Could your Trust be considered a “sham”?

Published by Neil McNab on July 16, 2013

 

If challenged, are you comfortable your Trust will stack up under the scrutiny of the courts? If you are unsure, continue reading...

 

There has been a recent shift by the courts to consider poorly drafted Trusts as "shams," treating them as if they never existed. To ensure that your Trust can handle the scrutiny a challenge brings, it is important to consider the following basic precautions:

1. Minimise the powers of the Settlor by giving them to the Trustees (who often include the Settlor) or to a third person (the Appointor):

It is important that your Trust has both substance and form. Avoid the situation where the Settlor calls the shots. If the Settlor is too powerful in your Trust, the Trustees may be considered "agents" or "nominees" who are not fulfilling their purpose and the Trust could be struck down. You might want to consider giving the Trustees the power to appoint and remove Trustees/Beneficiaries, as opposed to the Settlor. In general any power which rests with the Settlor, if feasible, could be transferred to the Trustees.

2. Ensure administrative functions are being adhered to:

It is essential that the minutes of annual meetings are thorough, signed, and stored securely. Trustees must ensure this procedure is being followed. If challenged, consistent minutes throughout the life of the Trust will be a strong indicator to the courts that the Trust is being used and managed properly.

3. Ensure the Trustees know what is required of them:

It is the Trustees, not the Settlors, who hold the legal title to the property of the Trust. In light of this, the Trustees owe a duty of care to the Beneficiaries of the Trust. In particular, they must conduct the business of the Trust in the same manner that a prudent businessperson would conduct business. These responsibilities must not be taken lightly if the Trust is to avoid being considered a "sham".

The above list is merely the starting point – it is not comprehensive by any means. It would be sensible to speak to your Trust advisor to ensure that you have safeguards in place to mitigate against your Trust being considered a "sham".

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