Introduction
The accrual system, as set out in the Matrimonial Property Act 88 of 1984 (hereafter referred to as the MPA), is a matrimonial property regime that aims to recognise the equal contribution of both spouses to a marriage and ensure a fair distribution of assets upon dissolution of the marriage.
Under the accrual system, each spouse’s estate is kept separate during the marriage, but upon divorce or death, the spouse whose estate shows a smaller accrual (increase in value) has a claim against the other spouse’s estate for an amount equal to half of the difference between the accruals of the respective estates (s 3(1) of the MPA). This claim is subject to certain exclusions, such as inheritances, donations, and assets excluded by antenuptial contract (s 5 of the MPA). The accrual is calculated by subtracting the net value of a spouse’s estate at the commencement of the marriage from the net value of their estate at the dissolution of the marriage, taking into account the value of money over time (s 4(1)(a) and (b)(iii) of the MPA).
However, a concerning trend has emerged where one spouse, often the husband, transfers assets acquired during the marriage to a trust, of which both spouses and their children are beneficiaries and trustees. This is typically done under the guise of estate planning or asset protection. The question arises whether such transfers effectively circumvent the accrual system and potentially violate the principles and provisions of the MPA. By removing assets from their personal estate and placing them in a trust, a spouse may be attempting to prevent those assets from being subject to an accrual claim by the other spouse upon divorce. This is particularly problematic when the transfer is made without the full knowledge and consent of the other spouse, or where the other spouse is persuaded to agree to the transfer without understanding the potential consequences for their future accrual claim.
This article argues that in certain circumstances, particularly where there is an abuse of the trust form, courts should be willing to go behind the trust and include trust assets in the calculation of the accrual, to give effect to the purpose and principles of the MPA. This approach is supported by case law such as Badenhorst v Badenhorst 2006 (2) SA 255 (SCA) and RP v DP 2014 (6) SA 243 (ECP). Furthermore, it is argued that a failure to do so may not only undermine the MPA but also infringe on constitutional rights such as the right to equality (s 9 of the Constitution of the Republic of South Africa, 1996 – hereafter referred to as the Constitution) and the best interests of children (s 28 of the Constitution). The transfer of assets to a trust during the marriage, if done with the intention of defeating the other spouse’s accrual claim, may perpetuate unfair discrimination on the grounds of gender and undermine the Constitutional imperative to achieve substantive equality between spouses.
The Accrual System and Trusts
The accrual system, as established in the MPA, is based on the idea that each spouse contributes equally to the growth of the couple’s wealth during the marriage, irrespective of their actual financial or non-financial contributions. This system aims to achieve a fair distribution of the assets accumulated during the marriage upon its dissolution.
Section 3 of the MPA sets out the core principle of the accrual system. It states that upon dissolution of the marriage, the spouse whose estate shows no accrual or a smaller accrual than the estate of the other spouse has a claim against the other spouse for an amount equal to half of the difference between the accrual of the respective estates (s 3(1)). This claim arises at the dissolution of the marriage and does not affect the spouses’ property rights during the subsistence of the marriage (s 3(2)).
The calculation of the accrual is governed by section 4 of the MPA. The accrual of a spouse’s estate is the amount by which the net value of their estate at the dissolution of the marriage exceeds the net value of their estate at the commencement of the marriage (s 4(1)(a)). Certain assets are excluded from the accrual calculation, including damages for non-patrimonial loss, inheritances, legacies, and donations, unless the spouses agree otherwise in their antenuptial contract (s 4(1)(b)(i) and s 5). The net value of the estate at the commencement of the marriage is adjusted to account for the change in the value of money over time, using the consumer price index (s 4(1)(b)(iii)).
