2.32There is no provision on sham trusts in current legislation. There is a question as to whether the law on sham trusts, including the effect of a sham finding, should be addressed through legislation or left to the courts to develop.
2.34There is also the more general concern that there are some trusts that have not been set up to run as proper trusts, or are not functioning as such. This includes the situation where settlors/beneficiaries are receiving the benefits of access to the property or directing the management of the property, as if they were the legal owners, but are protected from the responsibilities and liabilities of legal ownership. The sham argument has been used to try to address these types of situations, albeit usually unsuccessfully. There is a further issue as to the effect of a failure to comply with certain elements of proper formal trust management, such as resolutions, minutes and accounts.
2.37Nevertheless, we have weighed the competing arguments for and against setting out a legislative provision on sham trusts. The advantages would be to provide guidance and education to settlors and trustees; to clarify the law and provide more guidance about considerations for whether a trust is a sham; and to give more certainty about the appropriate evidential standard. More widely, it could prevent the undermining of public policy objectives in terms of people avoiding the responsibilities associated with a trust, and provide an effective mechanism to respond when a trust is not operating as a genuine trust. It could also better preserve the integrity of the trust concept. A legislative provision could be a faster way of addressing these issues than waiting for the courts to develop principles through case law.
2.38There are also a number of disadvantages or difficulties with such a provision. There is a concern that it could be inflexible compared with a judicial response, and could constrain judges from making appropriate findings in some cases. A number of submitters considered that shams are more effectively dealt with in the courts under existing law. They considered that the existing law is adequate and courts are better placed to respond since issues are likely to be fact-specific and involve a variety of scenarios, which would be hard to cater for in legislation.
2.39Some submitters also held the view that the concept of a sham is not well developed enough in a trust context to warrant legislative intervention. A provision could raise conceptual disputes that it would be helpful for the courts to develop and resolve rather than a legislative intervention. It could also present practical and operational issues that could be hard to resolve adequately in legislation, and could involve technically difficult drafting.
2.40There is a further concern that a sham provision could create unintended uncertainty about the validity of large numbers of existing trusts, which would lead to additional disputes requiring judicial resolution. Finally, it is possible that the issues with the use of a trust that underpin a claim of a sham are in fact not issues with the trust at all but rather lie in other areas such as relationship property or insolvency, and the problems are better dealt with in those areas rather than in trusts legislation.