Could your Trust be disregarded by the Courts?

May 14, 2021 | Article

 

The fact that you have a written trust deed is no guarantee that your assets are safe and that the trust is safe from attack. If you never intended to create a “genuine” trust from the outset, the trust may be attacked and labelled as a sham trust; in other words, a “smoke screen”.

If, on the other hand, you intended to create a trust, but you have dealt with the trust assets as if they were your own, then your creditors, SARS and soon-to-be-ex-spouse can attack the trust and have it labelled as an alter ego trust; in other words, an extension of yourself. Despite the fact that the trust does in fact exist, the Courts will disregard the trust and treat the assets as if they belong to you. There must be a clear separation of control from enjoyment of trust assets.

All trustees – and not just one of them – should control the trust assets for the enjoyment of the beneficiaries. You will experience dire consequences if your trust is labelled as either a sham trust or alter ego trust. These terms “sham trust” and “alter ego trust” are often used interchangeably, which is incorrect. The two concepts are completely different and should be distinguished from each other.
The principles espoused in this article by Phia van der Spuy are very import in trust planning and administration.