The problem arises when assets that would ordinarily form part of a spouse’s estate for purposes of the accrual calculation are transferred to a trust during the course of the marriage. Trusts are commonly used as an estate planning and asset protection tool. However, they can also be used to shield assets from potential accrual claims in the event of divorce. This is because assets held in a trust are considered to be owned by the trust, not by the individual trustees or beneficiaries (s 12 of the Trust Property Control Act 57 of 1988). Thus, if a spouse transfers assets to a trust, those assets would not form part of their estate at the dissolution of the marriage and would not be subject to an accrual claim by the other spouse.
However, courts have shown a willingness to look beyond the veneer of a trust and include trust assets in the accrual calculation where there is evidence that the trust is actually the alter ego of one of the spouses. The leading case in this regard is Badenhorst v Badenhorst 2006 (2) SA 255 (SCA). In this case, the Supreme Court of Appeal held that trust assets can be taken into account for purposes of the accrual calculation if the spouse who transferred the assets to the trust (in this case, the husband) controlled the trust and but for the trust would have acquired and owned the assets in his own name (para 9). The court emphasised that the control must be de facto and not necessarily de iure (para 9). Factors that indicated the husband’s control over the trust included his ability to discharge his co-trustee and appoint someone else, his use of the trust’s assets as if they were his own, and his failure to consult with his co-trustee on trust decisions (paras 10-11). The court concluded that the value of the trust assets should have been added to the value of the husband’s estate for purposes of calculating the accrual and making a redistribution order under s 7(3) of the Divorce Act 70 of 1979 (paras 13-16).
The Badenhorst case established the principle that where a trust is used as an alter ego of one of the spouses, particularly to shield assets from an accrual claim, the court has the power to include those assets in the accrual calculation to give effect to the purpose of the MPA and achieve a just and equitable outcome between the spouses. This principle has been applied in subsequent cases such as RP v DP 2014 (6) SA 243 (ECP) and MM v JM 2014 (4) SA 384 (KZP).
However, it is important to note that not every transfer of assets to a trust during the marriage will justify going behind the trust form. The courts have emphasised that there must be evidence of an abuse of the trust form, not just the ordinary use of a trust as an estate planning tool (Van Zyl v Kaye 2014 (4) SA 452 (WCC)). The spouse seeking to include the trust assets in the accrual calculation bears the onus of proving that the trust is in fact the alter ego of the other spouse and that but for the trust, the assets would have formed part of that spouse’s estate (RP v DP, para 37).
Piercing the Trust Veneer
The concept of “going behind the trust form” or “piercing the trust veneer” has been developed by South African courts to address situations where trusts are being abused, particularly in the context of matrimonial property disputes. This doctrine allows courts to disregard the separate legal personality of the trust and treat the trust assets as if they belong to the trustee personally, in order to prevent an injustice or to give effect to the true intention behind the trust arrangement.
The principle of piercing the trust veneer was clearly articulated in Van Zyl v Kaye 2014 (4) SA 452 (WCC). In this case, Binns-Ward J emphasised that there is a difference between the concepts of “sham” trusts and “abuse” of the trust form (para 16). A sham trust is one where the requirements for the establishment of a valid trust were not met or where the appearance of having met them was in reality a dissimulation (para 19). On the other hand, piercing the trust veneer is appropriate where a validly constituted trust is being abused to achieve an improper purpose (para 21). The court held that the common law allows for going behind the trust form in such circumstances, as an equitable remedy to prevent the unconscionable abuse of the trust form (para 22).
The court in Van Zyl v Kaye set out the circumstances in which piercing the trust veneer would be justified. This would typically be the case “in the context of an absence of the dichotomy between responsibility and interest that constitutes the ‘core idea’ of the legal concept of a trust, in other words, in a context in which the trustees treat the property of the trust as if it were their personal property and use the trust essentially as their alter ego” (para 21). Factors that would indicate an abuse of the trust form include a lack of independence of the trustees, a failure to adhere to the terms of the trust deed, and a lack of separation between trust assets and the personal assets of the trustees (Van Zyl v Kaye, para 24; RP v DP 2014 (6) SA 243 (ECP), para 32).
