#4631 - Secret Trusts - GDL Equity and Trusts

Intro

1. Normal requirements for testamentary trusts: must comply with s 9 Wills Act 1837

2. Reasons for using secret trusts: A will is a public document so privacy and also flexibility

3. Secret trusts – mechanism: either a) outright gift to the intended trustee in the will (fully secret) or gift in the will to the intended trustee stated to be ‘on trust’ (half secret)

4. Validity: Secret trusts appear to be exempt from statutory formalities

5. Standard of proof: onus is on the person claiming that a trust exists: standard is the normal civil standard (Re Snowden)

Justification for enforcing secret trusts:

1. “Fraud theory” – we enforce them otherwise it would vs. the equitable theory that you cannot use statute for fraud – but unclear who this ‘fraud’ is being committed against.

   • Hodge: thinks it’s a fraud on both the testator and the secret beneficiary – but theory only really works with FTF (as with HSF it is clear there is a trust on the face of the will)

   • Discussed in Kasperbauer v Griffith

2. “Dehors the will theory”

   • HSF: Blackwell and Blackwell – they happen outside the will – so we endorse them

     • So we circumvent the statutory formalities of s9 of the Wills Act

   • Secret trust operates by the declaration – not inside the will

   • Re Gardner (No. 2) beneficiary’s share did not lapse upon death (dubious decision : see below)

   • Re Young: secret trust benefited the testator’s chauffeur who had witnessed the will (see below)

Requirements

• Requirements set out in Kasperbauer v Griffith (2000)

1. Intention

2. Communication to the intended trustee

3. Acceptance of the trust by the trustee

Must comply with the three certainties like any express trust

Fully Secret Trusts

• 100,000 to Arthur - clandestine meeting with Arthur – to tell him that he is actually a trustee – Fully Secret Trust (FST) – looks like an outright gift to Arthur

• If it fails then the fully secret trustee will take the legacy absolutely

Communication

1. Timing of communication

• Must take place any time before death, whether before or after the signing of the will: Walgrave v Tebbs: the legatees had not been informed of the testator’s wishes in lifetime so they took free from the trust

2. What must be communicated

1. Existence of the trust

   • Wallgrave v Tebbs: if a trust is to be enforced vs. an apparent absolute legatee then there must be communication of the fact of the trust

   • If the fact of the trust is communicated inter vivos, the legatee cannot take beneficially as his conscience is bound

2. Terms of the trust

   • Terms as well as its existence must be communicated inter vivos

   • Re Boyes: terms of the trust were discovered after death in unattested documents – held to not having been properly communicated

     • CA held that there was a resulting trust to the testator’s estate as original trust had not been properly communicated

3. The property subject to the trust

   • Re Colin Cooper: increase in the sum of original trust not communicated to trustees – held that the first amount was subject to the trusts but the rest was a resulting trust to testator’s estate

3. Method of communication

• Oral communication – but leads to disputes

• Sealed envelope (Re Keen)– analogy of a ship sailing under sealed orders

  • 2 conditions – (1) trustee must know it contains terms of the trust (2) accepts it on that basis

4. Communication not made to ALL trustees

1. General rule: If not then the trustees are not bound by the communication – their conscience is clear

2. Exception : if the gift is to joint tenants, as opposed to tenants in common, all are bound if communication took place before the execution of the will (to A and B rather than to A and B equally)

   • Re Stead – communication to ONE trustee before the execution of the will BINDS ALL THE TRUSTEES: multiple owners treated in law as one person (timing issue is the same as a HST)

   • But where communication took place after execution, only those to whom communication was made are bound

• Need to look for words of severance

Acceptance

• Express: most clear cut

• Implied : your silence will not protect you - Moss v Cooper – ‘acquiescence either by words or consent or by silence’: what is important is that the testator must reasonably believe the trust has been accepted

Reliance

• On the ST’s acceptance

  • Makes a will (FST and HST)

  • For FST – you can make the will and then ask later (only FST)

  • Or don’t make a will at all (only FST)

Carrying out the secret trust:

• In most cases the obligation is to make some inter vivos transfer of property but in Ottaway v Norman: doctrine held to apply equally to an obligation to make a will in favour of the secret beneficiary

Half-Secret Trusts

• Where it is clear from the fact of the will that the property is left on trust but the will does not contain the terms of the trust - e.g. ‘10,000 to X on trust’ or ‘10,000 to Y on the trusts I have communicated to him’

• If the secret trust is not valid then there will be a resulting trust to the testator’s estate: half-secret trustee is a trustee on the face of the will and cannot take beneficially

• Rules for timing of communication are different to FST

Timing: Communication must take place before or contemporaneously with the execution of the will

• Re Keen: communication cannot take place after the will as this would ‘violate s 9 of the Wills Act’

• David Hayton: argues that this rule is unnecessary – timings are assimilated in several states of US and in Ireland

Consistency with the will

• Must be consistent with what you say in the will

• Re Keen : term in the will said ‘to be held on trust for the purpose I will communicate to him’ – reference to future communication – but actually had already communicated - so inconsistent + also because future communication was not permissible

  • Re Bateman’s Will Trusts: testator’s will stated that income was to be paid ‘to such persons and in such proportions as shall be stated by me in a sealed letter’ – referred to future communication so failed

Pre-decease of beneficiary

• General rule : gift lapses and falls into the residue of the testator’s estate

• But erroneous decision in Re Gardner (No. 2) (High Court): Held that a gift to a predeceasing B did not lapse, allowing the B’s estate to claim the residue

  • Romer J erroneously assumed that the trust was perfected at the time communication and acceptance took place – when in fact the trust was s improperly constituted prior to the testator’s death

  • Contradicts probate law principles: would suggest that a will is irrevocable

• Re Gardener will not be followed (has never been explicitly overruled as only HC)

Death or disclaimer by trustee

• When a trustee of a HSF died the trust still subsists because Equity will not allow a trust to fail because of want of a trustee: so the executor will carry out the trust if it possible to prove the terms of the trust despite the trustee’s death

• FST: where trustee dies the will cannot operate to vest property in someone according to its terms – so if the trustee dies then the trust cannot subsist

  • Disclaimers:

    • Re Maddock (HL) obiter: you can disclaim a legacy - if the secret trustee predeceases the testator or disclaims the gift then the trust will fail.

    • However: Blackwell v Blackwell (HL) obiter: you cannot disclaim - trustee of a FST will not be allowed to defeat the testator’s purpose by renouncing the legacy

    • Seems more likely that Blackwell will be followed : judgement is more recent, since secret trusts have become more established – follows equitable principle that equity will not allow a trust to fail for want of a trustee

Express or Constructive?

• Unclear whether secret trusts re express or constructive so that declarations of trusts of land are exempted by s53(2) LPA 1925 from the necessity for formality in s53(1)(b)

• 2 cases saying entirely different things

  • Re Baillie - Oral HST invalid because it didn’t comply with precursor to s53(1)(b)

  • Ottaway v Norman – per incuriam: court enforced a FST even though it was oral, but the issue of s53(1)(b) wasn’t considered by the court

• “Fraud theory” – the whole point of upholding FST is to prevent the trustee from defrauding the settlor & the...