Absolute Property Trust, a case of a Sham Trust?

Son takes parents to court to secure family home vested in Trust

The facts of the case are extracted and summarised based on the reported decision of Goh Yihan JC in Lau Sheng Jan, Alistair and (1) Lau Cheok Joo, Richard, (2) Sng Gek Hong, Cynthia ([2023] SGHC 196).

Sources: The Straits Times
Court grants bid by son, 26, to end trust for $4.9m house, rejects dad’s claim it was ploy to avoid ABSD

July 21, 2023

The applicant is a 26-year-old Singaporean. The first and second respondents are the father and mother of the applicant. The applicant (the son) resides at a landed property with the second respondent (the mother) and his sister. The first respondent (the father) resides in another property at Block 141 Lorong Ah Soo in the Upper Serangoon area.

On 13 July 2020, the respondents entered an option to purchase the landed property for S$4.925 million. At the time, the respondents were in their mid-50s, and the first respondent had retired. The respondents raised the purchase sum through various loans. The loans were eventually repaid through the sale of three other properties and by liquidating some of the respondents’ personal assets.

Later that month, the respondents jointly engaged solicitors to draft and execute a Trust by way of a deed. According to the Trust, the respondents were to hold the landed property, or alternatively, the net proceeds of its sale, in trust as joint trustees for the applicant’s sole benefit.

Crucially, however, the parties disputed the purpose of the Trust. The applicant and the second respondent say that the Trust was created to gift the applicant, who is the elder child and only son, a legacy property while the respondents were still alive. In contrast, the first respondent alleged the Trust deed was created to avoid the payment of ABSD (Additional Buyer’s Stamp Duty) and that it was a sham instrument.

According to the first respondent, the Trust was created because the respondents thought it would be better for the applicant to beneficially own the landed property so that the respondents could “buy” time to dispose of their other assets and avoid the hefty ABSD that they could not afford.

Relationship between respondents deteriorates

Sometime in 2021, the relationship between the respondents became rocky. The second respondent commenced divorce proceedings against the first respondent, who had moved out to stay at the Lorong Ah Soo flat. Hence, the applicant now wished to terminate the Trust in order to have the landed property vest in him immediately. According to him, this was to prevent any more disputes between the respondents, and to ensure that the second respondent, his sister, and him would have a place to stay after the divorce proceedings between the respondents were finalised.

The first respondent argued that there was no intention to give the landed property to the applicant as a gift, considering that it was allegedly the respondents’ matrimonial home. He says that the Trust deed was a sham instrument to avoid paying ABSD. In essence, the first respondent sought to defeat the applicant’s reliance on the rule in Saunders v Vautier by arguing that the Trust deed is either a sham and therefore invalid, or that the Trust is illegal and therefore unenforceable.

Decision of the court

The court agreed that the applicant could rely on the rule in Saunders v Vautier to terminate the Trust on the basis that he is a sole beneficiary who has reached full age and does not suffer from any mental disability. The court did not think that the Trust deed should be invalidated for being a sham instrument or that the Trust should be unenforceable for illegality.

The rule in Saunders v Vautier (1841) 4 Beav 115
This is a very old and leading English Trust law case. It laid down the rule of equity which provides that, if all the beneficiaries in a Trust are of adult age and under no disability, the beneficiaries may require the trustee to transfer the legal estate to them and thereby terminate the Trust. In the present case, the applicant was sole beneficiary and absolutely entitled to all the Trust property, which is tantamount to a form of Trust that can be described as an absolute fixed trust.

This form of Trust is also necessary if ABSD is not payable as provided for under the provisions of the Stamp Duty Act for the purchase in Trust of a residential property in Singapore. There is a look-through to the residential property status of the beneficiary or beneficiaries of the trust. If the beneficiary is a Singapore citizen and does not own, legally or beneficially, any interest in any other residential property in Singapore, then no ABSD is payable on the acquisition of the property in Trust.

Such kinds of Trusts are unlike many modern Trusts that are set up as discretionary Trusts where the beneficiaries are a determined class of persons and who could even be so named but they do not have any entitlement to the Trust fund. The benefits that they are given from the Trust fund are at the discretion of the trustees.

Sham and illegality of a Trust

The case demonstrates the difficulties when a party to a transaction raises issues on illegality to succeed on its arguments. There are legal hurdles. In answering whether the Trust in question is enforceable, the court should have regard to whether the Trust falls into an established category of Trusts which are prohibited, and are therefore void and unenforceable, or whether the Trust is valid but might nevertheless be unenforceable because it was created either for an illegal purpose or arose as an incidental consequence of the illegal purpose.

Should there be a finding of any illegal purpose, the court should apply the principle of proportionality in assessing whether to enforce the Trust, having regard to factors such as:

  1. Whether allowing the claim would undermine the purpose of the prohibiting rule
  2. The nature and gravity of the illegality
  3. The remoteness or centrality of the illegality to the Trust
  4. The object, intent, and conduct of the parties
  5. The consequences of denying the claim

Even then, if the court decides that the Trust was created for an illegal purpose and should not be enforceable, the court may consider if the party seeking to enforce the Trust in question can nonetheless establish an alternative basis for enforcing a proprietary interest by the operation of Trust law. In considering this, the court should apply the principle of stultification
– to stultify is to “make a fool of” or “to make nonsense of” – to determine if, in allowing the claim, the fundamental policy that prohibited the Trust in question in the first place would be undermined.

Was there a fraudulent Trust?

The first respondent’s contention of the illegality of the Trust if he had succeeded would have opened the possibility of fraud and prosecution in the avoidance of significant stamp duties. It appears that where such Trusts have been set up, many parents have also appointed themselves as trustees of these structures – likely for their own convenience and without understanding the proper role and responsibilities of trusteeship.

Many of these Trusts could instead be akin to nominee arrangements rather than proper Trusts, the motive largely being to avoid ABSD. Under the scrutiny and audit of the Inland Revenue Authority of Singapore (IRAS), many of these Trusts could be deemed as tax avoidance schemes and these “parent trustees” could possibly end up paying hefty fines.

Questions on the legacy of the Trust property

The judgement mentioned the applicant’s view that the Trust was created to gift him, as the respondents’ elder child and only son, a legacy property while the respondents were still alive. The respondents were only in their 50s and the first respondent was also then living in the landed property when the marriage between the respondents had not yet soured.

The first respondent had a reasonable basis to contend that the landed property was their matrimonial home as it was the respondents’ sole asset after the disposal of all their other properties. The applicant was 24 years of age, not yet married, when the Trust was set up. The facts of the case did not mention anything that the respondents had planned as a legacy for their other child, the applicant’s sister.
In this modern age, most parents invariably decide to give their properties away in equal shares to their children. If the respondents were looking to give the landed property ultimately to their son, the result could have been achieved by them drawing up Wills. It appeared that no Wills were drawn up or executed – if these were in existence, the Wills would have mentioned how their landed property was to be gifted or dealt with. And the Wills could have provided material evidence to support or break down the respective respondents’ testimonies.

This article was first published in our newsletter, The Custodian Issue 27. Click here to access our latest newsletter.


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