#15553 - Secret Trusts - GDL Equity and Trusts

Equity & Trusts: Secret Trusts

Exception to s9 Wills Act 1837

• Normal requirements for testamentary gift or trust: s9 Wills Act compliance ((1) in writing, signed by testator; (2) intention through signature to give effect to will; (3) presence of 2 or more witnesses; (4) witnesses attest).

Why use them?

• Wills = public documents. Eg way to benefit someone/purpose you wish to keep secret (eg mistresses, illegitimate children, political parties).

• Or if undecided re who to benefit.

• OR to get around strictures of Wills Act: eg if want to change mind, easier, don’t need to make new will.

Mechanism/definition

• FST: outright gift in the will to intended trustees. Trust not mentioned in will.

  • Eg: will says 100,000 to Arthur’; Arthur has agreed to hold on trust for B.

  • On the face of it, looks like an absolute gift.

  • If secret trusts fails: the trustee may may take the property absolutely (as, on face of will, it’s an absolute gift).

• HST: gift in will stated to be ‘on trust’ or equiv; but details kept secret.

  • Eg, will says: ‘100,000 to Arthur to hold on the trusts I have communicated to him’.

  • Only firmly established/recognised in Blackwell v Blackwell, HL (1929). 2 justifications for recognising HSTs:

    • (1) broader view of ‘fraud theory’, also applies to HSTs (see below).

    • (2) Dehors the will theory.

• Both cases: trustee is separately informed by the testator, inter vivos, of the trusts.

Standard & burden of proof

• Re Snowden: Burden on personal claiming the trust exists; standard: balance of probabilities (civil standard).

Justification/rationale for enforcing secret trusts

• ‘Fraud theory’ (re FST)

  • Maxim: equity will not permit a statute to be used as an instrument for fraud. So can’t permit s9 Wills Act to be used to commit a fraud (i.e. to defraud the intended beneficiary).

  • McCormick v Grogan: equity won’t let Wills Act requirement be used by intended trustee to fraudulently keep trust property. If somebody induces a settlor to leave them property under a FST, and then uses the requirement of Wills Act to try to and keep it for themselves (saying there’s no valid trust because terms not in signed writing etc) courts won’t allow that.

  • Fraud theory extended to HST, Blackwell v Blackwell:

  • Not fraud in same way as FST: because the existence of the trust is on face of will, so trustee can’t take property absolutely for himself.

  • Take a broader view of fraud; if a half-secret trustee doesn’t carry out the agreed trust, the property is held on RT for the testator’s residuary legatee, rather than going to secret beneficiary. Had the secret trustee not agreed to the trust, then the testator could have made other provision for the beneficiary. So would be a type of fraud perpetrated against settlor & beneficiary, because failure to carry out trust property goes to residuary legatee instead of secret beneficiary = fraud, the agreement by trustee denied chance of testator to bequeath the property to the beneficiary in another way.

• ‘Dehors the Will Theory’ (applies to FSTs and HSTs):

  • Blackwell v Blackwell, HL: Secret trusts = lifetime trusts, not testamentary trusts; they operate outside (dehors) the will; and thus not subject to Wills Act.

  • Viscount Sumner: ‘communication to the legatee’ + ‘acquiescence’ ‘removes the matter from the provision of the Wills Act’.

  • Makes sense in some way: as communication & acceptance take place inter vivos.

  • But, why doesn’t make sense: inter vivos trust must be constituted during settlor’s lifetime; but secret trusts are only constituted upon death of settlor, via their will (in this sense, they are more like testamentary trusts); are completely revocable until death unlike inter vivos trust.

  • Although the trust terms arise outside the will; constitution only takes place by virtue of the Wills Act, legal title passing to the trustees on death.

  • P Critchley points out: the beneficiary is dependent upon the settlor dying solvent, without having changed their mind.

  • Argument is that: the will doesn’t create the trust, is merely the device for constituting it by transferring legal title to the trustees; BUT, the trust is not constituted until death.

  • Also, ‘dehors the will theory’ would apply to both FSTs and HSTs; but doesn’t fit with the timing of communication for HST: HST doesn’t allow communication after the execution of the will (because that would void provisions of Wills Act); but, if secret trusts operate ‘dehors’ the will, then communication should be able to take place at any time before death of the settlor, regardless of Wills Act.

