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The Legal Test for a Sham Trust
A sham trust occurs when a trust exists on paper but is not intended to operate genuinely. Key indicators include the settlor retaining excessive control, treating trust assets as personal property, lack of trustee independence, and abuse of fiduciary duties. A landmark example is the New Zealand case Clayton v Clayton, where the Supreme Court emphasized that proving a sham trust is challenging but possible. Courts can set aside a trust if it’s shown that the parties never intended to be bound by its terms and the trust was effectively a facade.
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