Who is the settlor? A simple question but many take the answer for granted; essentially, the Deed of Trust indicates the settlor and a paragraph confirms the settlor’s intention and defines the settled property. A trust is established only upon the settlor expressing his or her wishes to create a trust and transferring property (referred to as the “settled property”) to the trustees of the trust.

Is this sufficient to establish who is the settlor?

Dunsby v. HMRC[1]

A decision from the UK Upper Tribunal in Dunsby v. HMRC addresses an interesting question; can somebody who has not contributed assets to a trust ever be a settlor?

A very brief summary of the case is as follows: Mr. Dunsby allowed Ms. Gower, an independent third-party, to subscribe for shares in his company and for her to settle the shares into a trust for the primary benefit of Mr. Dunsby. It was found this was done essentially at Mr. Dunsby’s request.

In its decision, the Court held there was no independent economic logic for Ms. Gower to transfer the settled property to the trustees. Further, the Court took the initiative of reviewing the preparatory steps which led to Ms. Gower acquiring the shares and found it had been orchestrated by Mr. Dunsby. The Court found the transactions had no other purpose but to enable the creation of the settlement and the subsequent flow of funds back to him.

Ultimately, the Court held that Mr. Dunsby was the settlor of the trust, despite the fact he never personally transferred property to the trustee, nor did he ever own the shares that were transferred to the trust.

In my view, the decision is worth noting for two reasons:

• Firstly, the definition of a “settlement” was interpreted widely to the extent it considered the preparatory steps leading to the acquisition of the shares. The Court held that Mr. Dunsby had orchestrated the planning and this was taken into consideration when determining the settlement of the trust.
• Secondly, the Court considered circumstantial factors to conclude there was no independent economic logic for the settlement itself. Independent economic logic is not a criterion associated to the settlement of a trust, but the Court appears to consider the purpose of the settlor as an indication whether the settlement was valid.

This UK decision demonstrates a “modern approach” to the concept of settlement of trust.

How Is This Case Relevant?

This case serves as a reminder that the Court is not simply bound by the Deed of Trust and may review all relevant preparatory facts leading to the settlement of the trust. It is important for advisors to confirm the settlor is not simply a “signatory party” and it would be worth documenting the settlor’s instructions and understanding of the terms of the trust.

It is unclear whether a Court in Canada would go as far as requiring an “independent economic logic” to a settlor transferring settled property; this could be an overreach. Nonetheless, advisors drafting planning memoranda, in which the introduction of a trust is suggested, may need to identify the relevant parties and document the parties’ instructions and understanding of their involvement in creating the trust.

For tax purposes, it is worth noting the Canada Revenue Agency does examine the role of the settlor during a trust’s audit. If the matter goes before the Tax Court of Canada, the settlor can expect to be examined and questioned as to its role and involvement as part of the settlement of the trust. This is another reason for making sure the settlor is involved in the process and not simply a signatory party.

Conclusion

The law of trust is evolving in Canada and worldwide. Court decisions, such as Dunsby v. HMRC, are an indication that judges will not accept a blank explanation and will require context and logic to the circumstances surrounding the settlement of the trust.

Trust advisors can play an influential role by assisting the settlor in documenting the intention to form the trust, the settled property and confirming the settlor understands the terms of the trust. At a minimum, the settlor should review and confirm the terms of the trust prior to its finalization and execution.  Ultimately, the validity of the trust depends on these preparatory steps.

[1] Dunsby v. HMRC [2021] UKUT 0289 (TCC)