Illusory Trusts

The editors of Lewin explain that the question whether a trust is illusory is different from the question whether it is a sham: The question whether a trust is a sham is a different question from the question whether the control of the settlor over the trust fund and its income under the terms of the trust is so extensive that the trust is invalid as an illusory trust; and it does not follow from a decision that a trust is not a sham that it is not an illusory trust.1 The difference is that a sham is concerned with the parties’ subjective intentions, which poses evidential difficulties considered in other editorials.2 Whether a trust is illusory turns simply on the terms of the trust itself, overcoming these evidential difficulties. In most cases, the question is whether the degree of control and interest reserved to the settlor is such that in substance the trusts are squeletic3 so that what is created is not a real discretionary trust but rather a form of trust analogous either to a bare trust or a fixed interest trust, under which the settlor is to be regarded as the 100 per cent beneficial owner of the trust fund. A trust will also be illusory if the trustees owe no enforceable duties to the beneficiaries so as to eliminate the ‘irreducible core of obligations’ which is fundamental to the concept of a trust.4 Again, the only trust created will be a bare or resulting trust in favour of the settlor.