Discretionary Trusts and the Concept of a Sham Trust.

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  • Topic: Trust law, Beneficiary, Fiduciary
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  • Published : March 22, 2011
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Discretionary Trusts and the concept of a sham trust.

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 way of doing this would be to demonstrate that the trustees have consistently acted in accordance with the settlor’s wishes. For example, this could be in relation to: always following the settlor’s directions without question; or by neglecting to exhibit any impartiality in the management of the trust and its assets. This was apparent in the case Abdel Rahman v. Chase Bank (CI) Trust Company Ltd [1991] JLR 103(www.westlaw.co.uk- case search: sham + discretionary trust + family law + divorce; 22 results-Abdel Rahman v. Chase Bank (CI) Trust Company Ltd [1991] JLR 103-13/08/10), where the judges unanimously agreed that a discretionary trust was a sham, as the settlor and beneficiary under a discretionary trust (Mr Rahman) had ‘dominion and control over the trustee in the management and administration of the settlement’. In this case, oral evidence, documentary evidence and the behaviour and actions of Rahman were utilised to establish that the settlor treated the assets in the trust as his own, while treating the trustee as a puppet to do his express bidding. This was especially evident is the following areas: Rahman had the ability to make or change investments by instructing the trust bank account directly; Rahman appointed an investment adviser himself; Rahman withdrew monies from the bank account without the trustees knowledge; Rahman corresponded with the investment managers without the trustees knowledge; and he referred to the trust as his ‘will and money’, while revoking appointments that were declared irrevocable. In another case, Midland Bank Plc v. Wyatt [1995] 1 FLR 696(www.westlaw.co.uk- case search: sham + trust + family law + void; 15 results- Midland Bank Plc v. Wyatt [1995] 1 FLR 696 -12/08/10), the concealment of the existence of a trust (that referred to other persons with proprietary interests) to a lender was considered a sham. As with the Rahman case, the court took into consideration the acts and conduct of Mr Wyatt in concluding that the...
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