Hiding Assets on Divorce: Sham Trusts

The use of Trusts involves the removal of an asset from an individual’s ownership, therefore potentially reducing or eliminating a third parties claim against said asset(s) in situations such as bankruptcy, death and divorce. For the purposes of this blog, we will limit our focus to consequences of divorce, but we are able to provide advice in all such areas.

The use of Trusts can complicate divorce proceedings in a number of ways, for example, a party to the proceedings may be entitled to a type of benefit under a trust or may have created a trust to dispose of their assets prior to the financial investigations. For these and other reasons, it is critically important to be aware of the various rules and powers relating to trusts in respect of divorce.

Sham Trusts
One of the ways in which one party is able to prevent the other concealing their assets by using trusts, is to challenge the trust on the grounds of ‘sham’. Basically, this means alleging that the trust in question is a ‘sham trust’, set up deceitfully with the intention of misleading others as to the reality of the ownership of the assets placed into the trust. In essence, it merely creates the impression that a trust exists. There are 2 key elements involved in proving a trust is in fact a sham:-

1. The ‘Settlor’ (the person who owns the assets and created the trust) never had any intention of constructing the trust in line with the terms of the trust deed (the document which gives effect to and creates the trust);
2. The ‘Trustees’ (the stewards of the trust, those who hold on to the property once it has ‘left’ the ownership of the Settlor) knew this and joined with the Settlor to create the trust.

Therefore, in reality, there is no trust and the assets remain in the ownership of the Settlor (and therefore subject to disclosure in divorce proceedings). Alternatively, it can also be the case that different types of trust arise (different to that described in the trust deed). In divorce cases, it is often the case that the assets are held as being subject to a Bare Trust, where the assets are held on trust for the Settlor (again making them subject to divorce proceedings). The last possibility being that the trust is held to have been used to defraud (intentionally concealed for financial benefit) a creditor such as HMRC, and therefore the trust fails and the assets revert back into the ownership of the Settlor.

However, the threshold for proving an allegation of sham is extremely high and is of no benefit unless it can be proven that the asset really is in the control of the Settlor. It should also be noted that if the Settlor has created the trust aboard (an ‘offshore trust’), the Courts in that country may be reluctant to enforce a judgement of the English Courts in any event.

Of course, Sham Trusts are used for a variety of different purposes, I.e. concealing the true identity of the beneficiaries (those entitled under the trust), but these ‘Red Cross’ or ‘Blind’ Trusts (to name 2 such types of trust) are another matter altogether and outside of the scope of this blog. Other methods of preventing the transfer of assets into trust include, but are not limited to; proprietary estoppel, improper transfer and invalidity.

As should be clear from the above, you should always seek professional advice if any of these issues are likely to affect you or your prospective divorce settlement or simply if you would like specialist advice in respect of any trust issues, please feel free to contact the team directly on 01942 206060 or alternatively email us at mbh@wigansolicitors.com. If you would like further information as to the sources or cases used in the preparation of this blog, please contact us and we will be happy to assist.