Piercing the Corporate Veneer of a Trust

The effective management and administration of a Trust requires much more than merely signing the Trust Deed and the subsequent issuing of the Letter of Authority by the Master of the High Court. The purpose of an inter vivos Trust is, after all, to manage at all times the assets in the Trust to the advantage of the beneficiaries of the Trust. Therefore the alter ego principle, which occurs more often than we think, can have a big influence on the rulings of the courts when it comes to the question of whether a Founder and/or Trustee is indeed one and the same as his or her Trust. In Badenhorst v Badenhorst 2006 (2) SA 255 (SCA) ([2006] 2 All SA 363) the Appeal Court ruled that the veil which separates the assets of the Trust from the personal estate of the Trustee/Founder shall be lifted where it is found that the Trust is the alter ego of the Trustee or Founder and that the affairs of the Trust are managed in a manner that leads to the personal welfare of the Trustee or Founder, and is not managed to the advantage of the beneficiaries. In the Appeal Court ruling in Land and Agricultural Development Bank of South Africa v Parker and Others 2005 (2) SA 77 (SCA) ([2004] 4 All SA 261) Judge Cameron stressed that the Trust as an instrument is often abused: “(t)he core idea of the Trust is the separation of ownership (or control) from enjoyment. Though a Trustee can also be a beneficiary, the central notion is that the person entrusted with control exercises it on behalf of and in the interests of another.”

For a Trust to be properly administered it is therefore necessary for the Founder of the Trust as well as the Trustees to distinguish their personal estates entirely from the estate of the Trust and, as Trustees, to act only in a fiduciary capacity. This is clearly stated in Section 12 of the Trust Property Control Act 57 of 1988. Effectively it means that the Founder must not solely take decisions regarding the management or control of the assets, despite often feeling that he/she must still exercise control of the assets since the assets are still his or hers because he/she registered it in the name of a Trust. The Founder must thus have the intention (and clearly exercise this intention) to register the asset/s in the name of the Trust and thus relinquish absolute control thereof in his/her personal estate. An example is the usual reference in the Trust Deed to a donation of R100. In this case the founder must indeed have the intention to donate the R100 to the Trust to the advantage of the beneficiaries, and it must be done as soon as the Trust is founded and must no longer form part of his/her personal estate.

In Rees and Others v Harris and Others 2012 (1) SA 583 (GSJ) the Court ruled that the veil may be lifted if it can be proved on a balance of probabilities that the assets which seemingly belong to the Trust, are the property of the Trustee(s) or, alternatively, that the Trustee is misusing the Trust for purposes such as, for example, tax evasion.

In RP v DP & Others 2014 (6) SA 243 (ECP) the Court ruled that a woman's accrual claim could be adjusted so that specific assets registered in her husband's Trust could be deemed part of his personal estate. Should the necessary proof that the Trust is effectively the alter ego of a person be submitted to court, all or some of the assets should be regarded as part of the person's estate and the veil must be lifted and such assets should be deemed part of the accrual.

In RP v DP & Others supra the court also determined that the circumstances of each case must be investigated: ‘’ In order to decide whether particular property constitutes true trust property or whether in reality and truth it falls within the personal estate of the trustee, the court will have regard to, inter alia, the terms of the trust deed, the extent of the de facto control of the trustee over trust affairs and assets, the nature of the assets, the liabilities of the trust, and the management of the affairs of the trust. Each case will be decided on its own particular facts, and the veil is pierced or lifted only in respect of those assets under consideration in the case. In all other respects the separation of trust assets and assets in the personal estate of the trustee is kept intact.’’

In the Appeal Court judgement in Nieuwoudt and Another NNO v Vrystaat Mielies (Edms) Bpk 2004 (3) SA 486 (SCA) ([2004] 1 All SA 396), Judge Harmse drew attention to the "new type of trust" where, for the purposes of estate planning, assets are transferred to the Trust but " everything remains as it previously was". In such cases the purpose of the Trust is clearly being misused and should be avoided.

Before a Trust is founded the Trustees and the Founder may consider the following suggestions:

1. A Founder and/or the Trustees must at all times ensure that their personal estate is kept separately from that of the Trust and that the Trust should not be used as an instrument to promote their personal wealth. The purpose of founding the Trust must therefore be clearly identified. Furthermore, a bank account must be opened exclusively for the Trust in order to clearly establish the distinction between the estate of the Founder and that of the Trust.

2. The Founder should not be the sole Trustee and also a beneficiary of the Trust. Ensure that an independent Trustee (excluding the spouse of the Founder or Trustee) is also appointed so that decision making is objective and an independent person also has a voice in the control of the assets. Beneficiaries are usually minor children of the Founder or Trustee and the assets are then managed to the advantage of the children until they come of age and can receive the assets.

3. Founders and Trustees should be familiar with the content of the Trust Deed and must ensure that the decisions and actions are taken in accordance with the powers and duties of the Trustees as set out in the Trust Deed. Therefore, if the Trust Deed stipulates that decisions, or certain decisions, must be put in writing, there should be proper written Resolutions to confirm such decisions.

4. Though there is no obligation for a Trust to be audited annually, it is advantageous to appoint an auditor or an accountant to assist with the financial management of the Trust, in order to facilitate aspects such as tax.

Louwrens Koen Attorneys

Louwrens Koen Attorneys, Conveyancers and Notaries have a modern outlook on life and have modern solutions for today's problems and needs without compromising on traditional values. Louwrens Koen was admitted as an Attorney in 1995. He is also an admitted Conveyancer, Notary Public and University Guest Lecturer.