Trusts — ‘True or Bare’?
| DOI | https://doi.org/10.1108/eb025966 |
| Date | 01 March 2000 |
| Pages | 60-67 |
| Published date | 01 March 2000 |
| Author | Martin S. Kenney,Elizabeth O'Brien |
| Subject Matter | Accounting & finance |
Journal of Financial Crime — Vol. 8 No. 1 — Analysis
Trusts — 'True or Bare'?
Martin S. Kenney and Elizabeth O'Brien
The answer to this rhetorical question is not some-
thing that is immediately apparent in the majority
of cases, the intent of the settlor being the determin-
ing, if not only, factor. The determination of whether
a trust is being used as a cloak for fraud or abuse, or is
a sham, will be aided by reference to the doctrine of
substance over form. Where a trust has but the
appearance of legal effectiveness (and where the set-
tlor either reserves the power to direct the trustee,
or where such power is conferred upon the benefici-
aries,
such that the settlement is not intended to have
any legal effect),1 the trust may be described as a bare
trust.2 The essential characteristics of a bare trust are
that either the settlor or the beneficiary has real, dis-
positive control over capital and interest (such that
the whole of the equitable ownership of the trust
property remains in the settlor), notwithstanding
the existence of a trust instrument designating a trus-
tee and beneficiary.
This paper aims to provide the reader with a broad
perspective on the use (or abuse) of the trust relation.
It is not within the ambit of this paper to discuss the
essential characteristics of a trust, the law underpin-
ning the same or the conventional methods used to
set trusts aside. Rather, this paper will concentrate
upon (i) the abuse of the trust form, (ii) the indicia
of abuse of trust, (iii) examples of such abuse and
(iv) the implications for the professional adviser
who becomes involved in facilitating such abuse,
whether wittingly or not.
It is imperative to look critically at the trust
relation from a multidimensional perspective. This
involves an appreciation of all relevant constituents
affected by the settlement, administration and use of
the trust relation. Sharp dealing, dishonesty and
other manifestations of mala fide conduct are often
(although not always) a precursor to a court opting
to look to the substance of the transaction and ulti-
mately treating the trust relation as non-existent. In
these circumstances, a court would be at large to
order that some or all of the responsible parties in
the chain of the trust, whether in its settlement or
administration, make good the loss sustained by a
claimant. Proof to establish the foregoing need not
be overt. In cases where the existence of a trust
relation is found, courts are increasingly being
asked to consider whether that trust relation is in
fact a true or bare trust. Where it is found to be a
bare trust, it may be fair to say that there is not in
fact a valid subsisting legal arrangement.
Thus,
the unquestioning faith in the integrity of
the trust relation has become severely undermined
in recent years, a fact which should be considered
by those who are party to such an arrangement. A
trust should therefore be considered with caution.
What might be valid at the commencement of the
relation may not necessarily endure at a later date,
when different facts and circumstances have arisen,
or when viewed from a different perspective. Recitals
and intentions of the parties to the trust arrangement
as expressed in the trust deed itself are but one of a
number of factors which fall to be put before a
court in its consideration as to whether it should
grant relief to an alleged wronged claimant. Thus,
trust deeds are important, but not sacrosanct. The
attack on these important documents, or rather the
transactions which they represent in holographic
format, has moved away from the unyielding,
turgid and unwavering 19th-century perspective of
the sanctity of contract, legal persons and relations.
Courts have become increasingly willing to call a
bare trust a bare trust — a non-entity, with all of
the repercussions that follow.
THE FACTORS TO BE CONSIDERED
In determining whether or not a trust is being used as
an instrument of fraud, or as a cloak for fraud and
abuse, a number of factors must be considered:
(i) the intent of the settlor;
(ii) the form of the transaction;
(iii) the substance of the transaction; and
(iv) the rights of the parties involved.
The object of the establishment of the trust is of para-
mount importance in considering whether the trust is
being used as an instrument of fraud. The trust model
has been used over the centuries as an effective and
legitimate estate management tool. However, the
attraction of the trust is equally apparent to the
man with improper intentions as it is to the man
Journal of Financial Crime
Vol. 8, No. 1, 2000, pp. 60-67
© Henry Stewart Publications
ISSN
0969-6458
Page 60
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