In the context of accrual claims in matrimonial property disputes, piercing the trust veneer is particularly relevant where assets that would otherwise have formed part of a spouse’s estate and been subject to an accrual claim are transferred to a trust during the marriage. If the purpose of such a transfer is to defeat the other spouse’s accrual claim, courts should be willing to go behind the trust form and include those assets in the accrual calculation.
This was the approach taken by the court in RP v DP. In this case, the wife sought to include the assets of a trust established by her husband in the calculation of the accrual of his estate. She argued that the trust was her husband’s alter ego and that but for the trust, the assets would have formed part of his personal estate (para 1). The court accepted that in order to succeed with such a claim, the wife had to show that the husband controlled the trust and but for the trust would have acquired and owned the assets in his own name (paras 13-14, 35). On the facts of the case, the court found that the husband had full de facto control over the trust and used trust assets for his personal benefit, that the trust was no more than his “alter ego“, and as such the value of the trust assets should be taken into account in determining the accrual of his estate (para 47).
The court in RP v DP emphasised that this power to pierce the trust veneer is derived from common law, not from the provisions of the Matrimonial Property Act or Divorce Act (para 15). It is an equitable remedy that allows courts to prevent the abuse of the trust form in a manner that is inconsistent with the fundamental idea of a trust and results in prejudice to third parties, in this case the spouse who would otherwise have an accrual claim (paras 21, 35).
It is important to note that not every transfer of assets to a trust during a marriage will justify piercing the trust veneer. The courts have cautioned against interfering with the use of trusts for legitimate estate planning purposes (Van Zyl v Kaye, para 24; WT v KT 2015 (3) SA 574 (SCA), para 31). There must be clear evidence of an abuse of the trust form, such that the trust is in reality the alter ego of the trustee, and the transfer of assets was made with the intention of defeating the other spouse’s accrual claim.
The doctrine of piercing the trust veneer is a vital tool for courts to ensure that the principles and purpose of the accrual system under the Matrimonial Property Act are not undermined through the abuse of trusts. Where a trust is used as the alter ego of a spouse, particularly with the intention of shielding assets from an accrual claim, courts should be willing to go behind the trust form and include those assets in the accrual calculation. This ensures a just and equitable outcome between the spouses and prevents the unilateral undermining of the matrimonial property system by one spouse. At the same time, courts must be cautious to only pierce the trust veneer where there is clear evidence of abuse, so as not to unduly interfere with the legitimate use of trusts for estate planning purposes.
Constitutional and Policy Arguments
The MPA introduced the accrual system with the aim of achieving greater equality between spouses in terms of their property rights. Previously, under the common law, marriages were automatically in community of property unless the spouses explicitly excluded this by means of an antenuptial contract. This often led to unfair outcomes, particularly for women who traditionally took on the role of homemaker and contributed less financially to the growth of the joint estate. The accrual system sought to recognise the equal contribution of both spouses to the marriage, regardless of the nature of their contribution.
In this sense, the MPA can be seen as giving effect to the constitutional right to equality, as enshrined in section 9 of the Constitution of the Republic of South Africa, 1996. Section 9(1) provides that everyone is equal before the law and has the right to equal protection and benefit of the law. Furthermore, section 9(3) prohibits unfair discrimination, directly or indirectly, on various grounds including gender and marital status. By providing for a more equitable distribution of assets upon dissolution of the marriage, the accrual system promotes substantive equality between spouses.
However, the use of trusts to shield assets from accrual claims undermines this purpose and can perpetuate inequality between spouses. If one spouse, typically the husband, is able to unilaterally transfer assets that would otherwise be subject to an accrual claim into a trust, it effectively allows that spouse to circumvent the intended operation of the MPA. This is particularly concerning in situations where the other spouse, typically the wife, is persuaded to agree to the transfer without fully understanding the implications for their future accrual claim, or where the transfer is made without their knowledge or consent.
