File image: Phia van der Spuy. (IOL).
JOHANNESBURG - The fact that you have a written trust deed is not a guarantee that your assets are safe and that the trust is safe from attack. If you did not intend to create a “genuine” trust from the outset, the trust may be attacked and labelled as a sham trust; in other words, a “smokescreen”. If, on the other hand, you intended to create a trust, but you have dealt with the trust assets as if they were your own, your creditors, the SA Revenue Service and soon-to-be-ex-spouse can attack the trust and have it labelled as an alter ego trust; in other words, an extension of yourself.

Despite the fact that the trust does exist, the courts will disregard the trust and treat the assets as if they belong to you.

You will experience dire consequences if your trust is labelled as either a sham trust or alter ego trust. These terms are often used interchangeably, which is incorrect - they are completely different.

What is a sham trust?

A sham trust exists where the trust appears to have been established in terms of a trust deed, but these terms do not reflect the parties’ (the founder and the trustees) true intentions, thereby misleading third parties about the true terms of the trust.

How do you determine a sham trust?

The starting point is to check whether the requirements for the creation of a valid trust are present. These are: the founder must intend to create a trust; his or her intention must be expressed in such a way that it creates an obligation; the trust property must be defined with reasonable certainty; the trust object (the beneficiaries in a family trust) must be defined with reasonable certainty; the trust object must be lawful; and the trust property must be transferred to the trustees or beneficiaries, depending on the type of trust.

Consequences of a sham trust

For a long time, there was uncertainty about the consequences of a sham trust. Our courts recently ruled that the consequence of a sham trust is that the trust is void from inception. So, too, are all transaction with such a trust.

What is an alter ego trust?

An alter ego trust exists where the requirements for a valid trust are present when the trust is established, but the trustees of the trust act as puppets, acting mainly under the instruction of the founder or another trustee. An alter ego trust also exists where the founder or a trustee treats the trust property as if it were personally owned by him or her, instead of belonging to the trust.

How to determine an alter ego trustLook out for signs of abuse, either in relation to the trust deed or in the actions of a trustee and/or founder. Signs of abuse could include:

* There is no independent trustee.

* The trust deed gives the founder and/or a trustee the power to amend the trust deed without the consent of all the trustees.

* The founder has retained some level of control in the trust deed.

* The trustee acts contrary to the terms of the trust deed.

* There is a dominant trustee who dictates how trustee decisions are made.

* The trustees are not acting with the care, diligence and skill expected of them under the Trust Property Control Act.

Consequences of an alter ego trust

As a general rule, if a trust is seen as an alter ego trust, it does not imply that the trust does not exist, or that the rights of the beneficiaries are nullified. The trust continues to exist, but the court will look through the trust and hold the trustees personally liable. There have been many divorce cases where one of the spouses - usually the wife - has attacked the trust in an attempt to have the assets included in the hands of the other spouse.

Women who achieved success were those who married before 1984 and did not have the benefit of accrual in terms of the Divorce Act prior to that date, when the accrual system was introduced. In these cases, the courts took the trust assets into account when determining redistribution amounts that would be considered fair. Spouses married under the Matrimonial Property Act (introduced in 1984) did not achieve the same success. The courts held that alter ego trust assets would not be considered, because the courts do not have the discretion to include assets that do not physically belong to either of the spouses in a divorce settlement. Instead, the courts could apply only the Matrimonial Property Act’s strict mathematical formula in order to calculate the accrual.

First National Bank v Britz (2011) was the first case in South Africa where the courts expressly allowed creditors to attach trust assets. In this particular case, the court confused the issues of a sham trust with those of an alter ego trust. If it can be demonstrated that a trustee, who has actual control over trust assets, acquired and owns such assets purely for his/her sole benefit, then the trust form would be disregarded and the assets would be considered as belonging to the trustee, and not the trust.

Phia van der Spuy is the founder of Trusteeze.

The views expressed here are not necessarily those of Independent Media.

-BUSINESS REPORT