Hiding Trust Assets
​The principal understanding of a South African trust is that there must at all times be a separation of
ownership or control of trust assets, from enjoyment of trust benefits, this concept was established
in the Supreme Court of Appeal case of Landbank v Parker 2005 (2) SA 77 (SCA). This principle is
reinforced by section 12 of the Trust Property Control Act, No. 11 of 2018 which states that “Trust
property shall not form part of the personal estate of the trustee except in so far as he as the trust
beneficiary is entitled to the trust property.”

These days trust forms are progressively abused particularly in family trusts and business trusts
where trustees are also beneficiaries. On many occasions our courts had to deal with the principal
of a separation of ownership and control of trust assets where the trust was nothing but the “alter
ego” of a trustee or trust founder which justified a court “going behind” the trust form or “piercing
the veil” of the trust.

One needs to distinguish between “sham” and “abuse” scenarios when it comes to the
administration of trust assets. Abuse happens because of lack of adherence to the main duties of a
trustee, i.e that:

• a trustee must exercise an independent discretion;
• a trustee must give effect to the trust deed;
• a trustee must act with care, diligence, and skill in performing duties/exercising powers.

In the case of Badenhorst v Badenhorst 2006 (2) SA 255 (SCA) the Supreme Court of Appeal (SCA)
dealt with the question whether trust assets could be taken into account for the purposes of a
redistribution order in terms of section 7(3) of the Divorce Act 70 of 1979. In this case the parties
were married prior to 1 November 1984 out of community of property. This case was a classic
instance where one of the spouses had full control of the assets of the trust and used the trust as a
vehicle for his business activities. The trust in this case was founded by the husband's father and the
husband and his brother were co-trustees of the trust. Notwithstanding the fact that both were
trustees there was a clause in the trust that gave the husband the power to dismiss his brother at
any time as a trustee. Furthermore, the trust deed stated that the trustees had carte blanche to deal
with the trust assets as they deemed fit. The facts of the case were that the husband rarely, if ever
consulted with his co-trustee, income that should have been paid to the trust (as a shareholder) was
paid to the husband personally, property owned by the husband was financed by the trust and trust
property was described as personal property for purposes of credit applications.

The SCA relied heavily on the control test. To succeed in a claim that trust assets be included in the
estate of one of the parties to a marriage there needs to be evidence that such party controlled
the trust and but for the trust would have acquired and owned the assets in his own name. The

court stated that control had to be de facto and not necessarily de iure.” To determine whether a
party has such control the court looked at:

At the terms of the trust deed, and
Evidence of how the affairs of the trust were conducted during the marriage.

In Badenhorst the SCA confirmed that the value of the assets of a trust could be taken into account
for the purposes of a redistribution of assets order (in terms of s 7(3) to (6) of the Divorce Act. This
was due to the fact ‘the terms of the trust deed’ as well as ‘the evidence of how the affairs of the
trust were conducted during the marriage’ demonstrated that the respondent had de facto
‘controlled the trust and but for the trust would have acquired and owned the [trust’s] assets in his
own name’.

As stated above the husband had had ‘full control of the trust’ and, in so doing, had ‘paid scant
regard to the difference between trust assets and his own assets’. He had, consequently,
disregarded the ‘core idea’ of the trust, which is to preserve a separation between the control (qua
trustee) of trust property and the enjoyment of the benefits derived from such control (Landbank v
Parker). In brief, the application of the ‘control test’ demonstrated that the husband had abused the
trust by utilizing it as his alter ego.

Unfortunately, the Badenhorst case created confusion. Was the court piercing the trust veil of
exercising its discretion in terms of section 7 of the Divorce Act.

After the Badenhorst case there was a conflicting decision in the Western Cape High court in the
matter of Van Zyl v Kaye 2014 (4) SA 452 (WCC). In this case the judge remarked “I am not aware of
any matter in which a South African court has yet ‘pierced the veneer’ of a trust … Badenhorst did
not entail any disregard of the trust involved in that case …” In essence: Badenhorst “went to the
application of section 7(3) – (5) of the Divorce Act, instead than to any remedy for abuse of the trust
form.”

An opposite view was in the case of RP v DP 2014 (6) SA 243 (ECP). The court was of the view in this
case that “[T]he power of piercing either the corporate or the trust veil is derived from common law
and not from any general discretion a court may have. It is a function quite separate from … making
a redistribution order under s 7 of the Divorce Act 70 of 1979 … and must not be confused or
conflated with such power.” Badenhorst consequently concerned a piercing because “[t]he only way
the personal assets of a trustee can include what is notionally regarded as trust assets is by lifting or
piercing the trust veil and finding that the trust is indeed the alter ego of the trustee …”.

