Trust Assets and the Dissolution of a Marriage: A Practical Look at Invalid Trusts, Sham Trusts and Piercing the Veneers of Trusts / Going Behind the Trust Form

• Jurisdiction: South Africa
• Date: 20 August 2019
• Citation: (2016) 28 SA Merc JL 508
• Pages: 508-543
• Published date: 20 August 2019
• Author: Iain Matthys Shipley

TRUST ASSETS AND THE DISSOLUTION OF

A MARRIAGE: A PRACTICAL LOOK AT

INVALID TRUSTS, SHAM TRUSTS, AND

PIERCING THE VENEERS OF TRUSTS /

GOING BEHIND THE TRUST FORM*

IAIN MATTHYS SHIPLEY

†

Attorney of the High Court of South Africa

1 INTRODUCTION

The purpose of this article is to address a deceptively simple question:

When a court is determining the patrimonial consequences following

dissolution of a marriage, under what circumstances can property

belonging to a trust (including a family trust) be taken into account

and/or be included in the distribution order? Due to the separation of

the trust estate, the dogmatic answer should be ‘never’. However, as this

article will demonstrate, the answer is more complex.

The relevance of this question can be illustrated with an example.

Hamish and Wynona are married in community of property. After

many years, their marriage breaks down, and Wynona decides to sue for

divorce. Hamish and Wynona are both extremely successful, and have

earned well over the years. They live in an expensive house, have driven

expensive cars, and have even purchased a beach house together.

Wynona expects that because the joint estate will be divided equally, she

will receive half of this jointly accumulated wealth. However, it trans-

pires that the vast majority of the assets used and enjoyed by the couple

are, in fact, owned by a family trust, which is controlled almost

exclusively by Hamish. The trust was set up years before, primarily for

tax reasons. Wynona always trusted Hamish’s judgment in f‌inancial

matters, and relied upon him to make these decisions. As a consequence,

the joint estate comprises of only a fraction of the pool of assets that

* I would like to thank Dr Cheri Young for her kind assistance in proofreading and

commenting on this article while it went through a number of drafts. I would also like to

thank Justice Azhar Cachalia, with whom I had a number of discussions on this area of law, for

being willing to consider the article while it was in draft form. Finally, I would like to thank the

anonymous reviewers for their helpful suggestions. All opinions expressed and errors made

are solely my own.

†

BCom LLB (UCT).

508

(2016) 28 SA Merc LJ 508

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Hamish and Wynona had the benef‌icial use and enjoyment of. Accord-

ingly, upon divorce, Hamish will in substance retain almost everything

that he and Wynona accumulated together — unless the trust property

is somehow taken into account by the court in making the distribution.

The question then is, under what circumstances is this possible?

A number of academic articles have been published which generally

consider the ability of a court to ‘go behind’ the veneer of a trust in South

African law.

1

This article differs from the majority of the existing

literature in that, rather than considering the topic in an abstract and

theoretical manner, it proceeds simply and practically by setting forth a

number of potential arguments (including going behind the veneer)

which may allow a court to take into account trust property in the

context of the dissolution of a marriage. It also differs from the literature

considering this area more specif‌ically,

2

in that it reaches fundamentally

different conclusions on the effectiveness of the possible arguments.

This article considers three plausible arguments that may allow a

court to take into account trust assets, namely (i) a failed transfer of

property, (ii) invalid and sham trusts, and (iii) ‘going behind’ the trust

form. The most interesting argument, from a legal perspective, relates to

going behind the trust form. This occurs where a court ignores the

separation of the estate of trustee

3

and trust.

4

The f‌irst two arguments do

not challenge the basic legal principles relating to trusts (in particular,

the separate existence of the trust estate), and their thrust is that for one

or another reason, the assets which appear to vest in the trust estate in

truth do not, and instead vest in the personal estate of the spouse(s).

5

As

will be demonstrated, there is no controversy as to their effectiveness in

1

See eg Van der Linde & Lombard, ’Nel v Metequity Ltd 2007 3 SA 34 (SCA) — Identity of

interest between trustees and benef‌iciaries in so far as object of trust is concerned: Effect on

validity’ (2007) De Jure 429; Van Der Linde, ‘Debasement of the core idea of a trust and the

need to protect third parties’ (2012) 75 THRHR 371 at 383; De Waal, ‘The abuse of the trust

(or: ‘‘Going behind the trust form’’) — The South African experience with some comparative

perspectives’ (2012) 76(4) The Rabel Journal of Comparative and International Private Law

1078; and Nel, ‘Two sides of a coin: Piercing the veil and unconscionability in trust law’ (2014)

35(3) Obiter 570.

2

See Du Toit, ‘Trusts and the patrimonial consequences of divorce: Recent developments

in South Africa’ (2015) 8 Journal of Civil Law Studies 655; and Van der Linde, ‘Whether trust

assets form part of the joint estate of parties married in community of property: Comments

on ‘‘piercing the veneer’’ of a trust in divorce proceedings’ (2016) 79 THRHR 165.

3

For ease of reference, this article generally refers to ‘trustee’ in the singular.

4

Note that ‘going behind’ the trust form is one of a variety of terms that have been used to

describe this phenomenon. See below at section II(a).

5

The term ‘trust assets’ will be used loosely to refer to all the assets that apparently belong to

a trust, and not only the assets that truly are owned by the trust. This is necessary because, as

can be seen, a number of the arguments take the form that, for one or another reason, the

trust’s ownership of a particular asset is subject to challenge.

TRUST ASSETS AND THE DISSOLUTION OF A MARRIAGE 509

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allowing a court to attach (apparent) trust assets. The third argument

does challenge the basic legal principles relating to trusts. It acknowl-

edges that the assets may have vested in a validly constituted trust, but

nevertheless proposes that the ordinary consequences of this should be

disregarded, and the assets should be taken into account for purposes of

the division of the estate(s). There is some controversy as to the scope

and effectiveness of this third argument, particularly after the recent

Supreme Court of Appeal (SCA) judgment in WTvKT.

6

Two

recent articles which consider this judgment conclude that this judg-

ment effectively excludes the ability of the courts to rely upon this third

argument in most instances of dissolutions of marriages.

7

This article

argues in favour of the opposite conclusion.

The structure of this article is brief‌ly as follows. First, there will be a

short summary of the background legal principles that must be borne in

mind to appreciate the arguments canvassed in this article. Following

this, each of the three arguments outlined above will be discussed in

depth.

II THE LEGAL CONTEXT

This section aims to provide a brief summary of the basic legal principles

that form the background to the arguments presented in this article. The

section is divided into discussions on the relevant principles of (a) trust

law, (b) matrimonial property law, (c) simulations, and (d) estoppel and

breach of a trustee’s f‌iduciary duties.

(a) Trust law

Before outlining the relevant legal principles governing trust law, a

cautionary note regarding terminology must be issued. Historically, the

terminology used to describe the sorts of situations discussed in this

article has been inconsistent, and there are a range of different terms,

8

which have been used interchangeably. For clarity, the terminology used

in this article is set out below.

The main distinction that must be drawn is between ‘sham trusts’ and

‘going behind’ the trust form or veneer. This important distinction has

6

WT & others v KT 2015 (3) SA 574 (SCA).

7

See Du Toit, (2015) 8 Journal of Civil Law Studies 655 at 696–697; and Van der Linde,

(2016) 79 THRHR 165 at 172–173.

8

For a list, see De Waal, (2012) 76(4) The Rabel Journal of Comparative and International

Private Law 1078 at 1079.

(2016) 28 SA MERC LJ510

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