Trusts can be a central issue in divorce, particularly where family wealth, inherited assets or business interests are involved. Keira Hand, Senior Associate, explains when a trust may be challenged as a sham, why that is difficult to prove, and why even a genuine trust may still affect the financial outcome.

If you’re going through a divorce and your spouse has placed assets into a trust, or you’re worried that your own trust may come under scrutiny, you may have heard the term “sham trust.” It sounds dramatic, but in legal terms it has a very specific meaning.

A trust is not a ‘sham’ simply because it protects assets or because it was created to help with tax or inheritance planning. Equally, the fact that a spouse is disappointed or frustrated that assets are held in trust does render the trust invalid – So, when will the court decide that a trust is a sham?

What is a sham trust?

A sham trust is one that was never genuinely intended to operate as a trust – Although the paperwork says the assets belong to trustees who must manage them for the benefit of the beneficiaries, everyone involved actually intends something quite different. In other words, the trust exists on paper, but not in reality.

The law sets a very high bar for proving this. The courts in England and Wales are generally reluctant to conclude that a trust is a sham unless there is clear evidence that the trust documents were never meant to reflect the true arrangement.

It will not necessarily make a trust invalid if the person who created it retains control over it. Many people who create trusts continue to have some influence over how they are managed. They may express their wishes to the trustees or be consulted before important decisions are made.

The real question is whether the trustees are genuinely making their own decisions or whether they are simply doing whatever the person who created the trust tells them to do – Trustees have legal duties. They are expected to think independently, consider the interests of all beneficiaries and make decisions. If they simply sign whatever they are told without exercising any judgment, the court may take a much closer look at how the trust has been operated.

What factors can lead a court to question a trust?

There is no checklist of factors that would automatically makes a trust a sham, but warning signs can include:

• The person who created the trust continuing to treat the assets as their own;
• Trustees never questioning or refusing requests;
• There being little or no evidence that trustees have made independent decisions;
• If the trust records are incomplete or non-existent; and
• If the paperwork says one thing while everyone behaves as though the trust does not really exist.

Even if all these boxes are ticked, these factors do not automatically mean the trust is a sham. The court will look at the whole picture.

How can a sham trust affect divorce proceedings?

Trusts often feature in divorce cases where there are substantial assets, family businesses or inherited wealth.

One spouse may argue that money held in a trust should still be treated as belonging to the other spouse because the trust is not genuine. If the court agrees, the trust may offer little or no protection. If it does not, the trust may still be relevant when deciding how financial resources should be shared – Every case depends on its own facts.

Can a valid trust still affect a divorce settlement?

One of the biggest misconceptions is that if a trust is valid, the family court cannot take it into account when deciding how assets should be distributed as part of a divorce – That is not the case.

Even where a trust is entirely genuine, it may still be considered as a resource. The court may consider whether funds are likely to be made available to one spouse in the future. If trustees have a history of making payments whenever requested, the trust may still influence the financial settlement.

This is why trust disputes in divorce are often complicated.

What to do if a trust is involved in your divorce

If a trust is involved in your divorce, early advice can help you understand whether the trust is likely to be challenged, how the trustees have behaved in practice, and what arguments may be available when negotiating or resolving the financial settlement.

The interaction between trust law and family law is highly technical – A trust that appears untouchable may not be, while a trust that looks suspicious at first glance may be perfectly valid.

Understanding how the trust was created, how it has been managed over the years and how the trustees have exercised their powers can make a significant difference to the outcome of a financial settlement.

How we can help

Cases involving trusts require expertise in both family law and trust law. Whether you are seeking to protect family wealth or you believe trust assets should be taken into account during your divorce, early specialist advice can help you understand your options and avoid costly mistakes.

Every trust is different, just as every family is different. The important question is not simply what the trust documents say, but how the trust has operated in reality and what that means for the financial issues in the divorce.