Be careful when transferring assets to a trust when married out of community with the accrual.

The right to claim accrual is provided for in section 3 of the Matrimonial Property Act 88 of 1984. This section provides in short that  at the dissolution of a marriage subject to the accrual system, the spouse whose estate shows no accrual or a smaller accrual than the estate of the other spouse, acquires a claim against the other spouse for an amount equal to half of the difference between the accrual of the respective estates of the spouses. This section is subject to section 8(1) of the Matrimonial Property Act 88 of 1984, which reads:

 ‘Power of court to order division of accrual (1) A court may on the application of a spouse whose marriage is subject to the accrual system and who satisfies the court that his right to share in the accrual of the estate of the other spouse at the dissolution of the marriage is being or will probably be seriously prejudiced by the conduct or proposed conduct of the other spouse, and that other persons will not be prejudiced thereby, order the immediate division of the accrual concerned in accordance with the provisions of this Chapter or on such other basis as the court may deem just.’

Where trust property is involved, the default position is that such property does not form part of the personal estate of the trustee, except in so far as he or she, as trust beneficiary, is entitled to the trust property (section 12 of the Trust Property Control Act 57 of 1988). A court can disregard this in two instances: where it finds that a trust is a sham or simulated, or when it finds that there has been abuse of the trust form.

A sham or simulated trust is when the trust does not exist which means that no effect will be given to the transaction and the founder will remain the owner and neither the trustees or beneficiaries will acquire any rights to the assets.  This entails that the intention to create a trust is lacking.  An example is where the founder of the trust “thought” he created a trust but it was maybe a partnership. In this case the assets will still vest in the personal estate of the founder of the sham trust.

Piercing the trust veneer implicitly recognises the validity of a trust in the legal sense, but finds that there may be a justification to disregard the ordinary consequences of its existence for a particular purpose.

 Parties to a divorce are in terms of section 7 of the Matrimonial Properties act obliged to furnish the full particulars of the value of their estates.  If one of the parties allege or believe that the other spouse is abusing the trust form by transferring assets to a trust to reduce the value of their estate (reduce their accrual liability) the courts are empowered to conduct an in depth examination of all the relevant facts to decide if the trust form has been abused.

This is what the courts had to decide in the P A F v S C F (788/2020) [2022] ZASCA 101 (22 June 2022) case.  This matter involved divorce proceeding where a trust was created (not a sham trust) soon before the divorce proceedings started and quite a substantial amount of money was paid to the off shore trust.  The question was whether the trust was created to reduce the calculation of the accrual for the divorce proceedings.  The court stated that if a spouse alleges that one of the spouses abused the trust form by transferring assets to a trust to reduce the value of their estate the court has to conduct an in depth examination of the facts to determine if a trust form had been abused. 

The so called “control test” referred to in  Badenhorst v Badenhorst [2005] ZASCA 116; 2006 (2) SA 255 (SCA) stated that to succeed in such a claim for trust assets to be included in the estate of one of the parties that there must be evidence that such party controlled the trust where control must be de facto  and not necessarily de jure. To determine if a person has “control” over the trust it is necessary to look at the terms of the trust as well as to consider the evidence of how the affairs of the trust were conducted during the marriage. 

The court stated in the PAF case that the applicant had neither de facto or de jure control over the trust.  This however is not decisive as the court must still examine the facts in each case to determine if the trust form has been abused.  The court will still look at if the trust form was used in a dishonest manner to evade liability or to avoid an obligation.

The Supreme Court agreed with the High Court decision to look at the following factors:

  1.  The timing of the creation of the trust and the donation made to it. The trust was founded a few days before the divorce proceedings started and donation was paid to the trust soon shortly after it was founded. This raised a few questions about the motive of creating the trust. There was also a loan that was paid suddenly that had not been paid since 1990.  Although the timing of the creation of the trust form is not the decisive issue but looking at the other aspects of the timing of paying back a loan dating back many years suddenly  and the donation to the trust could have been construed as a strategy to decrease his accrual liability.
  2.  Establishing of the trust form offshore (not in South Africa).  The question asked is why did he not create a trust form locally within the South African borders.  This will make it difficult and expensive for the respondent to challenge the manner in which the trust was managed.  Once again the motive was looked at by the courts.
  3. The applicant did not consult the respondent about the creation of the trust.  The applicant stated that as they were married out of community of property he was free to do as he pleased with the trust.  However historically the parties consulted each other in respect of their finances. 

The conclusion is to remember that the courts do have a wide power to investigate the accrual when it comes to trusts.  The court looked at what the possible motive could be for creating of the trust by looking at all the relevant facts.  The motive of moving assets may be seen as trying to decrease the value of the estate for accrual calculations.