Setting up a trust by declaration that is for your (trustee's) eyes** only

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Previous View posts have considered the fundamental requirements for validly establishing a trust, including the ‘3 certainties’, namely certainty of intention, subject matter and objects.

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Hyhonie Holdings Pty Ltd v Leroy [2003] NSWSC 624 provides a useful case study example of the application of the establishment principles.

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The case was focused on a trustee in bankruptcy looking to ensure that shares in a company formed part of the bankrupt estate of Robert Lewis Yazbek (Yazbek); as opposed to the bankrupt's argument that the shares were in fact held on trust for the Robert Yazbek Family Trust.

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Yazbek argued that a signed declaration of trust was sufficient to establish the shares being genuinely held by the trust. This was despite the fact that the trust's ownership was overlooked by successive accountants and multiple annual ASIC returns were prepared incorrectly.

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The court confirmed (including on appeal in Hyhonie Holdings Pty. Ltd. & Anor. v. Leroy & Anor. [2004] NSWCA 72):

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1. The onus of establishing a trust is on the person who alleges it and there must be evidence of an express declaration of trust, intended to be final and binding on the trustee.

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2. In order to create a trust over shares, no writing is necessary (that is the requirements of the state based Conveyancing Acts only apply in relation to real property or to disposition of an existing equitable interest).

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3. A person can create a fully effective trust merely by declaring themselves as a trustee (see Collinson v Pattrick (1838) 48 ER 575).

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4. Equity will only enforce a trust to the extent that the intention to create a trust is clear, and while words alone may suffice, where those words are at odds with the donor’s actions, proof may be lacking (see Arthur v Public Trustee (1988) 90 FLR 203).

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5. It is possible to create a trust by declaration without communication to any person (see Rose v Rose (1986) 7 NSWLR 679), however, the fact of little or no communication is a relevant factor to take into account when assessing whether any trust exists at all.

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6. That is, the absence of communication raises a strong inference against an intention to make an appropriation irrevocable. In the absence of evidence to the contrary the inference of silence is that it may have been intended to enable the declarant to adhere to or to abandon the declaration as would best serve their advantage from time to time (see In re Cozens [1913] 2 Ch 478).

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7. In this case, years passed and there was not a 'single scrap of paper' other than the document itself to indicate that the transaction was ever carried into effect. Rather, the business records of all relevant entities as prepared on the instructions of Yazbek were quite inconsistent with the transaction ever having been carried into effect.? Furthermore, there was a last minute attempt prior to Yazbek's bankruptcy to vest the shares in another family member, a step that was inconsistent with the shares having been already protected by being a trust asset.

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8. Thus, the court confirmed the proper conclusion was that Yazbek and his advisers were seeking the best of all worlds. The trust deed was in existence, but it was never seriously considered until the time came for it to be given significance, namely about the time of Yazbek's bankruptcy.

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9. Furthermore, it was held to be of little purpose to analyse whether the trust ever came into existence or whether it was merely incompletely constituted.

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10. Finally, given the relevant document was simply signed and witnessed and then left with other papers, not acted on, and never shown to anyone else, then the case was one of a lack of intention to give effect to the document, as opposed to being a 'sham' (a concept explored in other View posts).

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As usual, please contact me if you would like access to any of the content mentioned in this post.

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** for the trainspotters, the title today is riffed from a song by the Underground Lovers, namely, ‘Your Eyes' - who would have been touring with Died Pretty this time last year; but for the sad passing of vocalist Ron Peno, however are now on the road again.?

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View here:

https://www.youtube.com/watch?v=VVA8eoNkIZA&ab_channel=rubberrecords

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