Validity 2 Flashcards
Q1. What is a sham in trust law?
A1. A sham arises when the trust document or evidence presented does not match the true reality of the transaction – the parties are pretending to create certain terms (or a trust at all), but actually intend something else (or nothing).
Q2. Name the three main sham scenarios in a trust context.
A2.
No true transfer: The settlor never actually parts with ownership.
Different beneficial interest: The settlor intends to keep the benefit rather than following the deed’s stated terms.
Different terms: There is a genuine trust, but its true terms differ from those stated in the document.
Q3. What happens if the settlor never truly intends to part with ownership but the trust document claims they did?
A3. Then there is no genuine trust at all – it’s a sham. The trustee may just be acting as the settlor’s agent rather than holding property on trust.
Q4. How is a sham created if the settlor does transfer ownership but the documented trust terms are not the actual terms?
A4. The trust deed might claim certain beneficiaries or discretionary terms, but in reality, the settlor keeps full control or benefit (making it a bare trust or nominee arrangement rather than what the deed states).
Q5. Describe Scenario C of a sham trust.
A5. The settlor genuinely transfers the property to a trustee, but the actual terms (e.g., fixed shares for certain people) differ from the written terms (e.g., a wide discretionary trust). So, there is a trust but not the one stated in the deed.
Q6. In Jersey law, whose intention matters when deciding if a trust is a sham?
A6. Generally, both the settlor and the trustee must share the intention to mislead (or the trustee goes along recklessly) and jointly intend to give a false impression to third parties or the court.
Q7. Can a trustee’s recklessness support a finding of sham?
A7. Partly. The trustee may be reckless about the true terms (not caring what they sign), but they must knowingly or intentionally participate in giving a false impression. Merely being careless may not suffice for the second element of sham.
Q8. What is a letter of wishes and why is it relevant to sham?
A8. It’s a non-binding document where a settlor expresses how they want the trust’s discretion exercised. It can reveal the true intention if it contradicts the formal trust deed, potentially indicating a sham if the two diverge widely.
Q9. Is a letter of wishes binding on the trustees?
A9. No. It’s just guidance. Trustees may depart from it if circumstances change or if it conflicts with their fiduciary duties.
Q10. Does a trustee’s consistent compliance with the settlor’s requests automatically prove a sham?
A10. No. If each request is genuinely considered and deemed beneficial for the beneficiaries, it’s valid trustee behavior. It only suggests sham if the trustee blindly follows the settlor’s directions without any independent thought.
Q11. If a trust is valid when created, can it become a sham later?
A11. Generally, no. A validly established trust does not turn into a sham simply because the trustee later defers excessively to the settlor. However, that conduct could be a breach of trust (but not necessarily a sham).
Q12. Summarize the main conditions for establishing a sham trust in Jersey.
A12. You must show that:
The settlor and trustee intended to mislead about the terms or existence of the trust.
They both intended to give a false impression to third parties or the court.
This intention existed at the time of creating the trust.
