My Lords, no amendments were submitted and we proceed to final division.

Illusory and Sham Trusts Bill

A

Bill

to

amend the law relating to trusts to codify and set the bounds of the trust thus ensuring asset protection and heavily discretionary trusts, are used consistently with Equitable and Common Law principles to benefit beneficiaries.

Be it enacted by the Queen’s most Excellent Majesty, by and with the advice and consent of the Lords Temporal, and Commons, in this present Parliament assembled, and by the authority of the same, as follows:—

Definitions

Beneficiary means a person who has received, or who will or may receive, a benefit under a trust (other than a trust for a permitted purpose), and includes a discretionary beneficiary

Child means a person under the age of 18 years

Court means the Chancery Division of the High Court

Discretionary beneficiary means a person who may benefit under a trust at the discretion of the trustee or under a power of appointment but who does not have a fixed, vested, or contingent interest in the trust property

Official Assignee Settlor means a person who, clearly and with reasonable certainty (and subject to any formalities prescribed by any enactment),—

1. indicates an intention to create a trust; and
2. identifies the beneficiaries (or classes of beneficiaries. or the permitted purpose of the trust; and
3. identifies the trust property.

Terms, in relation to a trust, means 1 or more of the following, as the relevant provision expressly, or the context in which it is used, requires:

1. Express written terms of the trust:
2. express oral terms of the trust:
3. implied terms of the trust

Trust has the meaning given to it by Equity and Common Law

Trustee means a person who is appointed as trustee of a trust

Part 1: Court may declare trust illusory

1. The court may declare the trust illusory, if it is satisfied that in substance, the terms of the trust enable the settlor to self-benefit from the trust property to the detriment of the other beneficiaries.
2. In determining whether the terms of the trust deed allow for such self-benefit, the court must have regard to

a. whether the trust deed in substance omits a fiduciary relationship in which the trustee holds or deals with trust property for the benefit of the beneficiaries,

b. whether the trust deed in substance prevents a trustee from being accountable for the way the trustee carries out the duties imposed on the trustee by law

c. whether the trust deed in substance and by manner of operation would allow the settlor to self-benefit

d. whether totality of the powers created under the trust would allow a settlor to self-benefit

1. Section (2) does not limit the matters the court may have regard to.

2. If the Settlor is not a trustee, the court may make a declaration that the trust is illusory if it is satisfied that the terms of the trust deed give that person real control of the trust property.

3. Where the court makes a declaration that the trust is illusory, the trust is a resulting trust for the Settlor.

4. The court may decline to make a declaration of illusory trust if it considers that to do so would unfairly prejudice the interests of the other parties to the trust, or the interests of third parties.

5. For the avoidance of doubt, Section (6) opens the resulting trust to:

a. If the Settlor is an adjudicated bankrupt, their creditors

b. If the Settlor is undergoing divorce proceedings, their spouse or other claimants

c. If the Settlor is deceased, their creditors, heirs and successors, and claimants to the testamentary estate

d. Any other person who may have claims against the Settlor.

Part 2: Court may declare trust a Sham

1. The Court may declare a trust a sham where the settlor and trustee share a common dishonest intention to create the appearance of a trust but agree to be bound in reality by a contrary legal relationship.
2. In determining whether the trust amounts to a Sham the court must have regard to

a. whether there is a pattern of conduct subsequent to the establishment of the trust which contradicts with the settlor’s pretence in the trust deed to part with the property and set up a trust.

b. whether that subsequent conduct would reasonably colour the dishonest intention of the settlor.

c. whether the powers granted under the terms of the trust would reasonably colour the dishonest intention of the settlor

1. Where the court makes a declaration that the trust is a Sham, the trust is a resulting trust for the Settlor.

2. Section 2 does not limit the other criteria which the Court can consider.

3. A settlor cannot bring an action claiming that a trust is a Sham.

Part 3: Other provisions

1. For the avoidance of Doubt, an illusory trust is not a sham.
2. the Settlor of a trust is an adjudicated Bankrupt, entered into liquidation or receivership, the Official Assignee, receiver, or liquidators, may bring an Action before to seek the Court declare the trust a Sham.
3. the words: adjudicated Bankrupt, liquidation, receivership Official Assignee, receiver, and liquidators take relevant meaning in the Insolvency Act 1986

Part Four: Short title, commencement

1. This Act may be cited as the Illusory, and Sham Trusts Act.
2. This Act comes into force on the passing of this Act.
3. This Act extends to England & Wales.

