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This article is part of a mini series that explores the relationship between sham trusts and illusory trusts.
The New Zealand Supreme Court in Clayton speculated that an illusory trust may become a valid trust when the settlor’s role in relation to the trust changes. In particular, it was suggested that the fact that a trust is illusory ‘does not deny the possibility that a valid trust may come into existence at some time in the future, for example, if [the settlor] were to be replaced by a new Trustee who was not the Principal Family Member and/or a beneficiary.’[1] This notion has been described by one writer as “emerging validity”, and its converse (where a previously valid trust may become invalid as a consequence of a change in the people holding the powers) as “emerging invalidity”.[2]
The theory of “emerging validity” in relation to illusory trusts may work if, for example, analysed on the basis that the act of the settlor divesting himself of power is akin to divesting himself, at that point, of the beneficial ownership of the assets, such that the trust comes into existence at that point. This would be a bit like the analysis in relation to testamentary dispositions, where the trust only comes into real force and effect on the death of the settlor but is nevertheless valid (provided it complies with the relevant statutory requirements for a will). Up until that point, however, it is revocable and has little (if any) effect.[3] If, on the other hand, the notion of “emerging validity” is said to be capable of validating a previously-invalid illusory trust retrospectively, that is a step too far.
In relation to sham trusts, on the other hand, it is easier to see how a change in status could be effected and a sham trust could be converted into a valid trust by the appointment of new trustees who are not party to the shamming intent.[4] This is because, whilst the original trustees (who were party to the shamming intent) were in post, the trust would have the requisite nefarious intention for a sham, which would then be absent following the appointment of new, honest trustees, who do not share the shamming intent and who administer the trust in accordance with what is said in the documents, irrespective of what the settlor might intend.[5]
Further articles in this series
This article is part of a mini series that explores the relationship between sham trusts and illusory trusts. Other articles in the series include:
- Part 1: An introduction to sham and illusory trusts;
- Part 2: The unholy trinity of recent cases: Clayton, Pugachev and Webb;
- Part 3: The effect of reserved powers legislation;
- Part 5: The nomenclature for the future.
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[1] Clayton v Clayton [2016] NZSC 29 at [124]
[2] Young, G., (2018) Sham and illusory trusts – lessons from Clayton v Clayton, Trusts & Trustees. 24 (2), 194-204 at 200
[3] It is unclear whether this would have been the effect of the Bermuda Court’s reasoning in Re AQ Revocable Trusts [2010] Bda LR 26 because the Court found that the trusts were testamentary in nature and therefore had been revoked by the settlor’s second marriage, such that it did not have to consider whether an illusory trust could become valid when the settlor parted with control on his death.
[4] The new trustees would be well-advised to consider applying to court for guidance as soon as they discover the previous sham – see: Lynton, T., Le Poidevin, N., and Brightwell, J., (2020) Lewin on Trusts, (20th ed.), London Sweet & Maxwell at § 5-030.
[5] The reverse scenario – with original trustees who are not party to the sham (or, more accurately, the settlor’s intended sham) replaced by new shamming trustees – will not invalidate the trust, however. The new trustees, who share the settlor’s shamming intent, would be guilty of breach of trust vis a vis the beneficiaries, rather than their shamming intent converting a valid trust into a sham. See: Ibid. at § 5-026
Bermuda