Secret Trust

Question:

Is there yet any convincing reason for the enforcement of secret trust?

Suggested Answer:

A secret trust is a clandestine arrangement between a testator and a trustee which operates outside the terms of the will. Equity enforces the settlor's true intentions to benefit a third party even though this is contrary to the provisions of the Wills Act 1837, which was itself based on long-standing principles of the old Statute of Fraud 1677.

A secret trust arises when a testator wishes, for whatever reason, to transfer the benefit of property to a person without specifying that person as a legatee under his will. In consequence, a confidant is asked to act as trustee for this secret arrangement under which the confidant ostensibly receives a gift under the will which he is then expected to hold on trust for that third person. In this circumstances, equity will enforce a trust in favour of that intended beneficiary in spite of the fact that it breaches the Wills Act.

Equity's primary concern in developing the doctrine of secret trusts was to prevent the trustee from committing a fraud and attempting to keep the property under the clandestine arrangement for himself.

Once conceptual difficulty which emerges from this doctrine is that of deciding how to categorise the secret trust between the various possibilities of express trust, constructive trust and a rule based on the equitable principles of preventing fraud.

There are basically two types of secret trust: fully secret trust and half secret trusts.

In a fully secret trust, the will of a testator will not mention whatsoever of a trust. However, the testator will have declared that a legatee who under the will takes absolutely, is in fact a trustee and is to hold on trust for a third person. Neither the existence nor the terms of the trust are disclosed in the will. However, the existence and terms of the trust must be communicated to the trustee prior to the testator's death. The intended trustee must accept the office of trusteeship and acquiese to the terms of the trust (Ottoway v Norman).

The same will have occurred in a half-secret trust; the only difference being that the will discloses the existence of the trust though not the objects. For a valid half secret trust the existence and terms of the trust must be communicated to the trustee before the creation of the will. The intended trustee must have accepted office and acquiese to the terms of the trust (Blackwell v Blackwell).

Secret trusts are problematic because, to prove the existence of the trust, evidence which is not in the form required by s.9 Wills Act 1837 will have to be admitted. It is generally the case that the declaration of trust will not be evidenced in writing. The reasons why testators fail to comply with the requisite formalities are various, but the two most common are to avoid publictity and to produce an ability to change their minds without the need for a codicil. The motive for the avoidance of publicity comes from the fact that wills are public documents; anyone can inspect a will. So if the testator wants to make a provision for an illegitimate child, that might be something he would not want the public to know.

The question then is whether the court will admit evidence of the declaration of trust which is not in the form prescribed by the statute. The difficult question is why should the court do so. Given that evidence in such form will be ex hypothesi unreliable, it might be thought that the court should simply refuse to admit it and in the case of fully secret trust, allow the legatee to take absolutely; and in the case of half secret trust, holds that testamentary trust fails for uncertainty of objects and that there is consequently an automatic resulting trust in gfavour of the testator's estate.

The earliest justification was based on the idea that the statutory provisions, originally contained in the Statute of Fraud 1677, were designed to prevent fraud, and a legatee who took on the basis that he was a trustee but who later relied on the statute to take absolutely, would be using the statute as an engine of fraud (Rochefoucauld v Boustead).

There are, however, a number of problems with the fraud theory. Apart from the fact that it allows the admission of unreliable evidence, it is both circular and struggles to explain the enforcement of half secret trusts as was seen in the case of Blackwell v Blackwell, where his Lordship had to redefine the fraud which the courts were trying to prevent. In the words of Viscount Sumner, "it is communication of the purpose to the legatee, coupled with acquiescene or promise on his part, that removes the matter from the provision of the Wills Act and bring it within the law of trusts." Meggary V-C in Re Snowden stated that the whole basis of secret trust is that they operate Dehor the will (outside the will).

The dehor's theory is founded on an unduly narrow intepretation of what is a will. It assumes that the will is only a formal document excuted by the testator. But this is not what the statute means by a will.

Patricia Critchley correctly states: "The mistake is to confuse 'outside the will' with 'outside the Wills Act'. A disposition by way of secret trust is a testamentary disposition, being revocable, so as to fall within the Wills Act. It is therefore harmful effect that secret trustees' wrongful conduct that justifies equity's intervention.

There are number of problems with the dehor theory. It fails to address the fundamental objections that the evidence the court admit is inherently unreliable. It also does not explain why the acceptance of the trust by the trustee should be important.

Both fraud theory and dehor theory are still in play.

From the theories discussed above, it can be seen that there is not one coherent theory, no logic and no golden threat that links all the common law cases to explain the validity of secret trusts. What can be said is that any theory to explain the validity of secret trust is purely academic. In practice, judges solve the problems in each case according to the needs of the parties and to do justice using the established law of secret trusts.

As a result, there is no conceptual need to apply different rules to the two forms of secret trusts or even to continue to distinguish between them. The test for the creation of either form of trust are similar in requirements: intention, communication and acceptance/acquiescene. It is only in relation to timing of communication that there is palpable distinction between them.

In conclusion, secret trust demonstrates the willingness of equity to contravene straightforward statutory princples to achieve the result which the court considers to be in line with good conscience.

Other Related Cases:

McCormick v Grogan - Intention to create a legal obligation on trustees

Principles:
where the testator intended to impose a moral obligation on the legatee, then it would not be sufficient to impose positive trust obligation.

Re Maddock - Trustee predecease the testator

Principles:
In general law of probate, if an intended legatee were to predecease the testator, the gift will lapse into the residue. A fully secret trust will fail because the deceased secret trustee's personal representative would not know of the trust and therefore would not be able to carry out the trust unlike the case of half secret trust.

Ottoway v Norman

Principle:
Any person who received property and acknowledge that he was not to take beneficially would hold the property on resulting trust for the testator's residuary estate.

Re Boyes

Held: The presentation of 2 unattested document was insufficient to constitute communication of the terms of the trust as the trustee was not given the opportunity to refuse to act under the trust.

Re Keen

Principles: Equity allows for communication to be expressed constructively under the doctrine of :sailing under sealed orders". ..."that it was communicated to one trustee only and not to both would not, I think, be an objection ...".

Held: As the sealed envelope was delivered before the date of the will, it was not a communication consistent with the terms of the will.

Re Young

Fact: The chauffeur was a beneficiary of the legacy and he witness the will and therefore ought to be precluded from taking beneficially in accordance to s.15 Wills Act 1837.

Held: When considering s.15 Wills Act 1837 with reference to a legatee who has witness the will, it might be that the beneficiary is actually taking as trustee under a secret trust and not beneficially.

Re Stead (fully secret trust)

Princple:
1)Where trustees takes as 'tenants in common' then only those who knows of the trust are bound.
2) Where they take as 'joint-tenants' and the communication was before the creation of the will, then all trustees are bound. Where they takes as joint tenants and communication is after the creation of the will, then only those who were told are bound. (note: no case law on half secret trust. In geberal, it will be taken as joint tenants and communication must precede the creation of the will to bind all secret trustees.)

Re Willis

Principle:
Equity will not allow a trust to fail for want of a trustee, if an appointed trustee refuse to act or ceased to exist (S.36(i) Trustee Act 1925).

S.9 Wills Act 1837 - all valid will shall be in writing.

S. 15 Wills Act 1837 - If any person shall attest the will, such device shall against such person be utterly null and void.

S. 25 Wills Act 1837 - The legatee under the will must survive the testator.