Hidden assets in family trusts

Beware of the misuse of trusts in a divorce case

Divorce is never pleasant. Where there is a lot at stake financially, and particularly if the divorce is acrimonious, some spouses will attempt to keep certain assets out of the joint estate to avoid equitable distribution of assets and retain more than their fair share. This often happens where one spouse feels they have contributed more to the accumulation of assets, for example if one runs a successful business. However, the law has a procedure for testing the legitimacy of a trust vehicle and it can detect when a trust is being misused or abused. We examine recent legal developments and what they mean for anyone going through a divorce.

Family trusts

Family trusts are often created for legitimate estate planning purposes. They help manage and protect assets, ensuring they’re passed on according to the trust creator’s wishes. However, trusts can also be used to shield assets from a spouse during a divorce. This is often referred to euphemistically as “divorce planning”, but in fact it is a deception. By placing assets in a trust, one spouse may try to reduce their estate and limit the other spouse’s claims. 

Over the last 20 years, there has been a rise in cases where spouses – often but not always wives – claim that the assets of a trust misused in this manner should be included in the division of matrimonial property. This has led to significant legal battles and landmark judgments. 

Badenhorst vs. Badenhorst

In 2006, the Supreme Court of Appeal (SCA) in South Africa decided a pivotal case: Badenhorst vs. Badenhorst. The court held that for trust assets to be considered part of a spouse’s estate there needs to be evidence that the spouse controlled the trust and, without the trust, would have owned those assets personally. This is known as the “control test”.

To meet this control test, it must be shown that the spouse used the trust for personal business activities and didn’t distinguish between trust assets and personal assets. This case set a clear precedent for how trusts could be challenged in divorce cases.

REM vs. VM

In 2017, the case of REM vs. VM illustrated that trust assets could be considered in accrual claims at divorce if it was proven that one spouse transferred personal assets to a trust to avoid accounting for their estate’s true value. This is a form of evasion, and it introduced a two-step process: first, proving the trust is the alter ego of the spouse and, second, showing that the trust was used dishonestly to hide assets. 

PAF vs. SCF

In 2022, the PAF vs. SCF case brought new insights. In this case the court recognised that a spouse has a “protectable contingent right” to accurate accrual accounting, even before divorce. The court could pierce the trust veil if there was evidence of trust abuse, like setting up a trust to hide assets right before a divorce. The PAF case emphasised the court’s power to look into the facts and uncover any misuse of trusts.

This case was significant. It confirmed that the control test applies not only to redistribution orders but also to marriages under the accrual system. This means that even if a spouse doesn’t directly control the trust, the court can still consider trust assets if it deems there was an intent to defraud the other spouse. The accrual system has come under scrutiny lately, with the Greyling case judgment questioning the fairness of the “without accrual” matrimonial regime.

However, just a few weeks later, a different panel of the SCA in MJK v IIK concluded that the control test only applied to redistribution orders. This conflicting judgment has created uncertainty among legal professionals.

Conflicting decisions

Where does this leave us? The PAF case represents a significant step towards preventing dishonest “divorce planning” by ensuring that trusts can’t easily be used to hide assets. But the conflicting MJK decision means there’s still some legal ambiguity. For those going through a divorce, this highlights the importance of thorough legal advice and representation.

In summary

1. Trusts can be used to manage and protect assets but may also be misused in divorce.
2. The control test helps determine if trust assets should be included in the marital estate.
3. Recent cases like PAF v SCF have expanded the court’s ability to address trust abuse.
4. Legal uncertainties remain due to conflicting judgments. 

Understanding your rights and showing that you have a grasp of the latest legal developments can make a significant difference in achieving a fair outcome. A forensic accountant can be a big help in uncovering hidden assets in divorce.

Seek the advice of an excellent divorce lawyer if you suspect hidden assets

SD Law is a firm of experienced divorce attorneys based in Cape Town, with offices in Johannesburg and Durban. If you are considering divorce and want to discuss your options, or if you think your spouse is being less than honest with you about their finances, call family lawyer Simon Dippenaar on 086 099 5146 or email sdippenaar@sdlaw.co.za for a confidential discussion. 

Further reading:

• Concealed assets in divorce
• Forensic accountants and divorce
• Protecting business interests during divorce

Divorce Attorney Cape Town

http://divorceattorneycapetown.co.za/

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