DO ASSETS IN A TRUST FORM PART OF THE ASSETS IN A MARRIAGE
The meaning of a trust is defined in The Trust Property Control Act as an arrangement through which the ownership of property of one person is, by virtue of a trust instrument, made over or to another person, the trustee who hold it for the benefit of the beneficiary(ies) of the trust. Therefor a person whom transfers his assets to trustee(s) relinquishes his control of the assets to the trustee(s), who then become the owner(s) of the assets, but not for their own benefit, but for the benefit of the beneficiary(ies) of the trust. From this “special kind” of ownership by the trustee(s), it is clear that there is a separation from control of the assets by the trustees as owners, and enjoyment of the assets by the beneficiary(ies) of the trust.
The person who wishes to transfer his assets into a trust will draft a trust deed wherein he indicates how the trust must be administired and who the beneficiary(ies) of the trust will be. It is allowed that the person who transfers his assets to the trust, can be a trustee and a beneficiary of the same trust if he as a trustee is assisted by an independent co-trustee to scrutinize the control he has over the assets. After the trust deed is set up the person will usually with a series of transactions transfer his assets into the name of the trust. The trustee(s) who receive the assets and become the owner(s) thereof are then obliged to administer the assets according to the conditions of the trust deed for the benefit of the beneficiary/ies of the trust.
From the above it is evident that the person who transfers his assets into a trust passes his control of the assets from his private estate to the trustee(s) of the trust. In recent times trusts have been under attack, because trustees who transfer their own assets into the trust did not effectively pass over the control of the assets to the trustee(s) of the trust and are still controling the assets as if the assets are still in their private estate as if nothing has changed. In such a case the trust is known to be an alter ego of the trustee. An alter ego means that there are two persons living in one person.
In the case Badenhorst v Badenhorst which came before the Appeals court in 2005 the wife claimed that a family trust that the husband controlled was an alter ego of the husband and that the court must use its powers under clause 7 of the Divorce Act to include the trusts’ assets in a redistribution of the assets of their private estates. The facts are; in 1994 the couple created the Jubli Trust. A farm, two commercial buildings and an industrial erf, a beach cottage and also fifty percent of the shares of a private company named, Catwalk Investments (Pty) Ltd were registered in the name of the trust. The remaining fifty percent of the shares of Catwalk Investments (Pty) Ltd were registered in the name of the wife. The wife and husband ran a very succesfull estate agency business which was owned by Catwalk Investments (Pty) Ltd. The husband as trustee of the trust had unlimited access to the trust and administered the trust as his own assets. At the time of the divorce the wife’s fifty percent of her shares in Catwalk Investments (Pty) Ltd were registered in her private name and formed part of the assets of the calculation of the divorce. The remaining fifty percent of the shares were registered in the trust and did not form part of the divorce agreement. From the evidence that was lead in court it was clear that the husband conducted the affairs of the trust and he seldom consulted or sought the approval of his co-trustee, who was his brother. He was, in short, in full control of the trust and also of the fifty percent shares of Catwalk Investments (Pty) Ltd which was registered in the name of the trustees.
The judge ruled that if it was not for the trust all the trust’s assets would have been in the husband’s name where he would have controlled the assets for his benefit. The judge confirmed that the trustees are the owners of the assets and that the trust’s assets does not form part of the husband estate’s. He however concluded that because of the husband’s control of the trust the trust is the alter ego of the husband, and that the value of the trust’s assets must be included in the redistribution amount of the divorce order.
In recent times divorce attorneys are aware of the alter ego principle and they would examine trust deed’s of parties in the case of a divorce to see if there is a way to access the trust’s assets for settlement of divorce cases. If a person does not give up control of his assets that are transferred to a trust, then they run a risk that the trust's assets will be under attack by their spouse’s in the cases of divorce. The same principle can be applied to any other creditors of a person.
Important points to remember:
There is nothing stopping a person who transferred his assets into a trust from being a trustee of the trust, but he cannot be the sole trustee. A person that transfers his assets into a trust, who is a trustee and beneficiary of the trust, must be assisted by an independent trustee to scrutinize his actions. An independent trustee is someone who is not a beneficiary, not a relative, spouse and not even the auditor of the trust. A trust is likely to come under attack where the only trustees are the husband and wife.
All trustees must make sure they are familiar with the contents of the trust deeds wherein they act as trustee and that the provisions of the trust deed does not constitute excessive control. Especially older trust deeds must be audited by a trust specialist to determine if the trust deed has any clauses that empowers trustees who are beneficiaries to control the assets in such a way that the trust can constitute a sham trust, or an alter ego of the trustee.