Trust Abuse...

A family trust is a legal arrangement where a trustee holds and manages assets on behalf of family members or beneficiaries. The trust is created to protect assets, manage estate planning, and distribute income or capital gains to beneficiaries.

The ‘core idea’ of the trust is to separate those in control of the assets (the Trustees) from those who benefit from them (the Beneficiaries).

Unfortunately, some trustees do not uphold their responsibility and use the trust to further their personal interests, and this is known as “trust abuse”.

Divorce and trust abuse are unfortunately prevalent issues in South Africa, as couples face complex legal and financial disputes when their relationships break down

One example of a case involving trust abuse and divorce in South Africa is Van Zyl vs Kaye (2013). In this case, the couple had been married for over 30 years and had accumulated significant assets, including a farm and a trust. However, the husband had mismanaged the trust, failed to account for its finances, and used its funds for personal expenses. The wife claimed that this constituted trust abuse and sought to have the trust dissolved and the assets divided equally between them.

The court applied a control test to determine whether the husband’s conduct amounted to trust abuse. This test involves considering whether the trustee (in this case, the husband) had acted in good faith, exercised proper control over the trust assets, and acted in the best interests of the beneficiaries (in this case, the wife and any other beneficiaries of the trust). The court found that the husband had breached these duties and had engaged in trust abuse; he had conducted the trust as an alter ego. As a result, it dissolved the trust and ordered that the assets be divided equally between the spouses.

A similar case is Badenhorst vs Badenhorst (2006). In this case, the husband and wife had been married for over 20 years and had a joint estate. However, the husband had engaged in various forms of financial misconduct, including concealing assets and diverting funds to a secret account. The wife claimed that this constituted trust abuse and sought to have the joint estate divided in her favour. 
 

 The court applied a similar control test and found that he had acted in bad faith by using the trust for his personal gain. As a result, it ordered that the wife receive a larger portion of the joint estate than the husband.

Recently the Supreme Court of Appeal took things a step further. In the case PAF vs SCF (2022), the husband created a Trust in the British Virgin Islands three weeks before the divorce, and donated a substantial amount of money to it. His wife claimed that this was done to make it harder for her to access what was due to her under the accrual system. Although the same control test as applied above could not be applied to this brand new Trust, the court nevertheless found that the Trust was being used to manipulate the estate value, and found in favour of the wife.

 The SCA has made it clear that all material facts will be looked at in determining whether a Trust has been used to manipulate a spouse’s estate value.

Contact us if you need a professional to look over a trust matter and any concerns you may have.