Tuesday, June 5, 2018

Within you; without you - When is a Trust not in fact a Trust? **

View blog Within you; without you - When is a Trust not in fact a Trust by Matthew Burgess

The ability of third parties to attack arrangements on the basis they are void because they are a sham has been looked at in previous posts (see - Sham trusts and the Family Court and Leading gift and loan back case).

Arguably one of the leading cases which explores the ability of a trustee in bankruptcy to attack trust assets using the rules in relation to sham transactions is Lewis v Condon; Condon v Lewis [2013] NSWCA 204. As usual, a link to the decision is as follows – http://www.austlii.edu.au/au/cases/nsw/NSWCA/2013/204.html.

Although the facts were somewhat complex, at the centre of the dispute was a trust that had been established by a lady who subsequently became bankrupt and admitted that the structure facilitated ‘her purpose to deceive her former husband, the Family Court and to avoid tax’.

In considering whether the assets of the trust were exposed to attack from a trustee in bankruptcy on the basis that the trust was a sham the Court held relevantly as follows –
  1. Before any trust will be held void as a sham, it is necessary to show that there was an intention that the structure created not bear its apparent legal consequence. That was not the case here; 
  2. Even where a trust is established with an admitted purpose of deceiving, this is not enough to mean it is a sham, indeed here such an intention was in fact ‘entirely consistent with the creation of a genuine discretionary trust’; 
  3. Once it was established that the trust on creation was not a sham, subsequent events cannot turn the structure into a sham. 
The decision also confirmed that in a practical sense, a new trustee holds office from the time of their appointment replacing the previous trustee and not from the time trust property is formally transferred.

** For trainspotters, ‘Within you; Without you’ is the only George Harrison written song on the Beatles release ‘Sgt Peppers Lonely Hearts Club Band’, listen here – https://www.youtube.com/watch?v=q2dMSfmUJec&list=RDq2dMSfmUJec&t=34

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