Over the course of the last decade, a series of high-profile decisions has brought the topic of sham trusts into the spotlight.[1] While unscrupulous parties have always tried to shield assets from creditors or tax authorities, in recent years the judiciary has seen a number of cases in which individuals have attempted to conceal assets behind the guise of a valid trust structure.

Despite its popularity in legal vernacular, the term ‘sham trust’ is a misnomer. Before discussing why, I believe this is the case, it is necessary to understand what is meant by the term and the context in which it finds its usage.

The term sham trust, as the adjective implies, is meant to describe a particular trust-like relationship in which the parties have all the appearances of a valid, legal, and equitable relationship, but the true purpose of said relationship is to defraud creditors and/or conceal assets. This type of characterization finds its origin from Diplock LJ and the decision of Snook v London and West Riding Investments Ltd.[2] Although Snook is concerned with an apparent unscrupulous contract transaction, Diplock LJ goes on to describe “shams” as,  “acts done or documents executed intended to give third parties or to the court, the appearance of creating between parties, legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create”.[3]

Diplock LJ’s description of a sham in Snook is clear, and begs the following question: given that the exact nature, obligations, and structure of a trust remain highly variable, in what way is the relationship so described, not a valid trust?

Famously, in Spencer v Riesberry,[4] J.A. Gillese speaking for the Ontario Court of Appeal, went on to define a trust as a property arrangement with the following characteristics: “The trustee holds legal title to the trust property so that it can manage, invest and dispose of the trust property solely for the benefit of the beneficiaries. A trust can only exist when there is a separation between legal ownership in the trustee and equitable ownership in the beneficiaries”.[5]

Further, as stipulated in Knight,[6] and echoed throughout the centuries of subsequent caselaw, valid trust creation requires the presence of at least three certainties. The three certainties require certainty of intention, certainty of subject matter, and certainty of objects.[7]

How is the Term a Misnomer?

The term “sham” trust ought to be considered a misnomer for two principal reasons. First, as held in Spencer, a proper trust structure obligates a trustee to manage the subject property for the benefit of the beneficiaries. Conversely, sham trust arrangements often violate this precept because the settlor turned beneficiary, or beneficiary-trustee, never truly alienates their beneficial ownership or control over the asset.

Secondly, creation of a valid trust requires the certainty of intention. In its essence, a sham trust is nothing more than a façade either adopted by the ‘settlor’ or co-opted by the beneficiary to deceive creditors. In either event, such an ambition defeats the certainty of intention of the settlor as there is no true intention to create a trust or bind a trustee. Where there is no certainty of intention, the trust is declared void ab initio.[8]

Final Remarks

Although a convenient turn of phrase, the term sham trust can be misleading. For when a settlor enters a trust-like arrangement with the intent to retain full control over the assets and receive all the beneficial entitlements, there is no intention to create a trust or bind a trustee and therefore no trust is created.

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[1] See Clayton v Clayton [2016] NZSC 29; JSC Mezhdunarodniy Promyshlenniy Bank v Pugachev [2017] EWHC 2426 (Ch); Webb v Webb [2020] UKPC 22; Minwalla v. Minwalla, [2004] EWHC 2823 (Fam.).

Also see, relevant and recent news articles discussing the increased prevalence: Priscilla Mifsud Parker & Jean-Philippe Chetcuti, “Sham Trusts” (28 November 2024; updated 15 May 2025), Chetcuti Cauchi Advocates (Malta) (online): <https://www.ccmalta.com/publications/sham-trusts>; Golding & Golding, “The IRS Scrutinizes Abusive Trusts: Audits, Penalties, Amnesty” (International Tax Blog (Golding & Golding)(2024), (online): <https://www.goldinglawyers.com/the-irs-scrutinizes-abusive-trusts-audits-penalties-amnesty/>; andLaura Williamson & Michele Gavin-Rizzuto, “Part 2: The Unholy Trinity of Recent Cases: Clayton, Pugachev and Webb” (Kennedys Law, 12 December 2024, (online): <https://kennedyslaw.com/en/thought-leadership/article/2024/part-2-the-unholy-trinity-of-recent-cases-clayton-pugachev-and-webb/>

[2] Snook v London and West Riding Investments Ltd. [1967] 2 QB 786, [1967] 1 All ER 518, [1967] 2 WLR 1020. (“Snook”)

^[3] Ibid, at 802C-F. (Diplock LJ).

^[4] Spencer v. Riesberry, 2012 ONCA 418 (CanLII)

^[5]Ibid, at para 54.

[6] Knight v Knight, (1840) 3 Beav. 148, 49 E.R. 58 (Ch.).

[7] Ibid.

[8] JE Penner, The Law of Trusts (6^th ed, Oxford University Press, Oxford, 2008) at 100; Phillip Pettt Equity and the Law of Trusts (Butterworths, London, 1993) at 50; Paolo Panico International Trust Law (Oxford University Press, Oxford, 2010) at 34; and Nicky Richardson “Sham Transactions” (2011) 7 New Zealand Family Law Journal 70.

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SEE US AT THE STEP CAYMAN CONFERENCE, January 22-23, 2026, where Kimberly Whaley joins: Andrew Miller TEP, Bedell Cristin (moderator), Cayman Islands; Shân Warnock-Smith KC TEP, ICT Chambers, Cayman Islands; Toby Graham TEP, Farrer & Co, U.K. on a panel discussing “THE SHAM SHOWDOWN: IS DISHONESTY THE WRONG TEST?”

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