“Illusory Trusts” – a new tool to invalidate Trusts? Part 4

Is the out-of-favour Bundle of Rights “doctrine” likely to be replaced by the “Illusory Trusts” doctrine? That’s the question that readers of Clayton & Ors v Clayton [2013] NZHC 301 will want to know.

I don’t think so.

These are the kind of circumstances where the Courts have said that a Trust is “illusory”:

Where a Court was not satisfied that the settlor had the necessary intention to create a Trust: eg the AQ Revocable Trusts case that I wrote about in Part 3.

Where the Trust Deed or the surrounding circumstances lead to the conclusion that no Trust for the benefit of any particular person or persons was intended: eg where a Trust appeared to be for the benefit of A but on closer reading it was not for A.

When Queen Victoria gave a warrant to the Secretary of State for India to distribute booty of war to various people, it was held that the warrant didn’t operate as a declaration of trust in favour of them but merely made the Secretary of State the agent of the Sovereign for the purpose of distributing the fund.

Where monies are left to care for a person who dies prematurely or who recovers faster than expected and there is a surplus available, the Trust is “illusory” because the Trustee is the absolute beneficial owner of the money.

When a Trust is set up to take effect on the death of the settlor and the Trust does not comply with the terms of the Wills Act.

When a declaration is made that trustees must employ specific people, it is said that such a declaration “imposes no duty or trust on the trustees to continue the employment of such a person.”: Garrow, para 4.3.2.

When a devise is made “on condition” that something has to be done, the Court may decide that the condition imposes “merely a collateral duty” and the document will not be construed as a Trust: Garrow, para 4.3.2.

The authors of Waters say that where a settlor is seen to be “resisting his legitimate creditors and family claimants with false trust assertions” and “ignor[ing] the Trust when it suited him to do so” it is reasonable to conclude that “the true object of the creation of the trust was to deceive creditors and claimants into believing a transfer to others had taken place” and the Trust will be a sham. (The topic of “illusory Trusts” is dealt with in Waters in a section headed “ ‘Sham’ Trust”.) However, as in the AQ Revocable Trusts case, this assessment would seem to justify a conclusion that the Settlor lacked the necessary intention to create a Trust – a more traditional way of refusing to acknowledge the existence of a Trust.

The degree of mismanagement that is needed to justify declaring a Trust void will be exceptional. According to Waters:

“… if the trust is set up by the husband in circumstances that showed no intention to defeat the wife’s entitlement, the court may refuse to declare the trust void. This is so even though the husband always treated the property as his own, included the trust assets in statements as to his personal assets, the trustees were his friends, and during his time as trustee he controlled the trust property. The Court concerned with these ‘facts’ agreed with the husband’s submission that it would be ‘turning trust law upside down’ to say the trust was a sham.”

What then of Clayton’s case?

Of the various circumstances in which the term “illusory” Trusts is used, the most applicable to the Clayton case is Re the AQ Revocable Trusts case, but there, the Court was satisfied that “when the settlor executed the trust agreements he believed and understood that he would retain effective sole dominion over the settled assets during his lifetime” and he lacked “the necessary intention to create a Trust during his life-time.”

The Trust Deed also authorised the Trustee to be exonerated from “any liability or responsibility … to any person”, the effect of which was to prevent the Courts from being able to scrutinise the Trust in the interests of its beneficiaries. Although the powers that were given in the Clayton case were wide, they were not as wide as the powers that were given in the AQ Revocable Trusts case.

To the extent that a Trust might be held “illusory” because the Settlor was employing “the Trust concept to perpetrate an illegality” there was no suggestion that Mr Clayton was doing this. And, to the extent that a trust may be held to be “illusory” because it is apparent from the way the trust has been administered, that “regardless of the trust’s terms, the trust property was used without hesitation for the settlor’s personal purposes and the named beneficiaries of the trust had never received any benefits from the trust or any accounting from the Trustees” (Waters, p 155) the Clayton case does not meet that criteria since there was undisputed evidence that Mr Clayton had acted exclusively on the advice of two advisers.

This analysis should not obscure the fact that judges in family disputes often view Trusts with suspicion – where one spouse holds all the powers, and the Trusts are managed without any apparent consideration for anyone other than the person who holds the powers. If the Court in Clayton went beyond the current boundaries of what I will call “the illusory Trust doctrine”, practitioners need to realise that the best way to persuade a Court that a Trust is not a puppet under the control of such a person is to arrange for powers to be diversified and for the Trust to be managed in ways that show a genuine intention to assist its beneficiaries.

For information about Anthony Grant, see www.anthonygrant.com