Can you protect your property with trusts in case of a divorce?
This article is based on, and the accreditation is given to Prof. Bradley Smith BCom LLD (UFS), Senior Researcher at the Independent Institute of Education’s Varsity College and an Extraordinary Professor of Private Law at the University of the Free State, for his article which was first published in De Rebus in 2024 (June) DR 1,6 where he revises the workings of private law.
Using a trust is a common estate planning strategy, but it can also protect your assets in divorce proceedings. By moving property into a trust, you can reduce your estate’s value, potentially limiting or eliminating your spouse’s claim during a divorce.
There has been an increase in claims that assets within a misused trust should be considered when dividing matrimonial property during divorce. In 2006, the Supreme Court of Appeal (SCA) delivered a key judgment in the case of Badenhorst v Badenhorst. The court ruled that for trust assets to be included in a marital estate, there must be evidence that one spouse coordinated the trust and would have owned the assets personally if not for the trust. This control must be factual rather than legal, as displayed by the trust deed and its administration during the marriage. The court found that the respondent had full control over the trust, using it for business activities and discounting the distinction between trust and personal assets. Thus, the trust’s assets were deemed in the redistribution claim.
While the “control test” is determined for marriages eligible for redistribution orders, its application to marriages under the accrual system remains uncertain. Two differing SCA judgments highlight this: PAF v SCF (2022) and MJK and Others v IIK (2023).
Legal Position on Trusts in Marriages with the Accrual System Before the PAF Case
The 2017 REM v VM judgment clarified that assets in a misused trust could be included in an accrual claim during a divorce. Swain JA’s test requires proving that the respondent transferred personal assets to the trust and managed them to avoid accounting for their estate’s accrual.
This involves:
- Using the “control test” from Badenhorst to show the trust is the spouse’s alter ego.
- Demonstrating the trust was used to evade proper accrual accounting.
The PAF Case: A Challenge to the REM Approach
In the PAF case, the respondent was entitled to an accrual claim due to a smaller accrual in her estate. Just before their divorce trial, the applicant established a trust in the British Virgin Islands, naming his brother as trustee and his daughter as beneficiary, and donated £115,000 (around R2.2 million) to it. The court found this activity was intended to deny the respondent of her accrual claim fraudulently.
The SCA upheld this decision, noting:
- The High Court could include the donation in the applicant’s estate by piercing the trust’s veneer due to misuse.
- Both spouses have a protectable conditional right to accrual, preserved against irregularities and bad faith.
- Courts can probe trust abuse during divorce, using common-law powers like piercing the corporate veil in company law.
- The ‘control test’ from the Badenhorst case applies to marriages with an accrual system, aiming for fair patrimonial consequences.
- Even without control over the trust, assets could be considered if placed beyond control to frustrate the other spouse’s claim. Evidence showed the applicant created the trust and made the donation to hinder the respondent’s accrual claim.
Implications of the PAF Case
The PAF case has clarified that courts can consider all evidence in accrual claims involving trust from abuse. This expands the scenarios where courts may pierce the trust veneer beyond the typical alter ego situation, even if the errant spouse does not control the trust. This is a significant step towards addressing unethical ‘divorce planning.’
Additionally, the PAF case affirms that the ‘control test’ from the Badenhorst case applies to marriages under the accrual system, challenging the accuracy of the test for trust-veneer-piercing in such marriages as established by the REM case.
So does the PAF Court’s ‘Control Test’ Bring Hope Amidst Uncertainty?
The PAF court’s application of the ‘control test’ and its broad judicial discretion in cases of trust abuse in the accrual setting benefits spouses affected by manipulative divorce planning. This case advocates a unified test for addressing trust abuse in both redistribution and accrual contexts. However, the MJK court’s failure to engage with the PAF case represents a setback. We should be aware of these differing SCA judgments on the ‘control test’. Although the PAF approach is ideal, the correct legal position remains indeterminate.
Stay optimistic, as the legal landscape is progressing, and there is hope for more clarity in the future.