Trusts can be valuable estate planning tools, and are often legitimately used to protect assets from the risks of business failure. They must however be structured and administered correctly and lawfully otherwise, as illustrated in a recent High Court case, they are open to attack by creditors. The facts were that a couple owed a bank in excess of R56m. The bank established that the couple had no assets in their own names, but that two trusts controlled by them held substantial assets, including their family home, furniture and other contents. The bank applied for, and obtained, a court order declaring the assets of both trusts to be assets of the couple personally, and therefore executable to satisfy the personal debt. In the absence of fraud, a trust’s assets will generally only be included in the trustees’ personal estates where they have not treated the trust as a separate entity – where it is in fact the “alter ego” of the trustees. Relevant considerations in determining whether or not this is so will include –

  • The terms of the trust deed
  • The actions of the trustees in controlling the trust and conducting its affairs.

The Court, in finding that the trustees had in this instance not treated the trusts as separate entities, took into account a number of factors –

  • The couple were the only trustees and had practical control of the trusts’ affairs and assets via provisions in the trust deed granting them control over the appointment of further trustees, and granting them absolute and unrestricted discretion to act as trustees without reference to the beneficiaries.
  • The trustees made no distinction between their personal assets and those of the trusts, using them as their own.
  • Although the trustees claimed to lease the house from the trust that owned it, there was no lease agreement produced, nor any bank account for the trust to receive rental and disburse expenses (the bond was paid by the trustees personally).
  • No formal trustee meetings were shown to have been held.

Every case will be different – take advice in doubt.

Source: LawDotNews – November 2011

When can creditors attack trust assets?