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Sham trust, Trustee liability

A ruse is not a sham even if it is …

This blog could equally be entitled “Distribute in haste, repent at leisure”.  It concerns a case about a relationship breakdown and some ill-conceived tinkering with trust property in an attempt to better protect some trust assets. 

The means by which this tinkering was carried out included a purported distribution of trust assets to a new trust, together with a deed of bare trust declaring that the properties in question were held on a bare trust for the existing proprietor. 

The logic behind the arrangement derived from the fact that the (original) trust was GST-registered (the case pre-dated compulsory zero rating) any disposition would have negative tax-consequences.  Accordingly, to quote Allan J “the Deed of Bare Trust was created for the purpose of production to the revenue authorities as required.”

What was intended, was an outright transfer of trust assets for the ultimate benefit of one party to the relationship.  However, it was structured to look in part as if nothing had happened to avoid tax consequences.  I believe that this can also be considered as having your cake and eating it too.  A bit like fat-free chocolate.  It’s a lovely idea, but it isn’t ever going to deliver.

The fact that the solicitor acting was, to quote the judge, “hopelessly conflicted” may shed some light on the resultant mess.  Although the court did note that he was doing the best he could with the facts in play.

The question that played out in court was, whether the deed of bare trust was valid, despite its design characteristics of a “ruse”.  While one might presume the court would be quick to shoot down such a document as the sham, it likely is, perhaps surprisingly, the judge took the position that just because the deed was a ruse, it does not follow that it is invalid or ineffective.  The reason for this was that as the bare trust had been effective (the tax liability was avoided) it met its purpose.  A similar conclusion was reached in a recent New South Wales case where a trust for an improper purpose (hiding property from one Ms Lewis’ husband – and by inference the court hearing the relationship property proceedings.  When it later became convenient to do so from a tax perspective, Ms Lewis a further deception was added to the list) was found not to be a sham.  The court stating, whether or not it was clear the court, the revenue and the husband were deceived ” … even if deception occurs in fact, does not suffice to conclude that the … Trust was a sham” (Lewis v Condon). 

The result in the case in hand was that the trustees of the new trust were required to return the properties to the first trust, to which they remained subject. 

The end result was probably the “correct outcome”.  However, the facts perhaps warrant further consideration to determine whether the distribution was in fact subject to the deed of bare trust and what questions of trustee liability arise and whether the tax impost that was sought to be avoided was in fact avoided.

This decision was upheld on appeal.  In the appeal decision the Court of Appeal, referring to the fact the trust’s settlor was seeking to impugn the validity of a document prepared in accordance with her instructions, noted at [29] that:

 “On this approach, Ms Sparks’ interests would be able to profit from her own wrong given that she executed the documents on behalf of the settlor and trustee. That is because a finding of a sham would likely result in the trust property reverting back to the settlor but allowing it to be retained rather than being available for creditors. Such a result would be inequitable.”

References:

  • Glover Trust Limited v Glover Trust Corporation & Ors [2013] NZHC 545
  • Glover Trust Limited v Glover Trust Corporation & Ors [2013] NZCA 608
  • Lewis v Condon [2013] NSWCA 204
  • Glover Trust Limited v Glover Trust Corporation & Ors [2013] NZHC 2056 (amendment of freezing orders)

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