Part 5: The nomenclature for the future

This article is part of a mini series that explores the relationship between sham trusts and illusory trusts.

As set out in Part 1, the terms “sham trust” and “illusory trust” both describe different things. It could therefore be argued that both terms have a place in the nomenclature of the future. We disagree, however, for only one of these terms describes a thing that exists and therefore only one serves a useful purpose.

‘To call a trust “illusory” is a convenient, although analytically inaccurate, label. The trust transaction is illusory when the true intention gathered from the trust instrument was to leave the beneficial interest in the purported settlor of the trust rather than to create a trust for the beneficiaries named in the instrument.’[1] In other words, an illusory trust is a trust that does not exist.

The New Zealand Supreme Court in Clayton made the following observation in relation to this label: ‘For our part we do not see any value in using the “illusory” label: if there is no valid trust, that is all that needs to be said.’ [2] Similarly, Birss J in Pugachev considered the term “illusory trust” unhelpful, preferring instead to talk about the “True Effect of the Trusts” claim. As one commentator put it: ‘A trust is valid or not; to call it an illusory trust is poetic, but unnecessary and potentially misleading.’

Similarly, the term “sham trust” could be said to be unhelpful: ‘Properly understood … there is no such thing as a “sham trust”, but merely a document purporting to create a trust which does not in fact exist.’[3] A sham trust can, however, become a valid trust through the appointment of trustees who intend to operate in accordance with the trust deed, or else otherwise through the cessation of the shamming intent. In this way, a sham trust is qualitatively different from an illusory trust, despite both being invalid if challenged, because a sham trust has the potential for reform, whilst an illusory trust will always be an illusion. For this reason, we take the view that the term “sham trust” serves (and will continue to serve) a useful purpose and should be retained in the nomenclature of the future. The term “illusory trust”, however, does no more than describe something that is not a trust. A finding that there is no trust (or else there is a bare trust for the settlor) would suffice in such circumstances; the term “illusory trust” adds nothing. Courts in the future should move away from references to illusory trusts and adopt instead the vocabulary of Birss J in Pugachev, asking themselves: “What is the true effect of the trust?” [4] It is possible that this advice from Clayton and Pugachev has already been heeded. Certainly, the Privy Council in Webb did not use the word “illusory” at all.

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 4: The idea of emerging validity; and

 

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[1] McGhee, J., and Elliott, S., (2020) Snell’s Equity, (34^th ed.), London Sweet & Maxwell at § 22-071

[2] Clayton v Clayton [2016] NZSC 29 at [123]

[3] Lynton, T., Le Poidevin, N., and Brightwell, J., (2020) Lewin on Trusts, (20^th ed.), London Sweet & Maxwell at § 5-020

[4] Nitikman, J., (2021) More about illusory trusts: is “tantamount” to ownership the same as “ownership”? The Privy Council take a step too far, Trusts & Trustees. 27 (1-2), 69-81, at 70. There are, however, other commentators who like the term – see, for example: Bennett, M. J., (2021) The illusory trust doctrine: formal or substantive? Victoria University of Wellington Legal Research Papers. 11 VUWLRP 7/2021, at 16: ‘Taken as a whole, Birss J found that Pugachev’s trust deeds’ true effect was to make Pugachev the beneficial owner. In the terms I favour, the express trust was illusory.’