#15711 - Trust Formalities - Trusts and Equity

FORMALITIES

Formalities differ between a testamentary trust (made by will) and an inter vivos trusts. Further differences are dependent on the type of property subject to the trust.

Generally no need for formalities, however, there are exceptions for: (i) transfer of land; (ii) transfer of existing equitable interests; and (iii) where the trust is made in a will.

The need for formalities:

One of the purposes is to create certainty of transactions and prevent fraud —it needs to be clear from the outset who has the benefit of an equitable interest.

Fuller identifies the following functions of formalities (he’s writing in relation to contract):

• Evidentiary function: formality constitutes proof that a legal event has happened.

  • Some force to this: if the formality is constitutive, then every case has the formality and so that’s all the courts / third parties have to look for. However, formalities perhaps undermine this function because it limits the evidence the courts will look at (i.e. will only look at writing, closing their eyes to oral evidence). Improves certainty, but may undermine ability of courts to look at all the evidence.

• Cautionary function: they act as a check against inconsiderate action. Insures legal intention.

  • Does the requirement for writing actually help in this regard? Writing is far more common place than the use of a wax seal (old requirement).

• Channeling function: standardizing transactions “form offers a legal framework into which the party may fit his actions.” Allowing people to have confidence that their actions have legal effect.

  • If we abolished formalities an optional standard could be used to largely achieve this function, without defeating intentions of those who failed to do so.

Virgo: a strict insistence on formalities will frustrate the intention of the settlor in some instances. Tension between giving effect to the intention of the settlor and ensuring compliance with formalities.

Advantages for:

• Trustee: they need to be certain who beneficiaries are, so they can exercise their trust duties.

• Beneficiary: Must be certain of interest to prevent fraud by the trustee.

• Courts: When a court intervenes, it must ensure it acts correctly in relation to competing interests.

• Revenue/Customs: Need clarity to know who has the benefit of property for the purposes of tax.

TESTEMENTARY TRUSTS

Many trusts are created by will —a requirement of all wills is that they must comply with the requirements of s.9 Wills Act 1837 to be valid. Under this section, trusts must be:

• In writing

• Signed by the testator: or someone acting at the testator’s direction in his presence.

• Two witnesses: must sign and attest the will, at the same time, in the testator’s presence.

Formalities reduce the chance of mistake / fraud / undue influence / ill-considered, hasty dispositions.

If any of these requirements is not satisfied, the will is invalid and the trust void. For inter vivos trusts, a resulting trust is satisfactory if another trust fails —no good where the settlor has died. As such, mechanisms have been developed to ensure formality rules do not frustrate settlor’s intent, including:

Doctrine of incorporation by reference: Informal documents can be incorporated into a will provided: (i) they are expressly identified by the will; (ii) existed at the time it was executed.

• In the Goods of Smart [1902]: will directed trustees to give testatrix’s friends articles. These articles would be specified in a book. As the book was not prepared until years after the will, it could not be incorporated. However, Gorell Barnes J confirmed that an existing document could be incorporated if it was mentioned “in such terms that it could be ascertained” in a valid will.

SECRET / HALF-SECRET TRUSTS

Testators may intentionally evade the formality requirements of testamentary trusts —e.g. to leave assets to illegitimate children. Testator can try to do this in two ways:

• Half secret trusts: mention is made in the will of the existence of the trust, but the terms of the trust are not disclosed in the will (i.e. beneficiaries’ names are contained in another document).

• Secret trusts: where the trust does not appear on the face of the will. Will purports to leave property to a named person absolutely, but testator intends legatee to hold it on trust for another.

• If the legatee (aware of the testator’s intention) seeks to rely on his legal rights under the will, he will be using the Wills Act to perpetrate fraud. Strong case for equitable intervention.

Since secret trusts are an exception to the formality requirements of the Wills Act (all terms of trust must appear in writing), it needs justification. Three main theories:

1. Incorporation thesis: A written document can be incorporated into the will when the will specifically refers to it —under the doctrine of incorporation by reference.

