Written by Alessia Ryan Taken from Trusts & Divorces Seminar by Ceris Field
In the recent Supreme Court of Appeal matter of REM v VM 2017 (3)SA 371 (SCA) 9 March 2017 the Court was asked to rule whether the trust assets should be taken into account for the calculation of the accrual of a marriage out of community of property, with the accrual system being applicable.
In the aforementioned matter the divorce order was granted in 2011 but the patrimonial claim was postponed sine die. The parties’ antenupial agreement contained the following clauses which were relevant to the patrimonial claim:
- The husband’s exclusionary clause excluded the following assets:
- The assets….except for contributions made to the RMF Trust after the date of the marriage, which contributions and growth on such contributions will be subject to the accrual system…
- A beneficial interest in Vacation Investment Port Folio Trust and/or any other trust conducting business in the vacation time share property market
- Members interest in RM Consultants CC;
- Beneficial interest in the RMF Trust, fixed property within RMF Trust Portion 400 of Erf 375 Rietfontein.
The wife claimed the following in the Court a quo:
- Orders proclaiming the assets held by the Shajo Trust, the RMF Trust and the Capmark Business Trust were the husband’s assets. She purported that the assets were to be taken into account when determining the accrual of the husband’s estate for the purposes of her accrual claim, as they were not excluded from the accrual in terms of the ANC. In the alternative, the wife claimed that the trusts were simply the alter egos of the husband and the assets of the trusts were in reality his assets as he was in control;
- An order setting aside the transfer of the husband’s 50% membership interest in Milcar Development CC to the Shajo Trust, based on the husband’s fraudulent intent to defeat her accrual claim;
- An Order declaring that “contributions” that were made to the RMF Trust formed part of the husband’s estate in terms of the ANC.
- The assets in the Shajo and Capmark Trust were not excluded from the accrual by the terms of the ANC;
- The Shajo and Capmark Trusts were indeed the alter egos of the husband as he had managed these trusts in a proper manner;
- The assets of the two Trusts were accordingly to be taken into account when determining the accrual of the husband’s estate.
- That the husband’s beneficial interest in the RMF Trust be excluded for Accrual in terms of the ANC ; and
- The use of the word contribution in the ANC meant any asset that accumulated in the RMF Trust after marriage, irrespective of how it was accumulated.
On appeal to the Supreme Court of Appeal the Court found the following:
- The claims which relate to the Shajo Trust, RMF Trust and the Capmark Business Trust the Supreme Court of Appeal agreed with the Court a quo’s conclusion that the husband’s beneficial interest in the RMF Trust was excluded for accrual purposes in terms of the ANC and the assets held by the Shajo Trust and Capmark Business Trust were not excluded from the accrual of the Applicant’s estate in terms of the ANC.
However the enquiry is then the issue as to whether the assets held by the Shajo Trust and Capmark Business Trust legitimately form part of the assets of those trust.
The wife alleged that the assets held by those trusts formed the part of the husband’s estate and sought orders declaring the trusts were his alter ego. She alleged that the husband had:
- Established these trusts to conceal his assets and with the purposes of defeating her patrimonial claims;
- Transferred his personal assets to the trusts and in registering these assets in the trust, did not intend to transfer ownership;
- Dealt with the assets as his own and were it not for the trusts would have acquired and owned these assets in his own name;
- Failed properly to perform is fiduciary duties as a trustee.
Furthermore the husband advised that he had used the funds of his trusts to pay personal maintenance obligations.
Furthermore he effected it by crediting his loan account in these trusts. He had also utilised the funds in the account to pay personal liabilities. He had then left it to his accountant, a joint trustee in the Shajo Trust, to reconcile these payments and allocate them to various entities. He also accepted that he shifted money between various accounts including his personal account and used the funds of the trusts to fund his business enterprises.
It was apparent that the husband had disposed of his 50% interest in Milcar to the Shajo Trust without receiving monetary value, as no payment was made for the transfer, it being a transaction on paper. This transfer took place after the wife had instituted action for divorce. She submitted that the purpose of the transfer was to fraudulently exclude his assets from the reach of her accrual
The Court’s reasoning:
- The claim that the husband had used these trust as his alter ego, necessarily involves an acceptance of the valid existence of the trust. (Van Zyl and another NNO v Kaye NO and others 2014(4) SA 452 (WCC) para 21.) The wife did not claim that the trust were a sham and therefore did not exist with the consequence that the assets did not vest in the trust on this
- The remedy of going behind a validly established trust form, or “the piercing its veneer” is correctly described as:
“an equitable remedy in the ordinary, rather than technical, sense of the terms; one that lends itself to a flexible approach to fairly and justly address the consequences of an unconscionable abuse of the trust form in given circumstances. It is a remedy that will generally be given when the trust form is used in a dishonest or unconscionable manner to evade a liability, or avoid an obligation (Van Zyl (supra) para 22.)”
- The husband’s object was to isolate each business so that to protect the demise of one, not affecting the financial viability of the other businesses. This was deemed a legitimate business strategy.
- The evidence however did not support the wife’s contention that these trusts were established with the object of defeating any patrimonial claims of the husband. However, the husband’s demeanour in allegedly transferring personal assets to the trust, dealing with them as if they were assets of this trusts and not properly performing his fiduciary duties, all with the object of concealing these assets and thereby defeating the wife’s accrual claim , are the central issues in determining whether the trust veneer should be pierced.
- The ambit of a claim of this nature must be considered with due regard for the provisions of the Trust Property Control Act 57 of 1988. Section 1 provides for the transfer of interest or ownership in property or assets to a designated person or class of persons, as well as control of such property or assets by a trustee or trustees in accordance with the provisions of the governing trust instrument.
- Section 12 provides that trust property does not form part of the personal property of a trustee, except to the extent that a trustee is entitled to such trust property as a beneficiary in terms of the trust instrument.
- Breach by the trustee of his fiduciary duties in the administration of the trust, is not the determining factor. In either case, a claim lies against the trust, or the errant trustee on the basis that the unconscionable abuse of the trust form by the trustee, in his administration of the trust, through fraud, dishonesty or any improper purpose prejudices the enforcement of the obligation owed to the third party, or a spouse.
- The wife had to prove that the husband’s transferred personal assets to those trusts and dealt with them as if they were assets of the trusts with the fraudulent or dishonest purpose of avoiding his obligation to properly account to the wife for the accrual of his estate and avoid payment of what was due to the wife.
- If the above has been established, a declaration could be made that the trust assets are to be used for the calculation of the accrual of the husband’s estate as well as satisfy any personal liability of the husband’s to make payment to the wife.
- Although the husband in this matter administered the trusts with very little regard for his fiduciary duties as a trustee and without proper regard for the essential dichotomy or control, such conduct may have justified his removal as a trustee, or the appointment by the Master of an independent co-trustee in terms of Section 7(2) of the Trust Property Control Act. The evidence did not prove that he transferred personal assets to the trust and dealt with them as if they were assets of these trusts, with the fraudulent or dishonest purpose of avoiding his obligations to properly account to the wife for the accrual of the estate.
- The Supreme Court of Appeal held that the assets of the trusts were not to be taken into account in determining the accrual of the husband’s estate.
- The appeal was upheld to the extent that the assets of the two trusts were not found to be the husband’s assets.