Written by Justine Taylor, Senior Associate
Trusts originated in late medieval England where a wealthy land owner (“The Feoffor”) would convey land to another trusted party (“The Feoffees to uses”) to hold the land as directed for the benefit of persons nominated. The object behind the predecessor to today’s modern trust was to allow land holders to make ‘wills’ for their land, which would automatically have otherwise passed to their heir, and normally the oldest son.
The modern trust is commonly utilised and has many advantages including taxation benefits, strategic estate planning which keeps assets outside a will, and of course, protecting assets from creditors.
However the trust structure is not safe from attack (just ask Gina Rinehart), and the Court will in some circumstances go behind a trust.
CONDON V LEWIS
The question of when the Court will consider a trust to be a “sham” was considered in the recent case of Condon v Lewis  NSW CA 204. In that case the debtor, Colleen established a discretionary trust as the vehicle for the purchase of real property. Colleen was the Appointor (which is the person with ultimate control who decides who the trustee is) and the beneficiaries included herself, her daughters and her grandchildren. Colleen had established the trust and at the time the property was purchased told her accountant “I’m in a complicated court case. I’ve found property which I want to buy, but I want to keep it in my own name in the short term because of the court case”.
In 2005, Colleen amended the trust so that one of her daughters was the Appointor and she removed the corporate trustee and appointed herself personally as trustee. In 2006, proceedings between Colleen and her former husband were settled and a declaration was made that Colleen would hold the property as trustee of the discretionary trust and that it be transferred to her within 30 days.
Despite the 2005 deed of amendment and the settlement in 2006, it was not until 3 years later that Colleen transferred the property into her name as set out in the 2006 Order.
In 2009 and 2010, Colleen entered into a series of loans, secured over the property with no mention of her holding the property as trustee. Subsequently, Colleen’s daughter appointed a new trustee of the company, however the property was not transferred into the new trustee company’s name before Colleen was made bankrupt in 2012.
It is also noted that all funds purchased of the property were contributed to by Colleen personally.
The Trustee in bankruptcy asserted that the trust was a sham and was entered into so as to conceal fact that the property was actually owned by Colleen.
The Court of Appeal, held that the trust was not a sham and that whilst the trust had been established with the intention of protecting Colleen’s assets, it had been established with the intention that it should not have its apparent effect nor any legal consequence. “To say that a document or transaction is a sham, means that while professing to be one thing, it is in fact something different.”
The Court must essentially look to the circumstances in which the trust was created so as to ascertain the clear intention of the party in establishing trust.
The Court will only look behind a document or transaction if there is a “good reason to do so” so that there is effectively a presumption against the findings that a trust is a sham.
The Court also noted the distinction between sham trust and a trust which had been entered into specifically for the purpose of defrauding or defeating creditors.
The Family Court is no stranger to looking towards the true nature and controller of a trust, and indeed the Family Court requires disclosure as to the Appointor and interest in any trusts so as to determine the true extent of matrimonial assets.
It is for this reason that, when establishing a trust, persons will often elect to put in place an alternative friendly Appointor to put distance between the person and the trust. Of course this ultimately has to be weighed against relinquishing true control of the trust.
In the Family Court, even an entitlement as a beneficiary under a trust can be a relevant consideration to the Court, as in the case of Read v Chang  FAMCA 876, where a wife was the discretionary beneficiary of a trust which had assets of $630 million. In that case the Court held that “although the wife may only have a contingent entitlement and is no more than a member of a class of beneficiaries, the memorandum of wishes enlightens the Court as to future the wife’s economic circumstances”.