Overview - Sham vs illusory trusts: what's in a name?

In this mini-series of articles, we explore the relationship between sham trusts and illusory trusts, before making the case for dropping “illusory trusts” from the nomenclature of the future.

It is well-established that an apparently valid trust may nevertheless be set aside if it is a sham or an illusory trust. The law will not allow people to hide behind a fictitious trust structure in an attempt to avoid their liabilities, nor will it recognise the existence of a trust if the fundamental elements of a trust are missing, whatever the settlor might have intended.

The burden of proving that an apparently valid trust is not valid (either because it is a sham or because it is illusory) rests with the party asserting that all is not, in fact, as it seems.[1] But what is a sham trust? And what is an illusory trust? Are these two different ways of describing the same thing? Certainly, the terms are occasionally used interchangeably, but there are actually important differences that practitioners should be aware of.[2]

In particular, this mini-series will address:

1. An introduction to sham and illusory trusts;
2. The unholy trinity of recent cases: Clayton, Pugachev and Webb;
3. The effect of reserved powers legislation;
4. The idea of emerging validity; and
5. The nomenclature for the future.

 

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[1] See: Haley, M., and McMurty, L., (2023) Equity & Trusts: Textbook Series, (7^th ed.), London Sweet & Maxwell at § 16-012 and Erlam v Rahman [2016] EWHC 111 (Ch) at [77] (obiter). 

[2] As summarized in Haley, M., and McMurty, L., ibid. at § 2-011: ‘Whereas a sham is concerned with a comparison between the terms of the trust and the parties’ subjective intentions, an illusory trust turns upon the true construction of the trust instrument itself.’