  • So problems with theory, but is recognised, by courts, even HL in Blackwell

  • Cases supporting/using dehors the will theory:

  • Re Gardner (No 2): re: secret beneficiary predeceased the settlor; held that the gift didn’t lapse, because the beneficiary’s interest arose as soon as trust communicated & acceptance, not by the will (was ‘dehors’ the wil). [criticism of this below: until testator’s death, trust is not constituted].

  • Re Young: re said that secret beneficiary can benefit even if they witnessed the will (s15 Wills Act doesn’t allow this); by using ‘dehors’ the will theory, saying the trust is outside the will (‘a beneficiary under a secret trust does not take under the will’—so s15 Wills Act not applicable).

Requirements (Kasperbauer v Griffith)

• (1) Intention to create trust

• (2) Communication to the secret trustee

• (3) acceptance by trustee

• (4) Reliance (reasonable for settlor to rely on acceptance).

(1) Intention to create trust

• Must satisfy the 3 certainties: intention; subject-matter; object.

• Re intention: must be clear testator intends to impose a binding legal obligation on trustee, not merely moral obligation.

• Kasperbauer v Griffith: testator: wife ‘knows what she has to do’ with house = too vague.

• Margulies v Margulies: father statement re brother ‘knowing his wishes’ and ‘giving what’s appropriate’ = too vague.

(2) Communication (to trustee)

• (1) WHEN?

  • FST: existence communicated any time before death (whether before or after signing of the will), Wallgrave v Tebbs: instructions found after testator’s death = no valid trust.

  • HST (much stricter)

  • Must be communicated before, or contemporaneously with, the execution of the will (Re Keen). [[because communication after execution of will = power to a change a testamentary disposition, which violates s9 Wills Act]].

  • Re Bateman’s WT: if the will allows for future communication, will fail (will said income to be paid to persons & in proportions ‘as shall be stated by me in a sealed letter’—failed).

  • + need consistency with the will for HST (Re Keen; Re Bateman):

  • will cannot refer to any future communication;

    • anything in will can only relate to previous (or simultaneous) communications (eg on terms I have communicated).

  • + will cannot be inconsistent with other communications.

  • Re Keen, failed because (1) will referred to a future communication which was inconsistent with a previous communication; (2) reference to future communication, not permissible.

  • NB: criticism of different communication rules for FST and hST:

• (2) WHAT must be communicated? (same for HST and FST)

  • (a) existence of the trust inter vivos: Wallgrave v Tebbs

  • (b) terms of the trust: Re Boyes: solicitor agreed to hold property on trust, terms to be received; didn’t receive the terms (only found after death)

    • [if existence of trust communicated, but not the terms property held on RT for deceased’s estate (Re Boyes)]].

    • i.e. if a trustee has accepted their role as trustee, but trust fails for any other reason property held on RT for deceased’s estate.

  • (c) subject-matter: Re Colin Cooper: left 5k and communicated terms of trust; by a later codicil, increase the sum; later variation not communicated to the trustees only the first 5k was validly held on trust, the later 5k on RT for estate [a HST case, but applies to FST too].

• (3) HOW—method of communication

  • Can be oral or in writing (but land, see below)

  • Re Keen: sealed communication/envelope is sufficient (settlor saying this contains terms of trust, don’t open until I die).

    • Sealed envelope sufficient IF:

    • (1) Trustee knows it contains the terms

    • (2) AND trustee accepts on that basis (i.e. not knowing the specific terms).

  • Could probs be extended to ‘sealed’ electronic comms (eg memory stick, email etc)

• (4) TO WHOM?

  • General rule: to all trustees (Re Stead).

  • Exception, if gift is to Joint tenants, and communication is before execution of will (CF TICs) (Re Stead): then only need communication to one trustee. [[how to spot: property given to multiple trustees with no specification of how to divide/share it]].

    • JTs: hold property together, don’t have individual shares (CF TIC: ownership of individual shares).

  • If trustees are TICs: only the TIC(s) to whom communication was made are bound; the others, no communication made to them, may take the property beneficially.

  • If JTs, communication to 1 trustee will bind all if made before will is executed (Re Stead): if at least 1 is told about existence of trust, before the will is executed (same timing requirements for HSTs): then all JTs are bound by it.

    • But if communication is made after will is executed: only those to whom communication was made are bound (same as for TICs).

    • Logic: if you are JTs (likely spouses/civil partners), you will probably tell the other JT.

  • NB, Re Stead concerned FST; Re Gardom, for HST: The Re Stead joint tenant exception does not apply to HSTs if the will permits communication to be made to only one of the intended Half-secret trustees when such communication is...