1. WHAT IS AN ALTER-EGO TRUST?

An alter-ego trust is when all the necessary requirements for a valid trust are present and the trust is established, but the trustees act as puppets, mainly under the instruction of the creator or another trustee.  It is also present when the trust property is treated by the creator or a trustee as if it is personally owned by him, instead of belonging to the trust. Where a trust is created without the genuine intention of creating a trust, it is probable that the trust can be attacked and labelled a sham trust which never actually comes into existence as a trust.  Where a trust, however, was created with the intention of creating a trust, but the assets are dealt with as if they are a trustee’s personal property, creditors of the trust, as well as SARS and soon-to-be ex-spouses of trustees, can attack the trust and have it labelled an alter-ego trust. The result of this can be that courts disregard the trust and treat the trust assets as assets of the trustee in his or her personal capacity.

  1. WARNING SIGNS THAT A TRUST IS AN ALTER-EGO TRUST

There are a number of indications that a trust is an alter-ego trust.

  • Where a trust does not have an independent trustee, it is easy for a trustee to deal with the assets of the trust as he wishes and as if they are his own.
  • If a trust deed gives a founder and/or trustee the power to amend the trust deed without the consent of other trustees, or where the founder has retained a high level of control in the trust deed, it is a clear sign that the trust could be an alter-ego trust, however it will only be so where the founder exercises that control and/or power.
  • It is also probable that the trust is an alter-ego of a trustee where the trustee acts contrary to the terms of the trust deed and where the trustee is dominant, in that he or she dictates how trustee decisions are made without adhering to the joint-action rule that trustees must decide on matters together.
  • The most obvious sign that a trust is an alter-ego trust is when trustees do not act with the necessary care, diligence and skill expected of them in terms of the Trust Property Control Act.
  1. THE APPROACH BY THE SUPREME COURT OF APPEAL TO ALTER-EGO TRUSTS
  • The reason that the courts will deem an alter-ego trust as such, is to combat the abuse of existing trusts. In a number of past cases it was accepted that a spouse (who was neither a beneficiary nor a third party) who had transacted with the trust, had no standing to impugn the management of the trust as there was no fiduciary duty owed to him/her by the trust. Such findings have however been rejected in recent case law, such as REM v VM 2017 (3) SA 371 (SCA), where it was found that the fact that no fiduciary duty was owed to the spouse was irrelevant. In this case, the main issue was identified to be whether the spouse was seeking to advance a patrimonial claim that the other spouse had attempted to prejudice, by administering the trust in such a manner as to amount to an unconscionable abuse of the trust form. It was held by the Supreme Court of Appeal in this case that in marriages involving the accrual system, this would occur where a trustee spouse transferred personal assets to a trust and dealt with them as if they were trust assets, in a fraudulent attempt to conceal them and thus prejudice the aggrieved spouse’s accrual claim.
  • In Mills v Mills [2017] 2 All SA 364 (SCA), with the appellant and respondent in the process of being divorced, the High Court was approached by the respondent with a number of claims based on an antenuptial contract concluded between the parties.  The antenuptial contract provided for marriage out of community of property with the accrual system. The main issue between the parties was whether certain trust assets formed part of the accrual of the appellant’s estate. The respondent sought orders declaring that the assets held by three trusts were assets of the appellant and had to be taken into account when determining the extent of the accrual of the appellant’s estate for the purposes of the respondent’s accrual claim. It was alleged that the trusts were simply an alter-ego of the appellant and the assets of the trusts were in reality those of the appellant. These submissions were upheld in the High Court. However, in the Supreme Court of Appeal, the court decided that, although the appellant administered the trusts with very little regard for his fiduciary duties as a trustee and without proper regard for the dichotomy of control and enjoyment essential to the nature of a trust, and although such conduct may have justified his removal as a trustee or the appointment by the Master of the High Court of an independent co-trustee, the evidence did not prove that he 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. The assets of the trusts accordingly could not to be taken into account in determining the accrual of the appellant’s estate.
  1. CONCLUSION
  • As a general rule, the fact that a trust is regarded as an alter-ego trust does not imply that the trust does not exist, but the court can pierce the ‘trust veil’ and make an order that is just and equitable in the circumstances. This may include, for instance, deeming the trust assets to form part of a trustee or founder’s personal estate.
  • It is important to demonstrate that a trust is structured and managed as a separate entity to the founder, a trustee or its beneficiaries, as the consequences of not doing so may very well completely negate the reasons for forming and the benefits attached to using the trust.

As a starting point in establishing whether your trust can be considered to be an alter-ego trust we invite you to make use of our Smart Questionnaire as part of our firm’s Tech Enabled Law by –

  1. Click on the link – https://sstlaw.n-abler.biz/Home/Selection; or
  2. Visit the Tech Enabled Law page on our website at sstlaw.co.za

Should you further be uncertain about your estate planning, please feel free to contact our office to consult with one of our experienced fiduciary specialists.

Anica Theunissen

LLB; LLM (Estate Planning)

Director

Fiduciary and Commercial Department

Email:  anica@sstlaw.co.za

Phone: 012 361 9823