This scenario raises issues of unfair gender discrimination. The reality is that in many marriages, particularly more traditional ones, husbands still tend to be the primary breadwinner and have greater control over the couple’s financial affairs. Wives are often in a position of vulnerability and may feel pressured to agree to arrangements suggested by their husbands, even if it is not in their best interests. The use of trusts in this manner can thus perpetuate the economic disempowerment of women and undermine the constitutional goal of achieving gender equality.
Furthermore, the best interests of children, which are of paramount importance according to section 28 of the Constitution, can also be negatively impacted by the abuse of trusts to defeat accrual claims. If one spouse is able to substantially reduce their estate through transfers to a trust, it may leave the other spouse and any children of the marriage in a precarious financial position upon divorce. This is contrary to the constitutional imperative to protect children and provide for their basic needs.
The courts have a crucial role to play in addressing these constitutional concerns. By being willing to pierce the trust veneer and include trust assets in the accrual calculation where there is evidence of abuse, courts can give effect to the underlying purpose of the MPA and promote substantive equality between spouses. This approach is in line with the transformative vision of the Constitution, which seeks to address historical imbalances and create a more just and equal society.
Moreover, piercing the trust veneer in appropriate circumstances sends a clear message that the abuse of trusts will not be tolerated, and that the financial well-being of both spouses and their children is a matter of public concern. It recognises that marriage is not merely a private contract but a social institution with broader implications for society as a whole.
The use of trusts to defeat accrual claims is not just a matter of private family law but engages important constitutional rights and values. It has the potential to perpetuate gender inequality, undermine the economic security of vulnerable spouses and children, and subvert the transformative goals of the Constitution. Courts have an essential role to play in combating the abuse of trusts in this context, by being willing to go behind the trust form and include trust assets in the accrual calculation where appropriate. This ensures that the principles of the MPA are given full effect and that the constitutional promise of equality and protection of vulnerable groups is realised in the realm of matrimonial property law. At the same time, a cautious and fact-specific approach is necessary to ensure that legitimate uses of trusts are not unduly interfered with.
Conclusion
In divorce matters involving trusts, courts should be willing to look beyond the mere form of the trust and consider the substance of the arrangement. Where there is evidence that a trust is being used to circumvent the provisions of the MPA and defeat the accrual claim of one of the spouses, courts should pierce the trust veneer and include the trust assets in the accrual calculation.
This approach is necessary to give full effect to the purpose of the MPA, which is to promote equality between spouses and ensure a fair distribution of assets upon dissolution of the marriage. The accrual system introduced by the MPA recognises the equal contribution of both spouses to the marriage, irrespective of the nature of their contributions. Allowing one spouse to unilaterally undermine this system through the use of trusts would render the protections of the MPA meaningless.
Moreover, a failure to address the abuse of trusts in this context would be inconsistent with the constitutional imperative to promote equality and combat unfair discrimination. The Constitution of the Republic of South Africa, 1996, guarantees everyone the right to equal protection and benefit of the law, and prohibits unfair discrimination on grounds such as gender and marital status. The use of trusts to shield assets from accrual claims often perpetuates patterns of gender inequality and the economic disempowerment of women. Courts have a duty to interpret and apply the MPA in a manner that gives effect to these constitutional rights and values.
The best interests of children, which are of paramount importance under the Constitution, also demand that courts take a substantive approach to trusts in divorce matters. The abuse of trusts can have severe consequences for the financial well-being of children of the marriage, particularly where it leaves one spouse and the children in a precarious economic position. Piercing the trust veneer in appropriate cases ensures that the economic needs of both spouses and their children are considered in the division of assets.
At the same time, courts must be cautious not to unduly interfere with the legitimate use of trusts for estate planning and asset protection purposes. The mere fact that assets have been transferred to a trust during the marriage does not automatically justify going behind the trust form. There must be clear evidence that the trust is being used as an alter ego of one of the spouses, with the intention of defeating the other spouse’s accrual claim. The enquiry is thus a fact-specific one that requires a careful examination of the circumstances of each case.
