If you are using a trust as part of your estate plan, it is no longer enough that the paperwork is in place. South African courts and regulators are increasingly willing to interrogate how trusts are set up and, more importantly, how they are administered in practice. Where a trust is found to be a sham, or effectively nothing more than the founder’s alter ego, the financial consequences can be severe – particularly in divorce proceedings, disputes with creditors, and engagements with SARS.
Recent amendments to the Trust Property Control Act 57 of 1988 (TPCA), primarily through the General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act 22 of 2022, have tightened the regulatory net around trusts – with trustees now facing stricter recordkeeping and beneficial ownership reporting requirements, with meaningful penalties for non-compliance. Against this backdrop, it is essential to ensure that your trust is both valid in law and properly managed in practice.
The TPCA has always imposed strict fiduciary duties on trustees, including the obligation to act with the care, diligence and skill that can reasonably be expected of a person managing the affairs of another – and this duty cannot be watered down in the trust deed. Trustees must keep trust property separate from their personal assets, maintain proper records, comply with the trust deed, and act jointly unless the deed expressly provides otherwise. The anti-money laundering amendments have added a further layer of responsibility, requiring trustees to maintain a detailed register of the trust’s beneficial owners, keep supporting identification documents, and file this information with the Master of the High Court. Failure to comply can attract substantial fines or even imprisonment, which means that weak administration is no longer just a technical issue – it can have serious personal consequences for trustees.
Within this tougher environment, the concepts of ‘sham trusts’ and ‘alter-ego trusts’ have taken on renewed importance. Although the terms are sometimes used interchangeably in conversation, they describe two very different situations in law. A sham trust is one that was never truly intended to be a trust at all, even though a trust deed was drafted and registered. On paper it looks like a trust, but in substance, it is a façade designed to mislead third parties such as spouses, creditors or SARS. The core question is what the founder intended at the time the trust was created. By contrast, an alter-ego trust is a valid trust that meets the formal requirements for creation, but is administered in such a way that the founder effectively continues to treat the trust assets as his or her own. The difficulty here lies in ongoing control and administration, rather than in the original intention.
This distinction matters because the legal consequences differ. If a trust is found to be a sham, the court may hold that no trust ever existed and treat the assets as having remained in the founder’s personal estate all along – and any supposed protection against creditors, spouses, or SARS falls away. If a trust is found to be an alter-ego trust, the trust remains valid, but the court may ‘pierce the veneer’ of the trust for specific purposes – for example, to include the value of trust assets in a divorce accrual calculation, to satisfy a creditor’s claim or to address tax abuse. In practical terms, both scenarios can unravel carefully constructed estate plans if the trust has not been properly designed and administered from the outset.
An alter-ego trust typically arises where there is a breakdown in the essential separation between control and benefit. South African courts have repeatedly emphasised that the core idea of a trust is that trustees control the trust property in accordance with the deed, while beneficiaries enjoy the benefits of that control. An alter-ego problem emerges when the founder, who is often also a trustee and sometimes a beneficiary, never genuinely relinquishes control. The founder may make all decisions about the trust assets and simply expect the other trustees to sign resolutions without independent thought. Trustees may seldom meet, minutes may not exist, and resolutions may be signed after the fact to align with decisions already taken by the founder. Further, trust bank accounts might be used as if they were the founder’s personal cheque account, with little or no distinction between personal and trust expenditure. In some instances, the trust deed itself gives the founder wide unilateral powers – such as the ability to amend the deed or remove trustees at will – and these powers are exercised in a way that undermines the independence of co-trustees.
When assessing whether a trust might be vulnerable to attack as an alter ego, the overall pattern of behaviour is important. A founder who dominates decision-making, a board of trustees made up almost exclusively of close family members with no independent oversight, poor governance and recordkeeping, and a casual disregard for the terms of the trust deed are all warning signs. So too is the commingling of trust assets and personal assets, where funds flow freely between the founder and the trust without proper resolutions, loan accounts or interest terms. None of these factors, on their own, will automatically render a trust an alter-ego, but taken together, they can persuade a court that the trust is being abused, opening the door for its veneer to be pierced.
A sham trust goes deeper than mismanagement or weak governance. Rather, it concerns the true nature of the arrangement at the time the trust was established. In a sham scenario, the founder signs a trust deed and ostensibly transfers assets into the trust, but never intends to create a genuine trust relationship between founder, trustees and beneficiaries. The structure is used as a disguise – for example, to move assets out of sight shortly before divorce proceedings, or to mislead creditors or SARS. When a court is asked to determine whether a trust is a sham, it will look closely at the founder’s intention when the trust was formed, the wording of the deed, the surrounding circumstances and the way the trust has been administered. The question is whether the parties truly intended to create a trust in which trustees would own and control property for the benefit of beneficiaries, or whether they were simply dressing up a different arrangement to mislead others.
If a court concludes that there was never a genuine intention to create a trust, it can declare that no trust came into existence at all. The trust is then treated as void from the outset, with the result that no valid transfer of assets to the trustees is recognised and the assets are treated as part of the founder’s personal estate. Third parties may not be bound by transactions purportedly entered into with the ‘trust’, and any perceived insulation from SARS, creditors or divorcing spouses falls away. In serious cases, the founder may face both civil and criminal consequences. Note that, because no valid trust exists, ‘piercing the veil’ is not the remedy – in law, there is nothing to look behind.
Red flags that a trust could be attacked as a sham include a vague or contradictory trust deed that appears to create a trust but fails to establish real rights and duties, the absence of genuine trusteeship where trustees do not act independently or are not properly authorised, and the failure to transfer or register assets so that they remain indistinguishable from the founder’s personal property. In today’s regulatory environment, a lack of proper beneficial ownership records is another warning sign, particularly where there is no clear internal record of who ultimately owns or controls trust benefits. A pattern of using the trust structure only when the founder is under financial pressure or facing legal claims – such as hurriedly moving assets before a divorce or litigation without a coherent estate-planning rationale – will also attract scrutiny. If these elements are present, the risk of the trust being treated as a sham increases significantly.
Given the heightened scrutiny on trusts, it is prudent to stress-test your existing structures. This begins with a careful review of the trust deed to ensure that the objectives are lawful and clear, that beneficiaries and trust property are properly identified, and that the powers and duties of trustees are workable and appropriate. Trustees should satisfy themselves that the trust was correctly established with the Master of the High Court, that all trustees have been formally authorised and, where required, have furnished security. Governance must be tightened by holding regular trustee meetings, keeping detailed minutes, passing resolutions timeously and maintaining accurate accounting records. Trustees should also understand that they are personally responsible for the administration of the trust and are required to exercise independent discretion, not simply rubber-stamp the founder’s wishes. Just as importantly, trust bank accounts and investments must be clearly distinguished from personal assets, with no informal mixing of funds, and the beneficial ownership register must be prepared, maintained and updated when circumstances change. In many family trusts, appointing a knowledgeable, independent trustee can materially strengthen governance and demonstrate that the trust is not merely an extension of the founder.
Trusts remain powerful tools for intergenerational planning, asset protection and succession – but only if they are properly designed, genuinely implemented and diligently managed. If you already have a trust and are uncertain whether it meets the stringent legal and regulatory requirements now in force, it is wise to have it reviewed by a fiduciary specialist. The cost of proactive advice is almost always lower than the cost of defending a trust that is found wanting when it is tested by SARS, creditors or in the emotionally charged context of divorce.
Have a beautiful day.
Sue
