What is sham trust?

A sham trust is an invalid trust. If the truth of the matter is that the settlor retains full beneficial entitlement and there is no intention that the apparent beneficiaries will benefit, then what appears to be a trust may be deemed a sham. A sham trust will create this impression so that the settlor can maintain actual control of the trust. When a trust is created for an unlawful purpose, it is described as a sham trust.

These purposes may include:

Tax evasion;
Intent to defraud creditors;
Unlawful hiding of assets; or
Other fraudulent purposes.

Action example:

The settlor instructs the trustee to transfer a significant lump sum of his trust fund to his personal bank or investment account, disregarding the beneficiary's rights and benefits.

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How to prevent sham trusts arising? UniTrust as a licensed trustee upholds the highest level of the statutory duty of care imposed under Trustee Ordinance (Cap 29) Section 3(A). One of our duties is to protect your assets from any suspicion of being a sham trust. UniTrust reserves the discretion right to proceed with any trust instruction and all transactions within a trust must be approved by our Legal and Compliance Department.

How Do Courts Treat Sham Trusts?

A sham trust will be regarded as void by a court. As a result, they will be treated as though they had never existed, and the property that was supposed to be managed by the trustee reverts back to the settlor or among creditors. In other words, the asset firewall will be demolished. It is likely that your trust will be exposed to banks, financial institutions, authorities, and even creditors. It is always possible for them to take action against the assets held by your trustee.

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