Dear Colleague
“For to be free, is not merely to cast of one’s chains, but to live in a way that respects and enhances the freedom of others.”
Nelson Mandela
Nelson Mandela
South Africans will be celebrating Freedom month in April. Not only will we commemorate the first democratic election held in 1994, but we will also celebrate the inherent freedoms that we have. With people still in slavery in some parts of the world, this celebration emphasises that each freedom should be cherished and appreciated because we live in a world where things can change overnight. Enjoy the Freedom Day celebrations on 27 April!
How many copies of an original Will should be signed?
If there is no original signed Will, there is no Will. It has always been good practice to sign an original Will in threefold: One to be kept by the client, one for safekeeping by Efficient Board of Executors and one for yourself to file in your client’s file.
While it is not environmentally-friendly to use too much paper, this is one of those instances where a paper trail is still by far the best option.
While it is not environmentally-friendly to use too much paper, this is one of those instances where a paper trail is still by far the best option.
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WHEN CAN A TRUST BE DISREGARDED BY THE COURTS
A trust is a useful tool in estate planning. The establishment thereof, however, is guided by strict laws and regulations, which could render a trust invalid, if not followed to the letter. Even if there is a trust deed, it is no guarantee that the assets are secure and the trust is safe from attack. The question thus arises: Could a trust be disregarded by the courts?
If it was never the intention to create a genuine trust from the start, a trust could be attacked and labelled a “sham trust”.
Similarly, if a trust was created but the trust assets were treated as personal property, creditors, the South African Revenue Service (SARS) and even a soon-to-be-ex-spouse can have it declared an “alter-ego” trust.
A “sham trust” and an “alter-ego trust” are different concepts, which will be covered in this newsletter. There must be a clear separation between the control and the enjoyment of a trust’s assets. The role of the trustees is to control the trust assets for the enjoyment of the beneficiaries.
If it was never the intention to create a genuine trust from the start, a trust could be attacked and labelled a “sham trust”.
Similarly, if a trust was created but the trust assets were treated as personal property, creditors, the South African Revenue Service (SARS) and even a soon-to-be-ex-spouse can have it declared an “alter-ego” trust.
A “sham trust” and an “alter-ego trust” are different concepts, which will be covered in this newsletter. There must be a clear separation between the control and the enjoyment of a trust’s assets. The role of the trustees is to control the trust assets for the enjoyment of the beneficiaries.
SHAM TRUSTS
A sham trust is defined as a perceived entity that is not entirely what it portrays to be, a wolf in sheep’s clothing if you will. When a trust has been established on the terms of a particular trust deed, but these terms do not reflect the true intentions of the parties (the founder and the trustees), and thereby mislead third parties about the true terms of the trust, it will be labelled a sham trust.
The starting point to check for a sham trust is to check whether the requirements for the creation of a valid trust are present. These requirements include:
The starting point to check for a sham trust is to check whether the requirements for the creation of a valid trust are present. These requirements include:
- The founder must intend to create a trust.
- Their 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.
- The trust property must be transferred to the trustees or beneficiaries, depending on the type of trust.
The consequence of a sham trust
Only recently did our courts rule that the consequence of a sham trust is that the trust is void from inception. So too are all transactions with such a trust. The court held in the Van Zyl v Kaye case of 2014 that “when a trust is a sham, it does not exist”.
Only recently did our courts rule that the consequence of a sham trust is that the trust is void from inception. So too are all transactions with such a trust. The court held in the Van Zyl v Kaye case of 2014 that “when a trust is a sham, it does not exist”.
ALTER-EGO TRUSTS
The difference with an alter-ego trust is that the necessary requirements for a valid trust, as stipulated above, are present when the trust is established, but the trustees of the trust act as puppets under the instruction of the founder or another trustee. In such a case, the trust property is treated by the founder or a trustee as if it was their personal property and not belonging to the trust.
Where there are signs of abuse, either in relation to the trust deed, or in the actions of a trustee and/or the founder, it is labelled an alter-ego trust. The possible signs of this kind of trust are:
Where there are signs of abuse, either in relation to the trust deed, or in the actions of a trustee and/or the founder, it is labelled an alter-ego trust. The possible signs of this kind of trust are:
- There is no independent trustee.
