust assets.
Furthermore, a spouse with a smaller accrual is required to prove that the trust assets have ostensibly been held in a trust while the other spouse has enjoyed control and management of trust assets or at all material times such spouse has been the beneficial owner of such trust assets. These circumstances encourage the courts to exercise their common law powers to declare the value of trust assets as part of defaulting spouses’ personal estate. Such trusts are mostly regarded as a sham or simulated or alter ego when it is found that there has been abuse of such trusts (see Paf at para 26). Importantly, in a persuasive authority of Van Zyl and Another NNO v Kaye NO and Others 2014 (4) SA 452 (WCC) at para 16, the court held that when a trust is deemed a sham, such a trust will be regarded as if it has not existed, and its assets shall remain the assets of the defaulting spouse and will accordingly be deemed to form part of their personal estate. In such instances, a court entertaining a divorce action will consider including the value of the assets in a trust when determining patrimonial assets to which divorcing parties are entitled.
Further, although these trust assets, from the strict principles of trust law, are believed to be separate from the founder or the trustee’s personal estate. Should the alleging spouse produce sufficient evidence, which requires a court to conduct an in-depth inquiry into the facts of the case, the court should proceed to assess any possible dishonesty on the part of the financially stronger spouse regarding the true intention of having created such a trust in the first place. Should the court be satisfied that neither of the spouses will suffer any prejudice because of considering the value of the assets for the purposes of the patrimonial consequences of the divorcing parties’ marriage, the court will consider the value of such trust assets. After evaluating all the relevant evidence and satisfying itself that indeed a trust was created to preclude and/or frustrate a financially weaker spouse’s right to matrimonial property claim, a court is empowered to decide whether the trust deed was created to hide assets not to benefit trust beneficiaries. The SCA in Paf at para 39 stated that ‘where the trust form is abused to prejudice an aggrieved spouse’s accrual claim, a court should exercise its wider power in terms of the common law to prevent such prejudice’. The introduction of this common law power principle comes to the rescue of financially weaker spouses. This is the case because the majority of these spouses will have suffered financial prejudice due to the lack of available legal avenues to enable them to extend their matrimonial claims to the value of their financially stronger spouses assets that they hid in trusts because the MPA and the Divorce Act 70 of 1979 are silent with regard to whether or not the value of trust assets qualifies to form part of the matrimonial assets in a case where such trusts were created for a wrong purpose.
In conclusion, to enable the courts to be consistent when pronouncing on this issue and to also achieve certainty in judgments, it is submitted that the legislature should consider including the necessary provisions in s 3 of the MPA that cater for the inclusion of the value of trust assets when it is established that a financially stronger spouse created a trust with an intention of defrauding, firstly, by abusing such trust deed with a view of hiding assets for their own benefit and to also frustrate the other spouse’s matrimonial claim. The proposed provisions should also allow a court to exercise its statutory power as opposed to a common law power. This should be the case when a court is required to divide the divorcing spouse’s joint estates when married in community of property or determining the value of the spouses’ estates for calculating accrual claims from the estate that show great value when divorcing spouses are married subject to the accrual system.
Dintoe Daniel Kgole LLB LLM (Estate Law) LLM (Divorce and Pension law) (NWU) is a candidate legal practitioner at Marumoagae Attorneys Inc in Johannesburg and Mahikeng.
This article was first published in De Rebus in 2023 (Sep) DR 16.
