The Nature of Intention in Sham Trusts
Introduction
This paper is concerned with the issue of intention in the context of the sham trusts doctrine. A sham trust may seem simple in principle, but it is in fact extremely complicated and affected by a number of different factors. Essentially, a sham is essentially a declaration of intent to establish a trust, or to hold assets on trust, which is actually false. The falseness of the intent is made in relation to third parties and therefore, by extension, to the court. The reason for this is that the party making the representation has been dishonest, his motive being the intention gain an advantage which is in reality different from the intent stated on the trust deed.[1]
The Sham Trust and Intention
In the law of England and Wales, for a trust to be created, the three certainties must be present, these being certainty of intention, the subject matter, and objects.[2] Certainty of intention exists where evidence proves that the settlor definitively intended to establish a trust, and not to create another type of arrangement, such as a gift.[3] It is however necessary to note the difference between subjective and objective intention, as this is crucial to the way in which the courts have over the years developed the notion of intention in the formation of a trust. It is notable that legal authority provides that intention must be evaluated from an objective perspective. This was established in Twinsectra v Yardley, which held that a where a reasonable person considers that the settlor intended something specific, his other thoughts on the matter will not be considered relevant.[4]
Numerous commentators have defined the sham trust. Hudson’s definition is particularly precise; he stated that a sham trust is a “scheme of action or pattern of documentation which seeks to create the impression that the state of affairs is one thing when in fact it is something else.”[5] It must however be noted that in evaluating sham trusts, problems have been caused by the fact that so many sham trusts are established in overseas jurisdictions. This creates numerous problems due to different legal and taxation regulations, as well as for the English courts in the evaluation of intention. Indeed, English courts are in such cases required to disentangle many layers of interests. Although wealthy individuals and companies favour trusts for various legitimate reasons; a trust can also create a shield that can hide and protect assets from tax collectors and creditors.[6] Their use in this way is now however illegal – even when a trust is created without any real intention of conveying the property to any person other than the settlor himself. [7]
The sham trusts doctrine is a fairly new creation in the law of England and Wales. Indeed, it was not until of Midland Bank v Wyatt, in 1994, which concerned a man who placed his assets on trust for his wife and daughter as he hoped to protect them in the event of the failure of his business. The case found that Wyatt’s wife did not understand that the declaration she signed as a trustee had been created with dishonest intent.[8] The significance of the case lay in the fact that it established that a sham trust may be created even when a settlor does not know or understand the meaning or indeed the significance of the document that he or she is signing. It is notable that other jurisdictions established the notion of the sham trusts earlier than the courts of England; Jersey, for example, which is a popular jurisdiction for the establishment of offshore trusts, particularly due to the presence and reputation of its International Finance Centre, recognised the sham trust in 1991. The Jersey Royal Court ruled in Rahman v Chase Bank in which a trust settlor had controlled the trust’s administration and who had disbursed capital to himself without the knowledge of the trustees, had effectively treated the trust assets as his own. The Jersey Court held that the trust was a sham as there had never been any real intention to create a trust. [9] As in Midland Bank v Wyatt, the court held in that a trust that is not “intended to be acted upon but…entered into for some different or ulterior motive will be void and unenforceable.”[10]
Since Midland Bank v Wyatt, various cases have clarified certain aspects of the sham trust doctrine. Shalson v Russo in 2003, even if, quite ironically, the settlor actually intended it to function as a sham.[11] This was confirmed in A v A where a divorcing wife alleged that a proportion of the matrimonial assets were held in a sham trust; her motivation was that the confirmation of this fact would have resulted in the increase of her share of the assets being divided. Her allegation was however rejected and the court held that her award was reduced as a direct ““consequence of the misplaced zeal with which she chose to conduct a case built on exiguous foundations.”[12] This case was significant as it established that a valid trust cannot be turned into a sham’ if the initial intention to establish a trust is pure, if this intention changes at a later date, it is preferable instead for the case to be considered in relation to the rules pertaining to the breach of the duty of trustee, rather than the sham trust doctrine. It must however be noted that the courts have not yet ruled definitively on several key aspects, for example where a trustee who is involved in a sham trust attempts to rely on these rules concerning breach of trust.[13]
Conclusion
The notion of intention in the sham trust is still developing; arguably, in the law of England and Wales, it is still in its infancy. Debate continues as to the actual nature of the sham trust, as they continue to reappear in various forms. However, given the huge amounts of money and assets that are often involved, it would be preferable for key definitions to be fully and definitively clarified. The sham doctrine does exist; however, the academic disagreement that continues in relation to discerning certainty of intention must be resolved.
Bibliography
Cases
Knight v Knight (1840) 3 Beav 148
Re Kayford [1975] 1 WLR 279
Rahman v Chase Bank [1991] JLR 103
Midland Bank Plc v Wyatt [1994] E.G.C.S. 113 at 120
Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164
[1]Shalson v Russo [2003] EWHC 1637.
[1]A v A [2007] EWHC 99 (Fam).
References
Goldsworth. J. Lexicon of Trust & Foundation Practice (Mulberry House Press, 2016)
Hudson, A. Equity and Trusts (8th edn, Routledge, 2014)
[1]Hudson, A, Great Debates in Equity and Trusts (Macmillan International Higher Education 2014)
Le Poidevin, N. “Trusts: A Practitioner’s Perspective” in Edwin Simpson and Miranda Stewart (eds), Sham Transactions (Oxford University Press 2013)
[1] Goldsworth. J. Lexicon of Trust & Foundation Practice (Mulberry House Press, 2016) 325
[2] Knight v Knight (1840) 3 Beav 148.
[3] Re Kayford [1975] 1 WLR 279
[4] Twinsectra Ltd v Yardley [2002] UKHL 12, [2002] 2 AC 164, [71].
[5] Hudson, A. Equity and Trusts (8th edn, Routledge, 2014) 1057.
[6] Hudson, A, Great Debates in Equity and Trusts (Macmillan International Higher Education 2014) 115
[7] Ibid.
[8] Midland Bank Plc v Wyatt [1994] E.G.C.S. 113.
[9] Rahman v Chase Bank [1991] JLR 103
[10] Midland Bank Plc v Wyatt [1994] E.G.C.S. 113 at 120
[11] Shalson v Russo [2003] EWHC 1637.
[12] A v A [2007] EWHC 99 (Fam).
[13] Le Poidevin, N. “Trusts: A Practitioner’s Perspective” in Edwin Simpson and Miranda Stewart (eds), Sham Transactions (Oxford University Press 2013) [8.38].