Discretionary Trusts and the Concept of a Sham Trust.
Discretionary Trusts and the concept of a sham trust.
(a)
The central theme regarding trusts is that they are assets that are legally owned by the trustees and not the beneficiaries. In a discretionary trust, the trustees have discretion as to who among a class of beneficiaries should receive income and/or capital under the trust and in what proportion (e.g. Mettoy Pension Trustees Ltd v. Evans [1990] 1 WLR 1587). So until a beneficiary is chosen to receive income or capital, they do not possess an equitable interest in the trust property.
In order to determine how the concept of a sham applies to trusts, the developments in case law on the subject need exploring. The first real commentary on sham trusts and the classic definition of a sham was cited in Snook v. London and West Riding Investments Ltd [1967] 2 QB 786(www.lexisnexis.com/uk/legal-home search-‘sham + trust + definition’– 11 cases –search; Snook v. London and West Riding Investments Ltd [1967] 2 QB 786– 12/08/10), where Lord Diplock commented ‘if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations which the parties intended to create’. So in essence a sham exists where a party has settled assets in order to say one thing, while intending another. If a discretionary trust is established as a sham, it can be set aside and the assets returned to the settlor. The settlor’s wealth in turn will be enhanced and classified as available for distribution. This is of obvious benefit to the spouse of a settlor who names himself as a beneficiary under a discretionary trust, especially in the context of divorce proceedings.
If Mrs White is to set aside the trust in the scenario as a sham, she will have to argue that the assets still belong to Mr White (settlor). One
(a)
The central theme regarding trusts is that they are assets that are legally owned by the trustees and not the beneficiaries. In a discretionary trust, the trustees have discretion as to who among a class of beneficiaries should receive income and/or capital under the trust and in what proportion (e.g. Mettoy Pension Trustees Ltd v. Evans [1990] 1 WLR 1587). So until a beneficiary is chosen to receive income or capital, they do not possess an equitable interest in the trust property.
In order to determine how the concept of a sham applies to trusts, the developments in case law on the subject need exploring. The first real commentary on sham trusts and the classic definition of a sham was cited in Snook v. London and West Riding Investments Ltd [1967] 2 QB 786(www.lexisnexis.com/uk/legal-home search-‘sham + trust + definition’– 11 cases –search; Snook v. London and West Riding Investments Ltd [1967] 2 QB 786– 12/08/10), where Lord Diplock commented ‘if it has any meaning in law, it means acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations which the parties intended to create’. So in essence a sham exists where a party has settled assets in order to say one thing, while intending another. If a discretionary trust is established as a sham, it can be set aside and the assets returned to the settlor. The settlor’s wealth in turn will be enhanced and classified as available for distribution. This is of obvious benefit to the spouse of a settlor who names himself as a beneficiary under a discretionary trust, especially in the context of divorce proceedings.
If Mrs White is to set aside the trust in the scenario as a sham, she will have to argue that the assets still belong to Mr White (settlor). One
Bibliography: Textbooks: Open University (2009), W301, Law: ownership and trusteeship – rights and responsibilities, Units7-10 & 22, Milton Keynes, The Open University. Moffat, Graham, Trusts Law (2009), Fifth Edition, Cambridge, Cambridge University Press.