The next significant development was the SCA’s judgment in WT and Others v KT 2015 (3) SA 574
(SCA). Even though this case dealt with a marriage in community of property, the court dealt two
implicit, and yet definite, blows to the probability of trust assets being perceived in the accrual
framework. The very first, was the court’s finding that an essential distinguishing feature between a
marriage in community of property and the Badenhorst case was the absence of a ‘comparable
discretion as envisaged in section 7(3) of the Divorce Act, to incorporate the assets of a third party in
the joint estate’ (at para 35 of the WT matter). Academic commentators at the time correctly came
to the conclusion that this finding by implication stretched to accrual claims and thus supported the
perspective in the case of MM and Others v JM 2014 (4) SA 384 (KZP).

The effect of the WT case was that even if a trust is shown to be the trustee-spouse’s alter ego, the
value of trust assets can only be taken into account if marriage falls within redistribution
competency in sectio 7(3). The problem of this effect is that it permits “divorce planning” and allow
a trustee-spouse to “insulate” trust assets while simultaneously abusing the trust. This approach
does not gel with trust law and allows a spouse to evade obligations imposed by matrimonial
property law at divorce.

In the matter of REM v VM 2017 3 SA 371 (SCA) the SCA had to deal with a similar issue. In the REM
case, the court had to answer the question whether or not the assets of specific trusts properly
formed part of the assets of the trusts and not part of the husband's estate and, for that reason, not
falling under the accrual system. The court, for that reason, had to decide whether or not the trusts
in question were merely “alter egos” of the husband. Although the court did not find the trusts to be
merely “alter egos” of the husband, there are very significant repercussions that come about
considering this decision.

The court recognised an “equitable remedy” in the form of piercing the veil of an “alter ego” trust
which is approached flexibly in order to remedy an abuse of the trust form in particular
circumstances. The court mentioned that this remedy will usually find application where the trust
has been utilised for dishonest objectives or in an unconscionable fashion in order to avoid liabilities
or avoid commitments that the founder would otherwise have.

In REM the found that it is possible to “go behind” the trust if the aggrieved spouse can comply with
the following test, specifically demonstrating 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 the
respondent, in accordance with her accrual claim.”

Prof Bradley Smith contends that if this “test” is complied with' a declaration could then be made
that trust assets are to be incorporated in computing the accrual, and to satisfy any personal liability

of that spouse to make payment to the other spouse. He is of the view that the WT case pertaining
to locus standi of a spouse who is neither a trust beneficiary nor a third party who contracted with
the trust was wrong because a breach of “fiduciary duty” is not decisive. What is decisive he argues
is that the trust was unconscionably abused to evade an obligation owed to third party or a spouse.

What are the implications of new legal position?

In MM v JM 2014 4 SA 384 (KZP) it was ruled that the Matrimonial Property Act (MPA) does not
allow a court to make a judgment based on what it feels to be just vs RP v DP 2014 6 SA 243 (ECP)
where the court found that piercing may take place in an accrual context, because the court is
exercising a power derived from common law.

REM seems to support view in RP v DP in that piercing the trust veil is a power that is derived from
common law and exists independently of Divorce Act or the Matrimonial Properties Act.

In the midst of all of this there are two processes involved:

Is the trust an alter ego trust? The test to be applied here is the control test as set out in Badenhorst.
If the answer in the above question is in the affirmative, then the question is whether the trust was
unconscionably abused to avoid an obligation imposed by matrimonial property law? Where the
accrual system is applicable, this obligation is to properly account to the other spouse for the accrual
of his/her estate.

Prof Smith is of the view that the judgment in REM is leading us to conclude that:

There is adequate room for a divorce court to conduct an in-depth factual investigation to assess the
“true” accrual (see e.g., YB v SB 2016 1 SA 47 (WCC)); and the Matrimonial Properties Act should be
interpreted in line with the purpose of the Act namely to facilitate legal and economic equality
between spouses.

This purpose according to him is undermined if a trust is abused to conceal the true value of the
accrual. He argues further that the common law power can therefore co-exists with the Matrimonial
Properties Act.

As a result of the above one will be able to argue that the value of trust assets may be added to a
spouse’s accrual in appropriate cases:

Where trust was alter ego of spouse; and
(Ab)used to conceal true accrual.

In a recent case before the Western Cape High Court in the matter of LW v C W and Others [2020]
ZAWCHC 86 the court was of the view that the trusts were plainly abused by the husband and the
court acknowledged that the issue of going behind the trust form should be clearly distinguished
from the issue whether a particular trust is a so-called scam. The judge in this matter was of the
view that in the case of a ‘sham’ trust, no valid trust had ever come into existence, typically since the
required intention to form a trust was absent. On the other hand, the principle of “going behind the
trust form” entails acknowledging that the trust exists but ignoring the ordinary consequences of its
existence. A Court’s willingness to ‘go behind the trust form’ in a particular instance seems to be
closely linked to the notion of trust abuse. Dishonesty or unconscionability is not necessarily
requirements before trustee conduct can be described as trust abuse.

It seems to be only a matter of time that the above principles be ventilated before the Constitutional
Court.