The Supreme Court of Appeal (SCA) handed down its Judgment in an accrual calculation dispute during a divorce, ruling that the trust assets would form part of the couple’s estate for accrual purposes.
However, this decision depends on the time at which the trust was created and the circumstances surrounding its establishment.
According to Wright Rose-Innes, a trust is defined as an arrangement where the trust founder (trustor) transfers ownership of assets to a trust to be managed by trustees for the benefit of trust beneficiaries.
In this case, the husband created a trust and transferred money and property to the trust just before the accrual system finalised their divorce.
The accrual system denotes that what is yours before the marriage remains yours, and what you have earned during the marriage belongs to both of you.
This transfer of assets by the husband sparked a claim that the assets transferred to the trust be included in the calculation.
Facts of the case
Shortly before a divorce proceeding, a husband created a trust with the trustee being his brother and the trust beneficiary his minor child and donated a substantial sum of money to the trust.
The husband argued that the trust had been established for the maintenance of his child and that the amount transferred to the trust would be excluded from the accrual calculation.
The wife argued that this was done to hide assets from the divorce proceedings and to determine the accrual in the respective spousal estates.
Wright Rose-Innes said that in evaluating the allegation that the trust form had been abused by transferring assets to a trust to reduce the value of their estate for accrual purposes, the SCA held that the court was not exempt from investigating such an allegation.
In such an investigation, if confirmed that the trust form had been abused, the court was further empowered to pierce the veneer of the trust and order that the value of its assets be taken into account in calculating the accrual.
The SCA’s Judgment
Wright Rose-Innes reported that the SCA found the husband’s creation of the trust was intended to frustrate his spouse’s accrual claim, which was sufficient grounds to justify the piercing of the trust veneer.
The SCA’s ruling to include the husband’s trust assets as part of his estate and the accrual calculation resulted from the following considerations:
- The timing of the creation of the trust and donation. The SCA confirmed the importance of this requirement and found that the creation of the trust so close to the divorce was a strong indication that the trust was set up to frustrate the accrual claim.
- The location of the trust. The trust was established offshore, making it more difficult and expensive for the wife to seek to recover assets from the trust, effectively trying to put the trust out of the wife’s reach.
- No consultation beforehand. Given that the parties had a history of consultation on major financial matters and given that the trust was set up for the maintenance of their child, the lack of consultation about the creation of the trust stood at odds with the trust having a legitimate purpose.
- No immediate need for the trust. The husband had purported to create the trust for the maintenance of his child. This argument was confounded by the fact that he was responsible for the maintenance of his child regardless.
The precedent set for similar cases in future
Wright Rose-Innes noted that while the court has the power to pierce the veneer of a trust and include its assets in the calculation of accrual at divorce, this action is highly fact-dependent.
A trust is a legitimate and prominent estate planning tool, and to include such assets in all accrual calculations at divorce would undermine the purpose of a trust.
Wright Rose-Innes added that whether the veneer should be pierced and the trust creation was abused to devalue the other spouse’s claims will depend on each case’s circumstances and require careful consideration of the relevant factors applicable to the formation and use of the trust.