Alter ego trusts

Safeguarding wealth or sneaky business? The hidden truth behind trust assets in divorce

Divorce does not always bring out the best in people – even people who are normally decent and fair. It can cause some people to become quite cagey about their assets, particularly if they feel their spouse is likely to claim a disproportionate share – disproportionate in the eyes of the asset holder at any rate. Often where there is a wide discrepancy in earnings between spouses, and where the lower earner has not contributed in kind, i.e., by raising the children or helping the spouse out in other ways, the higher earner feels the spouse’s claim for 50% of the estate is unfair. However, if the couple is married in community of property this entitlement is legitimate. There is also a claim to be made if they are married out of community of property with accrual, although the calculation is not as simple. To get round the division of assets required by law, the wealthier spouse may create trusts to shield their assets from creditors or to disadvantage their financially weaker partner during divorce proceedings.

Is this legal? Candidate attorney Dintoe Daniel Kgole recently wrote about this topic in the legal journal De Rebus. Here we summarise his article in plain English for our readers.

How trusts are used in divorce

The inclusion of trust assets when determining the value of spouses’ estates in divorce cases is controversial. This is not a concern if the couple is married out of community of property without accrual, but it becomes relevant when the marriage is out of community of property with the accrual system or in community of property. Couples married in community of property split the joint estate equally on the dissolution of the marriage (i.e., divorce). In the case of out of community of property with accrual, the spouses will have an antenuptial contract in place specifying which assets are excluded from the accrual calculation. Trust assets are a contentious issue, as a trust can provide a way to hide money and protect it from being divided during a divorce.

Purpose of a trust

A trust is a legal arrangement in which assets are held by one party (the trustee/s) for the benefit of another (the beneficiary/beneficiaries) on the instructions of the owner (the donor/founder/settlor). Trusts are intended to separate assets from the founder or trustee’s personal estate, but the Matrimonial Property Act (MPA) provides guidelines for calculating accrual, which may involve trust assets. 

A recent Supreme Court of Appeal (SCA) case, Paf v Scf (2022), sought to clarify this issue. Financially stronger spouses sometimes use trusts to protect their assets, transferring them on the verge of divorce to make them inaccessible. This practice aims to prevent these assets from being part of the matrimonial property. Courts consider these trusts “alter ego trusts” when they are used for abusive or fraudulent purposes. 

Burden of proof lies with the claimant

If a spouse claiming accrual believes the other is hiding assets in a trust, the burden of proof lies with them to establish the inclusion of trust assets in the divorce settlement. They must show that the other spouse transferred assets to the trust, acted as a trustee and beneficiary, exercised control over trust assets, and had beneficial ownership of trust assets. When spouses attempt to hide assets in trusts, courts may exercise their common law discretion to insist the trust assets be treated as part of the person’s personal wealth in divorce asset division. 

When is a trust not separate from personal assets?

This approach seeks to balance the rights of financially weaker spouses against those of financially stronger ones. Trust assets, despite being legally separate, can be considered part of a spouse’s personal estate if the trust was created to hide assets. In such cases, a court may treat the trust as a sham or alter ego and include the trust assets in the divorce asset calculation. While trust law views trust assets as separate from personal assets, a court may examine the true intention behind the creation of the trust. If it finds the trust was established to defraud or disadvantage the other spouse, it may include the trust assets in the matrimonial property claim. 

More clarity is needed

There is a need for legislative clarity in cases involving trust assets in divorce proceedings. The Matrimonial Property Act needs to be amended to address explicitly the inclusion of trust assets that were created with the intent to defraud a spouse. Such provisions would ensure consistency in court rulings and provide a clear legal framework for addressing this issue. This is especially important where couples are married in community of property or out of community of property with the accrual system, when trust assets can significantly impact the division of assets during divorce. 

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

For the time being, the law is imperfect and it is up to the less wealthy spouse (usually but not always the woman) to prove that trust assets should be part of the divorce settlement. SD Law is a firm of experienced divorce attorneys based in Cape Town, with offices in Johannesburg and Durban. We have extensive experience helping clients arrive at a fair and equitable divorce agreement. If you are considering divorce and suspect 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
• Husband may not sell multimillion rand former matrimonial home prior to divorce, says court
• 7 advantages of holding assets in a trust
• Trusts – frequently asked questions

Divorce Attorney Cape Town

http://divorceattorneycapetown.co.za/

View more posts from this author