Will Your ANC Protect Trust Assets on Divorce?

A recent Supreme Court of Appeal (SCA) decision illustrates once again how essential it is, before getting married, to have your lawyer structure your antenuptial contract (ANC) correctly, and with as much detail as is needed for certainty.

A multi-million Rand fight over trust assets

• A divorcing couple had married and divorced three times.

• They had in respect of the latest divorce been married out of community of property with the accrual system, so each was in principle entitled to 50% of all “accrual” (growth) in their estates after marriage, except as specifically excluded from accrual by their ANC.

• The husband had, on the advice of his accountant, created a new legal entity for each of his new timeshare business ventures, in order to ensure that if one business failed, the others would not be affected.

• In their ANC the couple had specified which of the husband’s assets (including interests in business entities such as trusts, CCs and companies) were excluded from the accrual.

• On divorce, the wife asked the High Court to declare the assets of three trusts to be assets of her husband for the purpose of accrual on two grounds –
  • That on the facts and on interpretation of the ANC they were not excluded from the accrual, alternatively
  • That the trusts were simply the husband’s “alter ego” so that the assets of the trusts were in reality her husband’s assets.

The outcome, the law, and the lessons to be learned

The SCA held that none of the trusts’ assets were to be taken into account in determining accrual in the husband’s estate –

1. In respect of two of the trusts, on the particular facts of this case they weren’t covered by the exclusion clause which provided that exclusion was to extend to “any other asset acquired by such party by virtue of the possession or former possession of such asset”. The Court rejected the husband’s argument that this should be read widely to exclude “any asset acquired as a result of his activities in the timeshare industry” – it only covered “the particular asset, its proceeds, and assets which replace the excluded asset or are acquired with its proceeds”.Lesson 1 therefore is this – if you want a wide exclusion of a particular class of assets from the accrual process, say so clearly in your ANC.
2. However, the wife also had to convince the Court that the trusts were the “alter ego” of the husband.She was able to convince the Court that he had “administered the trusts with very little regard for his fiduciary duties as a trustee and without proper regard for the essential dichotomy of control and enjoyment essential to the nature of a trust and … such conduct may have justified his removal as a trustee, or the appointment by the Master of an independent co-trustee…”What she had failed to prove was any “abuse of the trust form” nor that “the trust form [was] used in a dishonest or unconscionable manner to evade a liability, or avoid an obligation.”Firstly, the husband’s use of separate trusts for each new business venture was a “legitimate business activity” given his “overall business strategy”.Secondly, there was no proof that the husband “transferred personal assets to these trusts and dealt with them as if they were assets of these trusts, with the fraudulent or dishonest purpose of avoiding his obligation to properly account to the respondent for the accrual of his estate. In addition it was not established that the transfer of assets to these trusts by the appellant was simulated with the object of cloaking them with the form and appearance of assets of the trusts, whilst in reality retaining ownership.”

   Lesson 2 therefore is that if you want to attack your spouse’s use of trusts to hold assets you will need to prove more than just misconduct in the administration of the trusts.  You will also have to prove a fraudulent or dishonest attempt to avoid the consequences of accrual.