Trusts and Accrual Claims – Piercing the (Bridal) Veil

Anybody who has been through a contentious divorce, which category most divorces fall under, knows how many different tactics can be used by an aggrieved ex-partner to manipulate the outcome of the legal conflict in their own favour.

Some of these means are not exactly above board and some are plainly against good morals. One of these less than lawful methods is the exploitation of the special legal personality attached to trusts.

The biggest battles in most divorces concern two issues: money and children. Oftentimes neither spouse wants to give even an inch of leeway to the other due to anguished feelings and injured pride. What this leads to is all manner of unscrupulous contrivances.

With the recent judgement of the Supreme Court of Appeal in REM v VM 2017 (3) SA 371 (SCA) (“the REM case”), there has been a huge fight back against the use of trusts in the field of family law in general and divorce in particular.

Background

Starting way back in 2006, with the case of Badenhorst v Badenhorst 2006 (2) SA 255 (SCA), the Supreme Court of Appeal provided some relief when it came to the issue of shielding assets using a trust’s separate legal personality. In this case it was decided that the value of assets in the trust could be taken into account when it came to considering a redistribution order, which applies to marriages entered into before 1 November 1984, being the date that the Matrimonial Property Act came into force.

The reason for the provision relating to redistribution orders is to curb the unfair results of marriages out of community of property before the accrual system came into effect. Simply put, before 1984 partners wishing to get married out of community of property did not have the option of the accrual system, hence the need for redistribution orders so as not to prejudice those spouses because they never had the option of an accrual.

In the Badenhorst case, the court held as it did because the terms of the trust deed and the evidence as to how the trust was being conducted during the marriage were indicative of the fact that the trust founder spouse maintained actual control of the trust, but wished to make use of the trust as if it weren’t simply just a pool for his money.

The reasoning behind this decision was that the founding spouse had not respected the difference between trust assets and his own assets, resulting in a blur in the distinction between which assets belonged to him and which assets were controlled by the trust.

Thus, the values of the assets of the trust were taken into account in determining the extent of the redistribution order in the case in question. This amounted to a “piercing” of the trust’s veil, which is usually respected. This “piercing” closely resembles what is referred to in commercial law as “piercing the corporate veil.” Piercing the corporate veil occurs in order to get past the separate legal identity of a business so as to hold a natural person personally liable for certain consequences due to an abuse of the separate legal identity of said business.

The REM Case

In the REM case, the Supreme Court of Appeal had to answer the question whether the assets of certain trusts legitimately formed part of the assets of the trusts and not part of the appellant’s estate and, therefore, not falling under the accrual system. The court, therefore, had to determine whether the trusts in question were simply “alter egos” of the appellant. While the court did not find the trusts to be merely “alter egos” of the appellant, there are very important consequences that come about because of the decision.

The court acknowledged an “equitable remedy” in the form of piercing the veil of an “alter ego” trust which is approached flexibly in order to redress an abuse of the trust form in certain circumstances. The court stated that this remedy will generally find application where the trust has been used for dishonest purposes or in an unconscionable manner in order to evade liabilities or avoid obligations that the founder would otherwise have.

The most important aspect of this decision was the opinion of the court that the main consideration in cases of trusts and the patrimonial consequences of divorce is whether the trust-creating spouse had attempted to prejudice a monetary claim of the other spouse by administering the trust in a manner that is an abuse of the trust form.

The court held that this would occur, in the accrual system, where the trust-creating spouse had set up the trust, transferred assets to it and dealt with them as if they were trust assets in a fraudulent or dishonest attempt to hide them and prejudice his/her spouse’s accrual claim. In such situations, so the court held, the assets of the trust in question would be used to quantify the accrual claim of the aggrieved spouse and to satisfy any payment owed under the accrual regime to the other spouse.

Conclusion

The assets of an alter ego trust can now be taken into account in order to calculate the accrual claim of a prejudiced spouse, providing more protection to less financially-stable divorcees who are prejudiced by the concealment of assets by unscrupulous ex-spouses.

Clinton van Niekerk – Candidate Attorney
clinton@mrf.co.za

Kim Rademeyer – Partner
kim@rademeyer.co.za

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