Sham Family Trusts Explained
Most people think that once assets are placed in a Trust they are protected forever! However, this is simply not the case. If a Family Trust is found to be a “sham”, then asset protection can be lost.
So what is a Sham Trust? The concept of Sham Trust has evolved over time but for our purposes, it can be thought of as something that isn’t genuine, a disguise or a façade.
Professional Trustees often ‘rescue’ a Trust from the sham stigma.
They do this by faithfully and properly carrying out the work of being a Professional Trustee. This means they review the activities of the Trust and ensure that all administration work has been correctly carried out.
Trustees have a legal duty to discuss, agree and document the activities the Trust is undertaking. When this doesn’t occur, the door is opened for a creditor or even a beneficiary to allege that the Trust is a sham, and if the allegation is successful, asset protection can be lost and the trust assets can be “up for grabs”.
Sometimes a Family Trust can be a sham at its very beginning. This occurs when Settlors and Trustees create a trust and transfer assets to the Trust, but in reality never intend for the Trust to do anything or to operate properly. Usually, what is really happening is that the Trust has been set up to conceal the real intentions of the parties or to conceal a transaction.
A common type of Sham Trust we see today is called an Emerging Sham. This is where a genuine Trust is established but it becomes a sham over time.
For example, the Trustees start out practicing good behaviour, but then stop meeting, discussing and documenting what activities they will undertake on behalf of the Trust.
What then happens is that records documenting Trustee discussions or decisions are not kept and frequently, the Settlor starts to treat the Trust assets as if they were his very own property.
It’s important to note however that a lack of documentation won’t of itself make a Trust a sham, but it does assist a Court in finding that a sham exist.
When a Trust is found to be a sham, loss of asset protection can result.
If you are considering setting up a Family Trust or wanting to review your existing Trust, ensure your accountant or lawyer has the specialist expertise to protect you.
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