It was all a sham

If a trust is found to be a sham, then there is in effect no trust and so the assets in question will be found to still be held by the person who sought to create the trust.

If a claimant has a valid claim against that person, those assets will therefore in theory be available to enforce against and/or to be taken into account in any claim. In determining whether there is a sham trust the same legal principles apply whatever the context.

A classic example of a sham trust is someone who, facing marital difficulties and wishing to avoid their spouse obtaining their assets on divorce, creates a trust document under which his/her assets are purportedly placed on trust for their children, but in reality, he/she retains the beneficial interest in and control over those assets.

The Family Court has repeatedly shown its willingness to examine the truth of an arrangement where there is evidence to suggest that a trust document may not reflect reality, to ensure that fairness can be achieved on divorce. The benefits of proving sham can be significant where it results in assets which would otherwise have been excluded being treated as part of the ‘matrimonial pot’ and subject to division on divorce.

The decision to make a claim of sham in divorce proceedings is not one to be taken lightly given the difficulty in securing a finding, which essentially involves proving an intention to mislead. The prospects of success very much depend on the circumstances and available evidence. This can often be limited, particularly where arrangements exist between family members who are unlikely to have maintained formal records.

Making an allegation of sham is also likely to result in additional costs, particularly if third parties who purportedly have an interest in the trust property are joined to the proceedings.  Therefore, before advancing a claim, it is important to consider whether it is proportionate to do so, the risk of being required to pay another party’s costs if unsuccessful, and the potential tax implications arising from the true ownership position.

Kingsley Napley’s Family team recently obtained judgment in our client’s favour from the Family Division in the case of Michael v Michael (No 1) [2024]  where the Court made two significant findings of sham.

The Court found that a trust said to hold the majority of the shareholding in property investment and development businesses operated by the husband was in fact a sham, and made the following findings of fact in relation to the alleged trust:

1. The alleged settlor had “nothing whatever to do with the creation” of the purported trust and all of the assets transferred into it “came from the husband”.
2. The trust deed was created “to give a false impression” and neither the husband nor the professional trustees intended it to create the legal rights and obligations it asserted to do.
3. The husband retained the beneficial interest in the assets purportedly held in the trust at all times and treated the assets as “money to do with what he wanted”.

The Court also found that declarations of trust which asserted to transfer the beneficial interest in the husband’s shares and interest in a separate family-owned property investment company and partnership to his sisters were “a fake presentation” to support the husband’s case in the financial proceedings on divorce.

Sophie is a Senior Associate in the Dispute Resolution team. She specialises in trust, estate and court of protection disputes, often acting in high value and complex cases.

Hannah is a Senior Associate in the Family Team. She advises UK and international clients in relation to all aspects of family law, with a particular focus on complex financial cases.