To Trust or not to Trust?

PAF v SCF

(788/2020) [2022] ZASCA 101 (22 June 2022)

The Supreme Court of Appeal has recently been faced with the decision to determine whether a divestiture of one’s estate, to a trust, amounts to an abuse of the trust form whereby the donation should be taken into account for the purposes of the accrual calculation.

In this case, the couple was married out of community of property, subject to the accrual system. Twenty days before the commencement of the divorce trial, the husband founded a trust in favour of the daughter from the marriage and made a considerable donation thereto.

The wife claimed that the foundation of and donation to the trust amounted to an abuse of the trust form, intended to deprive the wife of her accrual claim. Therefore, the wife looked to the court to grant an order whereby the calculation of the accrual takes the value of the donation into account. The High Court concluded that the donation to the trust was made with ‘fraudulent intention’ and deemed the donation to be part of the husband’s assets for the purposes of calculating the accrual.

The Supreme Court of Appeal conceded that the default position is that trust property does not form part of a person’s estate, unless that person is a beneficiary. Exceptions to this default position arise where the trust is a sham, a simulation that requires the veneer of the trust to be pierced by the court, or where the trust serves as a person’s alter ego.

In the past, the courts have debated as to whether the accrual claim should be determined on a strictly ‘factual and mathematical basis’, without the exercise of discretion, or whether the court should use its discretion to “pierce the corporate veil” in terms of the common law.

The SCA held that the court may pierce the trust veneer where it is necessary to “address the consequences of an unconscionable abuse of the trust form…to evade a liability, or avoid an obligation.”

Among other things, the court considered the timing of the trust formation and the donation to be crucial evidence pointing towards the abuse of the trust form in order to evade his liability to pay in terms of the accrual system.

The SCA held that the High Court’s decision was correct and confirmed that the donation to the trust should be taken into account for the purposes of the accrual calculation.

In the future, the courts may be inclined to scrutinise donations to trusts to determine whether such donations should be taken into account for the accrual calculation or not.