Invalid and Sham Trusts

On occasion, parties in financial proceedings may try to surreptitiously hide matrimonial assets by use of a deed of trust. The goal is to create an illusion, disguising the actual ownership of property which could be deemed to be matrimonial assets, if successful, the matrimonial pot could be greatly diminished. Such arrangements are commonly entered into between a settlor spouse and his/her: family members; friends; or business partners.

In such circumstances, the deed of trust entered between the spouse and the co-conspirator will express that the parties’ beneficial interest in the property is different to their actual intention. For example, a spouse may enter a deed of trust with a third party declaring that their interest in a property is split 20:80, when in reality, the interest is 50:50. If such a deed was not questioned and/or was found to be legitimate, it could mean (in the case of property or shares) that hundreds of thousands of pounds are excluded from the matrimonial pot. For this reason, a party to divorce proceedings may wish to bring the validity of a trust into question.

The Family Courts do have wide ranging powers in financial proceedings, however Munby J confirmed in A v A that the Family Court cannot “simply ride roughshod over established principle, least of all where there are, or ought to be, third party interests involved”. Therefore, a potential applicant must take care when seeking to persuade a court that the trust in question is not legitimate.

The three certainties:

A recognised basis for setting aside a trust is to question the trusts validity, a court can find a trust to be invalid due to a technical error in its constitution. In order for a private express trust to be legitimately created, the three certainties must be present:

• certainty as to the intention of the settlor to create a trust, known as the certainty of words, the trust property being intended to be kept separate from other property of the trustee.
• certainty as to the property to which the trust is to attach, known as the certainty of subject matter.
• certainty as to persons or 'objects' who are intended to benefit, known as the certainty of objects.

It is for the court to determine whether all three certainties exist, if all the certainties are not present, the court can determine that the trust is not valid and is therefore void.

Sham Trust

Another method of bringing the trust into question, is for the Applicant to ask the court to determine whether or not the trust is a sham. When an Applicant alleges that a trust is a sham, they are seeking to convince the court that when the trust was created, the first certainty was not present, and the parties lacked the certainty of words required to legitimately create the trust.

The meaning of sham can be found in the case of Snook v London and West Riding [1967], sham 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 (if any) which the parties intend to create”.

It follows that for a trust deed to be a sham, both parties to the deed must intend that the true arrangement is different from that set out in the document. Referring to our example earlier, the trust deed may set out that the beneficial interest in a property is split 20:80 when the parties’ actual intention is that the beneficial interest is split 50:50.

It is worth noting that, just because the respective interests of the parties documented in the deed may amount to a poor bargain or be on uncommercial terms does not automatically mean that the trust deed will be a sham. The key factor is that the parties intend that some other arrangement will bind them.

In deciding whether a trust is a sham, the court is not limited to examining the ‘four corners of a document’ and may examine external evidence including the parties’ explanations and circumstantial evidence. Common warning signs of a sham include: the agreement being arranged in secret; unusual haste being used when creating the deed; the parties omitting to obtain professional advice regarding the trust; and the settlor continuing to exercise total control over the trust assets.

In any event, the Applicant spouse must take care when alleging sham, the accusation of sham is extremely serious being an allegation of dishonesty. The burden of proof falls upon the party trying to prove the sham and the test of intention is subjective. The Applicant must prove that the parties to the trust intended to create different rights to those set out in the deed.

If a trust is found to be a sham, it will usually be void – in Family Court financial proceedings the assets will return to the settlor spouse, and this could greatly increase the matrimonial pot. Case law has confirmed that courts will be slow to find dishonesty and applications can be time consuming and expensive. Nevertheless, considering the value of assets that may be subject to a trust – such applications can be worthwhile.