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Removal of trustees – factors a court will consider
Cally Brosnan
Assets are typically placed in a trust for legitimate purposes, such as safeguarding wealth for future generations. However, arguments that a trust is in fact a “sham” created to hide the true ownership of assets often arise in the context of divorce litigation, bankruptcy/insolvency where a creditor seeks to argue that a trust is a pretence seeking to shield assets from creditors, or in estate disputes, where beneficiaries look to bring assets of the deceased back into an estate.
When is a trust a sham?
The leading case on the definition of a sham remains Snook v London and West Riding Investments Ltd [1967]
“…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 rights and obligations (if any) which the parties intend to create."
Essentially in order to prove that a trust is a sham, a claimant must show:
- That there was no intention to create a trust.
It is necessary to show this lack of intention in relation to all parties involved. It is not enough that the settlor had a shamming intent; it must be proved that the trustee also did or that the trustee was “recklessly indifferent” or the trustee went along with the shammer not knowing or caring what they were signing.
- That there was an intention to give a false impression to third parties.
As such, in order for there to be a sham, there has to be some level of pretence. Usually the document said to evidence the trust, the trust deed, will on its face be valid but the person seeking to show sham will need to prove that the document was essentially only there as façade.
In terms of the evidence a court will likely take into account, it will look at all of the factual circumstances around the trust, including:
- The day-to-day administration of the trust including the reasons for any trustee decisions;
- The terms of the trust, for example, does the person who set up the trust still retain significant control;
- Whether in reality the settlor has retained control over the assets and/or treats them as their own;
- Whether the trust was kept secret.
Consequences
If a trust is found to be a sham, then there is in effect no trust and so the assets in question will be found to still be held by the person who sought to create the trust.
If a claimant has a valid claim against that person, those assets will therefore in theory be available to enforce against and/or to be taken into account in any claim. In determining whether there is a sham trust the same legal principles apply whatever the context.
Sham in divorce context
A classic example of a sham trust is someone who, facing marital difficulties and wishing to avoid their spouse obtaining their assets on divorce, creates a trust document under which his/her assets are purportedly placed on trust for their children, but in reality, he/she retains the beneficial interest in and control over those assets.
The Family Court has repeatedly shown its willingness to examine the truth of an arrangement where there is evidence to suggest that a trust document may not reflect reality, to ensure that fairness can be achieved on divorce. The benefits of proving sham can be significant where it results in assets which would otherwise have been excluded being treated as part of the ‘matrimonial pot’ and subject to division on divorce.
The decision to make a claim of sham in divorce proceedings is not one to be taken lightly given the difficulty in securing a finding, which essentially involves proving an intention to mislead. The prospects of success very much depend on the circumstances and available evidence. This can often be limited, particularly where arrangements exist between family members who are unlikely to have maintained formal records.
Making an allegation of sham is also likely to result in additional costs, particularly if third parties who purportedly have an interest in the trust property are joined to the proceedings. Therefore, before advancing a claim, it is important to consider whether it is proportionate to do so, the risk of being required to pay another party’s costs if unsuccessful, and the potential tax implications arising from the true ownership position.
Recent ruling
Kingsley Napley’s Family team recently obtained judgment in our client’s favour from the Family Division in the case of Michael v Michael (No 1) [2024] where the Court made two significant findings of sham.
The Court found that a trust said to hold the majority of the shareholding in property investment and development businesses operated by the husband was in fact a sham, and made the following findings of fact in relation to the alleged trust:
- The alleged settlor had “nothing whatever to do with the creation” of the purported trust and all of the assets transferred into it “came from the husband”.
- The trust deed was created “to give a false impression” and neither the husband nor the professional trustees intended it to create the legal rights and obligations it asserted to do.
- The husband retained the beneficial interest in the assets purportedly held in the trust at all times and treated the assets as “money to do with what he wanted”.
The Court also found that declarations of trust which asserted to transfer the beneficial interest in the husband’s shares and interest in a separate family-owned property investment company and partnership to his sisters were “a fake presentation” to support the husband’s case in the financial proceedings on divorce.
Whether an individual is facing a challenge to the validity of a trust on the basis of sham, or considering advancing such a claim, specialist advice should always be sought at an early stage to minimise the risk of a costly and lengthy dispute.
about the authors
Sophie is a Senior Associate in the Dispute Resolution team. She specialises in trust, estate and court of protection disputes, often acting in high value and complex cases.
Hannah is a Senior Associate in the Family Team. She advises UK and international clients in relation to all aspects of family law, with a particular focus on complex financial cases.
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