The SHAM Trust

In today’s fast paced life, it is easy to forget to thoroughly plan ahead for unlikely and unforeseen situations. The same goes for marriage, divorce and the accompanying trusts established by the relevant parties before or during marriage. It would do you well to know how to protect your assets in case of a divorce in the future or the death of your spouse.

Creating a trust

Creating a trust is a plausible way of gaining protection for your assets, but take care – if you are not certain about how to establish and run it, it might be considered a ‘sham’ trust and you face a very real risk of losing everything.

So, what is a sham trust? An easy explanation would be that a sham trust is a trust which were not created for the benefit of the named beneficiaries, but is in actual fact an ‘alter ego’ of the trustee who created the trust in order to keep assets outside of his or her estate to avoid legal consequences which may arise out of the chosen matrimonial system into which he or she married.

Thus, the question would be: how can you avoid your trust being labeled as a sham trust in the event of divorce? First, make sure your trust is legal and lawful. The purpose of the trust should also be easy to determine and very clearly stipulated. Ensure that the Trust Deed is properly drawn up and that the clauses therein do not undermine the fact that it is separate from the trustees. Carefully draw up and attend to the minutes, accounting records and resolutions.

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Take care that the trust and its assets are kept and managed separately from your personal estate. Only transfer assets that will benefit the appointed beneficiaries to avoid accusations of cheating or trying to avoid legalities regarding the assets from your spouse. If any of the above is not adhered to, the Divorce Court will view it as a sham trust which would lead to the redistribution of the assets between you and your spouse.

Another way to ensure that your trust functions legally, is to appoint co-trustees, of which some must be independent trustees. If you are the sole trustee and beneficiary of the trust, it might look like you are trying to evade tax or in the case of divorce, trying to hide assets which would have been eligible for redistribution in the divorce case.

When decisions are taken regarding the assets hold by the trust, all the trustees must be involved in the process. Never leave the decision-making to only one trustee, as this might reflect badly in court and could earn you the ‘sham’ trust label. This means regular meetings must be held and all trustees should attend it.

Conclusion

It would be wise to adhere to these principles straight away to ensure that your trust is able to survive a divorce if you do find yourself in that unfortunate position.