In conclusion, the treatment of trusts in divorce matters involving accrual claims engages important principles of matrimonial property law, constitutional rights, and policy considerations. Courts should be willing to pierce the trust veneer where there is evidence that the trust is being abused to circumvent the provisions of the MPA and undermine the accrual system. This approach ensures that the purpose of the MPA is given full effect, that the constitutional rights to equality and the best interests of children are protected, and that the transformative potential of matrimonial property law is realised. At the same time, a nuanced and fact-specific approach is necessary to ensure that legitimate uses of trusts are not unduly interfered with. Getting this balance right is crucial for the fair and just administration of matrimonial property law in South Africa.
Questions and Answers
What is the accrual system under the Matrimonial Property Act 88 of 1984 (MPA)? Answer: The accrual system is a matrimonial property regime where each spouse’s estate is kept separate during the marriage, but upon dissolution, the spouse whose estate shows a smaller accrual (increase in value) has a claim against the other spouse’s estate for an amount equal to half of the difference between the accruals of the respective estates (s 3(1) of the MPA).
How is the accrual of a spouse’s estate calculated under the MPA? Answer: The accrual of a spouse’s estate is the amount by which the net value of their estate at the dissolution of the marriage exceeds the net value of their estate at the commencement of the marriage (s 4(1)(a)). Certain assets, such as inheritances and donations, are excluded unless otherwise agreed (s 4(1)(b)(i) and s 5).
What is the effect of transferring assets to a trust during the subsistence of a marriage subject to the accrual system? Answer: Assets transferred to a trust during the marriage would ordinarily not form part of the transferring spouse’s estate at dissolution and would thus be excluded from the accrual calculation. This could potentially prejudice the claim of the other spouse.
In what circumstances have courts been willing to include trust assets in the accrual calculation? Answer: Courts have included trust assets in the accrual where there is evidence that the trust is the alter ego of one of the spouses and that the assets were transferred to the trust with the intention of defeating the other spouse’s accrual claim (Badenhorst v Badenhorst 2006 (2) SA 255 (SCA)).
What is the difference between a “sham trust” and “piercing the trust veneer”? Answer: A sham trust is one where the requirements for a valid trust were never met. Piercing the veneer, on the other hand, applies to a validly constituted trust that is being abused for an improper purpose, such as defeating an accrual claim (Van Zyl v Kaye 2014 (4) SA 452 (WCC)).
What factors indicate an abuse of the trust form justifying piercing the trust veneer? Answer: Factors include a lack of independence of trustees, failure to adhere to the trust deed, lack of separation of trust and personal assets, and the use of the trust as the alter ego of one or more of the trustees (RP v DP 2014 (6) SA 243 (ECP)).
What is the constitutional basis for including trust assets in the accrual calculation where appropriate? Answer: The MPA’s accrual system gives effect to the constitutional right to equality (s 9 of the Constitution). Allowing the abuse of trusts to defeat accrual claims would undermine this right and perpetuate economic inequalities between spouses.
How does the abuse of trusts to defeat accrual claims impact the best interests of children under the Constitution? Answer: Section 28 of the Constitution makes the best interests of children paramount. The abuse of trusts can prejudice the financial position of children of the marriage upon divorce, undermining their constitutional rights.
What is the role of courts in addressing the abuse of trusts in divorce matters involving accrual claims? Answer: Courts should be willing to pierce the trust veneer and include trust assets in the accrual calculation where there is evidence of abuse. This gives effect to the MPA, constitutional rights, and the transformative potential of matrimonial property law.
What is the limitation on the power of courts to pierce the trust veneer in divorce matters? Answer: Courts should not interfere with the legitimate use of trusts for estate planning and asset protection. There must be clear evidence that the trust is being abused as an alter ego to defeat the accrual claim of the other spouse. A careful, fact-specific enquiry is required in each case.
Written by Bertus Preller, a Family Law and Divorce Law attorney and Mediator at Maurice Phillips Wisenberg in Cape Town and founder of DivorceOnline. A blog, managed by SplashLaw, for more information on Family Law read more here.