Do the assets of a discretionary family trust form part of the assets of the joint estate of spouses married in community of property?

According to the recent Supreme Court of Appeal (“SCA”) judgment in WT and Others v KT (933/2013)[2015] ZASCA 9 the SCA confirmed that they do not.

WT and KT were married in community of property and lived in a house purchased by and registered in the name of WT’s family’s trust (of which WT was a trustee but not a beneficiary) prior to their marriage. During the course of the divorce proceedings, KT instituted a counterclaim that she was entitled to a 50% share of the house as she claimed that WT had led her to believe that she was a beneficiary of the trust. The High Court found that WT had administered the trust as his alter-ego and that the house therefor formed part WT’s assets to be included in the joint estate. WT in his personal capacity, together with his brother GT as trustees of the trust brought an appeal in the Supreme Court of Appeal (“the SCA”) challenging the High Court’s order.

In deciding that the house owned by the trust did not form part of the joint estate, the SCA considered two issues:

1.The alleged misrepresentation by WT that KT was a beneficiary of the trust

The court held that there was insufficient evidence proving that KT had been deceived into believing that she would be a beneficiary of the trust or that WT had taken steps to prevent KT from receiving her 50% share of the assets that did fall into their joint estate.

2. Looking behind the veneer of the trust to determine whether it was established as WT’s alter-ego

Section 12 of the Trust Property Control Act 57 of 1988 (“the Act”) confirms the common law position providing that trust property does not form part of the personal property of a trustee, except in instances where the trustee is a beneficiary of the trust. In this regard, a trustee may not use the trust as a front and control the trust for his or her personal benefit. The court found that WT was not a beneficiary of the trust and was thus not owed any fiduciary duties by the trustees.

Furthermore, in considering a trustee’s conduct, a functional separation between the control of the trust property by the trustee and the enjoyment of the trust by the beneficiaries is as essential as ensuring the protection of the third parties who transact with the trust. Because KT had not contracted with the trust and was not a beneficiary of the trust the court found that she had no standing to challenge the administration of the trust.

In finding that the house formed part of the trust’s assets, the SCA noted that it was deemed the property of a third party.

The SCA held that the High Court’s order amounted to a transfer of the trust’s assets to the joint estate without considering the ramifications on the trust’s creditors, thereby exceeding the discretion contained in section 7(3) of the Divorce Act 70 of 1979. This decision reaffirms that property held by a trust does not form part of the personal property of its trustees and that courts may not grant an order stating otherwise unless there is substantial evidence to indicate that the trust is being used for improper motives by the trustees.

These cases are thus viewed on a case by case basis. The court will take into account the conduct of all the parties during the existence of the trust, the intention of the founder when the trust is created and how the trustees administered the trust.

Had KT been a beneficiary of the trust, the outcome of the case may have been different.