The clever man knows many ways, the wise man knows the right way.

- CJ Langenhoven

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08May2012
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Always make sure there is a "distance" between you and your spouse

In the case of Jordaan v Jordaan 2001 (3) SA 288 (C), the claimant instituted an action for a divorce and, among other things an order in terms of the stipulations of sec. 7(3) of the Divorce Act.  (Sec. 7 clearly specifies that the court has almost unrestricted discretion to order a redistribution of assets if the court is of the opinion that it would be just and equitable to do so Ė and that all relevant factors can be taken into account when exercising this discretion.)

The point of contention is the extent of the order in terms of the aforementioned legislation, in other words the extent of the assets that must be taken into account in the redistribution order in respect of the claimant and the defendant.  The defendant alleged that (a) the assets in his respective inter vivos trusts must not be taken into account when determining the extent of his estate, as well as (b) the farm that he inherited.  (In this correspondence, we will focus on (a).)

Three trusts were involved:
In trust A, the financial statements indicated that x amount on loan account was owed to the children.  In answer to the question why the loan amounts were never used to the childrenís benefit, the defendant answered that he would have done so had the childís action and behaviour pleased him as defendant.  According to the court, it was a clear indication of how closely the trust and the defendant are interlinked.

In trust B, the defendant sent a letter ďto whom it may concernĒ and which mentioned that the claimant may not use the house, which forms part of the trust assets, before the defendant gives written permission to that effect.  It was also common cause that the defendant simply used the trust to do tax-effective business.  According to the court, it was very clear that the defendant is in total control of the trust.  The decisions on trust-related matters were made solely by the defendant.  He did not consult with his fellow trustees and also kept no records of any decisions.

As far as trust C is concerned, it was the courtís opinion that the defendant also had full control over it (the trust).

The courts view was that the manner in which the trust had been administered was a relevant factor that could be taken into account in its decision-making, in terms of the above-mentioned sec. 7.  The financial statements and irrefutable evidence indicate that large amounts of money moved between the respective trusts without any formal decisions being made in that regard.  The defendant had initiated and given instructions for the movement of the money in the trusts.  Loans were made to the defendant by the trust without any formal decision-making by the trustees.  Trust A financed renovations to a home in trust B without there being any book entry in that regard.  Loans that were made from one trust to another were reflected in the statements, but without there being any minutes of the authorisation of the loan.  A further indication of how the defendant handled the trust assets is the fact that trust A handled the farming activities of the defendantís farm.  The farming activities generated a turnover of almost R1 500 000 a year.  It was clearly a very valuable farm and if this ďleaseĒ was an armís-length business transaction, one would have expected rental to be paid to the defendant.  The defendant simply regarded the trusts as a vehicle for deriving a financial benefit for himself.

The courtís ruling:
The defendant had simply used the trusts to derive a financial benefit for himself.
The trusts were in fact the alter ego of the defendant and were also regarded as such by him.
When evaluating the issue as to what should be the extent of the redistribution order in respect of the claimant and the defendant, it would be just and equitable to take into account the assets of the trust!

In the light of the above, it was not even necessary for the court to decide whether the circumstances justified the lifting of the corporate veil.  (As a matter of interest, it was mentioned that the asset value of the trusts was about R8 million.)

In conclusion:
Is that the way in which your clientís trust is administered?  Your client must note the implications of this case and must make sure that:
any decisions regarding trust assets must be properly minuted;
decisions must be made by way of a majority decision by the trustees; and
proper ďbookkeepingĒ must be kept of all transactions.

Although the case has not been argued from an estate duty or creditor point of view, it could, however, in future very easily be used as a precedent, with the result that the trust assets could be taken into account for estate duty purposes or that creditors could attach them.