• Although this is a way of mitigating harsh formalities, it’s difficult for this to be the basis of secret trusts, since if you’re explicitly identifying a document in the will, it’s no longer secret.

2. Fraud theory: this is the historical justification for secret trusts, but isn’t convincing.

• Narrow view: unless the trust is upheld, the legatee will take the property beneficially, thereby unjustly enriching himself. However, this isn’t convincing as a reason to uphold the trust, because an RT to the testator’s estate could prevent this.

• Broad view: could define a fraud as anything which defeats the settlor’s intention (therefore trust should be upheld). However, if we take this view, any trust could be enforced regardless of formalities.

3. Dehors the will theory: the secret trust operates ‘dehors’ (outside) the will. The trust does not arise from the will, but from the communication to and acceptance of the trustee (Re Young). This means the secret trust is inter vivos and the Wills Act does not apply.

• Rickett: If we see secret trusts as express trusts, secret trusts of land should still be caught by the relevant formalities for dispositions of land in s.53 LPA.

Dehors will theory supported in the case law:

• Re Snowden [1979] See below for facts. Megarry VC: “The whole basis of secret trusts...is that they operate outside the will, changing nothing that is written in it, and allowing it to operate to its tenor, but then fastening a trust on to the property in the hands of the recipient.” He rejects the fraud theory, which has implications for the standard of proof required —i.e. high standard to prove fraud, but only a civil standard of proof to show existence of a secret trust.

• Re Gardner (No. 2) [1923]: testatrix attempted to create a secret trust, but the beneficiary of the trust died before her. Usual practice for trusts created by will was for property to revert back to the testator’s estate. Romer J: a secret trust arises immediately —therefore, the beneficiaries title arose not under the will, but by the trust already in existence prior to the testatrix’s death. Trust is created before the will. The representative of the beneficiary could therefore claim her share.

  • Virgo: case is wrongly decided. Romer J held that the dead beneficiary acquired her interest at the date of declaration of the secret trust. Because she had an interest before she died, the usual rules under which a gift lapses do not apply. However, this is contrary to principle: beneficiaries of a trust cannot acquire an interest in the trust property until the trust has been completely constituted, and a secret trust is not constituted until the testator dies and the trust property is vested in the legatee/trustee by operation of the testator’s will. No interest is acquired on communication / acceptance by the trustee. Thus, the secret beneficiary did not have an interest at the time of her own death —the secret trust should have lapsed and the property held on RT for those entitled to residuary estate.

• Re Young [1951]: Testator’s will left property to his wife subject to a condition that she should make certain bequests he had previously communicated to her, including a gift of 2,000 to his chauffer, Mr. Cobb. C had witnessed the will, which meant he could not receive a legacy under it. Dankwets J: C was entitled to receive the money because his interest arose from an oral secret trust, not under the will. Wills Act formalities were irrelevant to the trust.

Issues with ‘dehors’ theory:

• Constitution: because trust is declared while testator is still alive, but is constituted following his death, equity allows the trust to bind property added to the estate in this period. This contravenes the rule in Re Ellenborough against declaring an immediate trust of future property.

• Half-secret trusts:

Operation of fully secret trusts

Elements were identified in the following:

• Ottoway v Norman [1970] Testator left his bungalow to his housekeeper in his will. H did so on the separately communicated understanding that, on her death, she would leave it to his wife and son (claimants). Housekeeper died and left bungalow to N. Brightman J: Three elements necessary for a fully secret trust: (i) intention to create a trust; (ii) communication; (iii) acceptance by the trustee (which can be express or silent). These elements were present here.

• McCormick v Grogan [1869]: Intention not proved. Testator left property to D and, as he lay dying, instructed D in letter what to do with the property. Terms were not obligatory: “I do not wish you to act strictly on the foregoing instructions, but leave it entirely to your own good judgment”. D complied with some wishes, not...