Making Sure Your Trust Is Not A Sham 09 Dec 2011
"Many trustees are unknowingly sitting on a time bomb as a result of the failure of advisors forming trusts to provide practical guidance on trust law, the running of trusts, or the duties of trustees. This has resulted in many trusts being either shams i.e. invalid, or a series of invalid transactions."
(From "Sham Trusts" by Ross Holmes)
Parry Field Lawyers provide legal advice on a range of trust matters including entry into and operation of family trusts and charitable trusts.
What is a Sham Trust?
Inland Revenue has issued a Ruling on Sham Trusts which purports to set out the essential features of a Sham. The Ruling is written in typical legal language and is not easy to read or translate - the dictionary definition is perhaps an easier way to understand what a sham is:
A sham is "anything that is not what it appears to be, something that is false or fictitious that purports to be genuine, a person who pretends to be something other than he is, counterfeit or false."
Trustees must GENUINELY take part in decisions involving the Trust. They must understand what a Trust is and how to exercise their duties. Trustees must hold meetings, record minutes, and act as if the Trust exists independently of the personal financial affairs of the creators of the Trust.
If a Trust is deemed to be a Sham, then everything done by that Sham Trust is ineffective - it is as if the trust had never existed. The Trust will be "set aside", in the same way that companies held to be shams are set aside. The longer a Sham Trust continues, the worse the implications become for the creators of the Trust.
Ensuring Your Trust is Accepted as Valid
Many people think that because they have appointed an independent trustee to their Trust, it will never be a Sham trust. But this is not enough. Trustees, whether independent from the creators of the Trust or not, must act in good faith, responsibly and reasonably. They must inform themselves, before making a decision, of matters which are relevant to the decision.
If you have any concerns, now is the time to act. The team at Parry Field have many years of experience dealing with family trust issues. If you would like further assistance with your trust matters we recommend you contact Tim Rankin or Ken Lord (348-8480) at Parry Field today.