- The trust deed gives the founder and/or trustee the power to amend the trust deed without the consent of all of the trustees.
- The founder has retained some level of control in the trust deed.
- A 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 necessary care, diligence and skill expected of them in terms of the Trust Property Control Act.
The consequence of an alter-ego trust
In the case of an alter-ego trust, it does not imply that the trust does not exist, or that the rights of the beneficiaries are set aside. The trust continues to exist, but the court will “investigate” the trust and hold the trustees personally liable.
Marriages concluded before 1984 did not have the benefit of accrual in terms of the Divorce Act. The Matrimonial Property Act with the inclusion of the accrual system was introduced in 1984. In the past there have been many divorce cases where, more commonly the wife, has attacked the trust to have the assets included in the hands of her husband, in order to have the trust assets taken into account when determining redistribution amounts that would be considered fair. Two women who were married prior to 1984 succeeded with their respective cases.
Spouses married under the Matrimonial Property Act 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. The courts abided by the strict mathematical formula under the Matrimonial Property Act to calculate the accrual.
Marriages concluded before 1984 did not have the benefit of accrual in terms of the Divorce Act. The Matrimonial Property Act with the inclusion of the accrual system was introduced in 1984. In the past there have been many divorce cases where, more commonly the wife, has attacked the trust to have the assets included in the hands of her husband, in order to have the trust assets taken into account when determining redistribution amounts that would be considered fair. Two women who were married prior to 1984 succeeded with their respective cases.
Spouses married under the Matrimonial Property Act 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. The courts abided by the strict mathematical formula under the Matrimonial Property Act to calculate the accrual.
Two examples of cases:
- The first case in South Africa where the court expressly allowed creditors to attach trust assets, was the First National Bank v Britz case of 2011. In this case, the court confused the issues of a sham trust with those of an alter-ego trust.
- In the Rees v Harris case of 2012, where a creditor attempted to attach the trust’s assets (which were connected to the trustee), the court held that, under appropriate circumstances, the veneer of a trust can be pierced in the same way as the corporate veil of a company. When it can be demonstrated that a trustee, who has actual control over trust assets, acquired and owns such assets purely for their sole benefit, the assets would be considered as belonging to the trustee and not to the trust.
Source: Could your trust be disregarded by the courts? written by Phia van der Spuy, IOL
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MYSTERY BOX
Imagine having to wait 66 years before being allowed to take a peek inside a mystery box? This would require quite a lot of discipline and strict self-control. The British Museum passed this test with flying colours!
Francis Douce, an antiquarian, left a mystery box to the British Museum when he died on 30 March 1834. His Will specified that the box could only be opened on 1 January 1900. Douce had an exceptional collection of old books, manuscripts, coins and artefacts, which he amassed over his lifetime. The majority of his collection was bequeathed to the Bodleian Library in Oxford. These items became one of the library’s prize collections.
The mystery box became one of the British Museum’s treasures as curators speculated over the contents thereof. They respected Douce’s wishes, despite their impatience, and the box remained unopened. The bequest was deemed especially unusual because Douce had worked at the museum for a very short period before resigning, listing multiple reasons and grievances why he had to leave.
Francis Douce, an antiquarian, left a mystery box to the British Museum when he died on 30 March 1834. His Will specified that the box could only be opened on 1 January 1900. Douce had an exceptional collection of old books, manuscripts, coins and artefacts, which he amassed over his lifetime. The majority of his collection was bequeathed to the Bodleian Library in Oxford. These items became one of the library’s prize collections.
The mystery box became one of the British Museum’s treasures as curators speculated over the contents thereof. They respected Douce’s wishes, despite their impatience, and the box remained unopened. The bequest was deemed especially unusual because Douce had worked at the museum for a very short period before resigning, listing multiple reasons and grievances why he had to leave.
When the time came to open the box, expectations were very high. However, the disappointment was much higher as the box only contained some old notebooks and some pieces of scrap paper. Some type of revenge maybe, seen in the light of the list of reasons that Douce provided for having to leave after such a short period of employment? His reasons for this strange bequest remain a mystery to this day.
Until next month!
The Let’s Talk EFBOE Team