How strong is the trust firewall against creditors?
There’s a firewall between your creditors and the trust assets, but how strong is it?
This gets tested in the courts relatively often and two cases were reported in De Rebus, the Law Society magazine recently. In both cases the firewall held and quite rightly because these trusts were properly constructed and properly administered.
The first case was the classic – a divorce. Both the husband and wife were trustees and beneficiaries and her attorney sought to get the trust assets included in the accrual calculations. He claimed that the husband had treated the trust as his alter ego (other self). This became a favourite argument after the famous Badenhorst vs Badenhorst case which Mr Badenhorst lost, so any attorney worth his salt will have a crack at it even if his argument has no real merit (of course he won’t tell his client that). Interestingly, the other trustees joined with the wife in the claim for accrual, which was pretty stupid as the lot of them had costs awarded against them. I’ve said it over and over – the trustees have absolute discretion which means that the beneficiaries have no claim whatsoever against the trust assets or income, but then I’m not an attorney whose job it is to take on a case whether or not it has merit.
The second case was also argued on the alter ego issue (surprise surprise) and that the trust was a sham (also taken from the Badenhorst vs Badenhorst case – I guess they teach that one at law school). Our hero went into bankruptcy and the liquidators tried to claim the trust assets as part of his insolvent estate. The application was dismissed with costs and again, quite rightly so. What a waste of the court’s time and the creditors’ money. But I bet the attorney and the advocate enjoyed pulling out their university textbooks!
Always have an independent professional (attorney or accountant) as one of your trustees and be sure to document all resolutions of the trust, making sure that they are, in the opinion of the trustees, for the benefit of none but a beneficiary or beneficiaries. Do that and with a well crafted Trust Deed, you’re on firm ground.
Should you wish to make an appointment, please feel free to visit Derek’s diary and book a time that suits you.