Not a sham? Perhaps not a trust either
The case of Webb v Webb highlights the need for careful drafting of trust deeds, particularly in the context of settlor-reserved powers. Otherwise, trusts may be left vulnerable to would-be attackers claiming that the settlor has never parted with beneficial ownership of the trust’s assets.
A New Zealand-based entrepreneur, Mr Webb, established two trusts. He was also a trustee, one of the beneficiaries and the “Consultant” (a role similar to a protector with powers which included the ability to replace the trustee) of the trusts.
As part of a matrimonial property claim, Mrs Webb argued that the two trusts were invalid/ineffective on the following key grounds:
- they lacked the “irreducible core” of obligations necessary for a trust to exist. In this case, the key example given was the limited right of the beneficiaries to call for trust accounts; or
- the trusts were shams; or
- the settlor of the trusts did not intend to relinquish control of the beneficial interest in the trust property.
Decision at first instance
The judge at first instance found that the trusts were valid. In reaching her decision, the judge did not distinguish between the arguments that the trusts were shams and that beneficial interest had not been relinquished, on the basis that both required a common intention between the settlor and the trustees not to create the necessary rights and obligations of a valid trust.
Although it was found that the trusts had been administered in a “cavalier” manner, and that one of the trustees had been “naïve” as to the scope of her duties, it was held that the settlor and trustees lacked subjective intent to render them invalid.
Court of Appeal
Despite its acceptance that there was no intention by Mr Webb/the trustees to give third parties a false impression of the rights and obligations under the trust deed, the Court of Appeal, however, found that “the trust deeds failed to record an effective alienation of the beneficial interest in the assets”.
The key test here was whether Mr Webb could take all the trust property for himself, without the agreement of a truly independent person and without being subject to an enforceable fiduciary duty (which would, the Court of Appeal held, give rise to “objective nullity” rather than a sham).
The Court of Appeal found that, taken together, Mr Webb’s rights under the trust deeds (which included a personal power as settlor to nominate himself as sole beneficiary in place of the existing beneficiaries, in addition to his powers as trustee such as to transfer the trust’s entire fund to himself to the exclusion of all other beneficiaries) were such that Mr Webb could take all the trust property for himself. The Court of Appeal therefore concluded that the trusts were ineffective and Mr Webb remained the beneficial owner of the trust assets.
The Privy Council agreed with the decision of the Court of Appeal that Mr Webb’s rights under the trusts were equivalent to total ownership, and further noted that there is no inconsistency in accepting that a trust is not a sham whilst being ineffective to divest the settlor of beneficial ownership as a result of the drafting of the trust deed. The Privy Council’s judgment again confirmed there is no need to prove an intention to deceive for a trust to be ineffective in this way.
Read in conjunction with Pugachev and the decision of the New Zealand Supreme Court in Clayton v Clayton, it is clear that a pattern is emerging in which trusts can be found to have been ineffective to remove ownership by the settlor without any reference to the intent of the parties. Extra care needs to be taken therefore, particularly by settlors who reserve wide powers for themselves or their close associates (including the unchecked ability to distribute assets), to ensure the trust can withstand an attack as to the transfer of beneficial ownership (for instance by a local tax authority, creditors or under a marital claim).