KembaraXtra - Legal Terms - Sham Trust

A sham trust is a trust that appears to have been validly created but was never genuinely intended to operate as a trust according to its stated terms.

Such trusts are often established to protect assets from creditors in the event of bankruptcy or insolvency while allowing the settlor to continue exercising unrestricted control over the property.

For a valid trust to exist, there must be a genuine intention to create enforceable trust obligations. Where the settlor intends the trust document to operate merely as an “insurance policy” against future creditors, that intention is absent.

In Midland Bank plc v Wyatt [1995] 1 FLR 696, the court held that a trust established solely to shield assets from creditors, without any genuine intention that the trust should operate, was a sham.

Once a court determines that a trust is a sham, it ignores the trust arrangement and treats the beneficial ownership of the assets as remaining with the settlor.

A sham trust should be distinguished from an illusory trust, although both may ultimately result in the trust being ineffective.