This bill was written by the Most Honourable Sir Toastinrussian, the Marquess of Canterbury KG OM GCMG CT CBE LVO PC, on behalf of Her Majesty’s Government.

Introductory speech Deputy Speaker,

How excellent it is, to be back presenting a bill in this Honourable House! For those Noble Lords and Honourable Members of the Commons whose interest lies in governing this country, and not into the minor qualms of the law of equity, I shall provide a brief contextual speech.

I will not get into the legal history of trusts, except to note that they stem out of Equity which is a separate but adjacent branch of law to the Common law.

A trust is formed when a settlor, person A gives their property to trustees, persons b and c to hold for the benefit of beneficiaries, persons d and e. A settlor can also be a trustee or a beneficiary. The resulting legal outcome is that the property is no longer owned by person A. Think of ownership as being split into two parts. The title is owned by the trustees, and the beneficial interest is owned by the beneficiaries. Therefore, the trustees only have the power to use the property for the benefit of the beneficiaries, this is called a Fiduciary duty.

One might use a trust for complex estate planning, ensuring certain property is used for someone else, or to manage property. Trusts are also used to subvert statutory schemes. Often settlors will settle trusts so that should they go bankrupt, be divorced, or to avoid estate taxes the property cannot pass to creditors (the liabilities of property). The legal logic runs that you can avoid the liabilities of property by losing the benefits of property. These are legitimate ends, if, the trust property is held for the benefit of beneficiaries.

The original type of trust was a Bare trust, like above. If the beneficiary’s interest was fixed, under the trust deed, that could be accessed by creditors. To avoid this, a common arrangement now sees discretionary trusts. Here distributions of the trust property are made at the discretion of the trustees, following the purpose of the trust. Therefore, beneficiaries only have a hope of a benefit, and the property cannot pass to their creditors.

This is the problem the bill seeks to remedy. Now, Settlors are settling trusts where they are the Settlor, Trustee and Beneficiary. They are highly discretionary with few controls on their behaviour. Many are able to remove trustees for any reason and make distributions for any reason. This is commonplace. Individuals are able to hide property in a trust and remain de facto owners. They can subvert statutory schemes without any real changes in behaviour. The Court in JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev and Tasarruf Mevduati Sigorta Fonu v Merrill Lynch Bank and Trust Company Limited has begun to recognise that such an arrangement does not meet the fundamental requirements to be a trust. My Lords and Honourable Members of the Commons, I agree. However the law still remains murky.

The bill would therefore allow the Court to declare trusts illusory, where the powers in the trust deed would allow a settlor to benefit themselves. This goes further than the Court in the cases above, but I believe this is necessary. This is the correct decision. The new standard is fair, and will protect the interests of creditors and beneficiaries. Additionally, the Court is limited in its ability to change the law, so this bill recognises and codifies the principles coming out of these cases.

A trust will not be illusory If there is a real and legitimate duty to make distributions in the interests of all the beneficiaries. It does not preclude self benefit either. Self benefit will be fine, where the settlor is a beneficiary and makes a letimide request of the trustees, which is considered against the needs of all beneficiaries, in accordance with the trust deed. Therefore, most common trusts will be unaffected, but trusts which are used to hide assets from creditors are at risk. This is a good policy outcome.

For clarification My Lords and Honourable Members of the Commons, the Bill would mean that property held in trusts that are illusory or are shams, is held solely for the benefit of the settlor. Therefore, a Settlor's creditors could sue for that property.

My Lords and Honourable Members of the Commons, this bill would uphold honest trusts, allowing for complex estate planning, and management of family property, but would ensure creditors get their share. Most importantly, it will help uphold the rights of beneficiaries, by ensuring their interest in trust property is respected, and not merely illusory.

It would also allow the court to declare a trust a sham, where a settlor signs a trust deed, but they and the trustees act upon some hidden arrangement. Therefore a settlor could not agree to give up the power to self-benefit, but arrange with the trustees for the property to be distributed back to them.

I commend this bill to your this house.

This vote will end on the 17th July at 10pm BST.