As I explain in paragraph 7.9 of my book the ‘Contentious Trusts Handbook’ published by the Law Society in July 2020, ‘An illusory trust is not a valid trust. It is a pretense. Whereas a sham is concerned with the parties subjective intentions, whether a trust is illusory turns entirely upon construction of the terms of the trust. Where in substance, what is created is not a discretionary trust, but rather a form of trust analogous either to a:
- bare trust: or
- fixed interest trust,
under which the settlor is to be regarded as the 100% beneficial owner of the trust fund, then the court may conclude that the trust is illusory. A trust will also be illusory if the trustees owe no enforceable duties to the beneficiaries so as to eliminate the irreducible core of obligations fundamental to the trust concept. The only trust created will be a bare or resulting trust in favour of the settlor.
As part of my summer Tax litigation update reading, which involved reading: the 10th edition of ‘Tiley’s Revenue Law’, the 5th edition of Keith Gordon’s book, ‘Tax Appeals – Law and Practice at the FTT’; and the 2nd edition of Tolley’s ‘A Practical Guide to Tax Disputes’ by Adam Craggs, Julian Hickey & Jonathan Levy , I am now on page 552 of ‘Tolley’s Estate Planning 2021-2022’ by gurus Sharon & Simon McKie, which contains the following commentary about illusory trusts:
‘Another, and in some ways novel, approach to challenging a disposition into trust which fell short of a finding of sham was successfully pursued in the case of JSC Mezhdunarodniy Promshlenniy Bank v. Pugachev [2017] … The settlor, who was also the protector and a discretionary beneficiary, had reserved a substantial number of powers. It was a combination of these factors (and the particular facts of the case) which led the court to conclude inter-alia there was no real intention to create a trust and that the settlor had never intended to part with control of the assets, i.e. that the trusts were illusory. In Webb v Webb [2020], the Privy Council, on appeal from the Court of Appeal of the Cook Islands, found in Pugachev-esque fashion that, “the Court of Appeal is plainly entitled to find as it did the trustees failed to record an effective alienation by Mr Webb of any of the trust property. The bundle of rights which he retained is indistinguishable from ownership.”’ See also my earlier blog, ‘The offshore trust that never was!’