The rules of the secret trusts

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107633 Introduction The secret trusts include fully secret trusts and half secret trusts. They are mechanisms whereby estate can be disposed of without the details of the beneficiary becoming common knowledge. Rules for testamentary dispositions are strict and this is necessarily so since the testator is no longer able to provide evidence of intention. Despite arising from a historic need, felt acutely, when expectations of society were such that individuals felt compelled to conform despite having aspects of their lives they wished to conceal and still provide financially for their mistresses and illegitimate children after death. So the secret trusts arose as a means of “breaking the rules” surrounding the writing of wills but unfortunately they also break the rules for trust law. It is therefore not surprising that their legal justification is so much in doubt. The rules of the secret trusts Inspection of the will reveals nothing about the existence of a secret trust and no details about the beneficiary’s identity in the case of a half secret trust. In a secret trust the testator tells the legatee that he is a secret trustee and what he must do with the property; Ottaway v Norman [1971].[1] Alterations to the details of a fully secret trust can be made by the testator right up until the time he dies. Although there are similarities between the two types of secret trust there are also important differences. Communication of a secret trust may be in a sealed envelope; Re Keen [1937].[2] The secret or half secret trustee must accept the trust; this may be express or implied Wallgrave v Tebbs [1972][3] or by silence; Moss v Cooper (1861)[4] or conduct; Ottoway v Norman [1972].[5] An essential element is an obligation which must be legally binding; McCormack v Grogan.[6] There are some important differences between the two types of secret trust as outlined and justified by Wilde, 1995. The testator must have communicated a fully secret trust to the secret trustee before he, the testator, dies; Moss v Cooper (1861)[7] otherwise the trust fails and the secret trustee will hold the property for himself absolutely; Re Gardner [1920].[8] If the secret trustee dies before the testator a fully secret trust will fail; Re Maddock [1902][9] because according to the will the secret trustee is only a beneficiary and a beneficiary must survive a testator. However if the trustee of a half secret trust dies before the testator “equity will not allow a trust to fail for want of a trustee” and another trustee will be appointed ; Re Smirthwaite (1861).[10] In the case of a half secret trust the trust must be communicated to the half secret trustee before the will is made; Blackwell v Blackwell [1929][11] Reference to instructions after the will is made invalidates the trust; Re Bateman’s Will Trusts [1970].[12] A half secret trustee may witness a will by which he clearly does not benefit therefore s.15 Wills Act 1837 is inapplicable; Creswell v Cresswell (1868).[13] The practical and legal problems The legal requirements in relation to wills confers protection against fraud in the situation where the testator is no longer able to protect his wishes. A will must comply with certain formalities and this is interpreted strictly. S.9 Wills Act 1837 states that to be valid a will must be in writing and signed by the testator in the presence of two independent witnesses who must also sign the will. Formalities are also required for alterations; Re Edwards [1948].[14] However the secret trusts are having the effect of handing over property after death and failing to comply with these requirements despite the fact of the will the detail required by statute is just not there. S.25 Wills Act 1837 states that a beneficiary must outlive the testator yet the secret trust is created before the testator dies and the beneficiary’s estate may benefit; Re Gardner (No 2) [1923][15] but, defying s.25 Wills Act 1837 there is benefit to the estate upon the death of the testator. The anomaly here is that the testator could have changed his will right up until the time of his death. A fully secret trust contravenes s.53(1)(c) of the Law of Property Act 1925 since nothing need be in writing at the time of transfer during the effect of the will since at this point the legal and equitable interests are fused; Gold v Hill [1999].[16] A beneficiary under a will cannot witness that will; s.15 of the Wills Act 1837 yet the fully secret beneficiary (but not the fully secret trustee) can; Re Young [1951].[17] If it were to be accepted that the secret trusts operate outside the will then the law of trusts should apply to them. Yet they disregard trust law in many respects. For instance expectancy cannot usually be the subject matter of a trust yet this happens for the secret trusts; the secret beneficiary not acquiring the property until the death of the testator. The secret trustee commits fraud if he breaks his promise to the testator and instead keeps the property for himself. The fraud would actually be committed against the testator and also against the secret beneficiary. Lord Viscount Sumner stated in Blackwell v Blackwell [1929][18], “the proposed donee [secret trustee] encourages him to bequeath the money in the faith that his intentions will be carried out.” An extension of the fraud is where the secret beneficiary has mischievously encouraged the testator to set up the secret trust in the first place. This fraud either cannot occur or is exceedingly difficult in the case of a half secret trust since the fact of the trust and the identity of the half secret trustee are both readily available from inspection of the will. Whether it is a sufficient justification for the acknowledgment of both fully secret and half secret trusts The fully secret trust may well work because of the effects of the equity maxim “equity will not allow a statute to be used as an instrument of fraud.”[19] If this doctrine was not in existence then if the secret trustee committed fraud by keeping the property he could argue that according to s.9 Wills Act 1837 the will, not complying by not being in writing, negated the trust. It is up to the secret beneficiary to make the challenge; Re Snowden [1979].[20] The court will not allow the secret trustee to retain the property because the statute relating to formalities has not been adequately met. The Statute of Frauds 1677 was incorporated into the Law of Property Act 1925 and the Wills Act 1837. These statutes cannot be used by the unscrupulous to fraudulently retain trust property; McCormick v Grogan (1868)[21] LR 4 HL 82. The existence of the half secret trust depends in part upon the mechanism of avoidance of this fraud whereby the secret trustee has to complete the personal obligation that he owes the testator.[22] The court of conscience about which Lord Viscount Sumner spoke in Blackwell v Blackwell [1929][23] is equity; meaning that the fraudulent behaviour would be unconscionable and that in this context this doctrine “seems to be a perfectly normal exercise of general equitable jurisdiction.” The unconscionability and the fraud theory are closely linked. Lord Viscount Sumner’s view in Blackwell v Blackwell [1929] is very likely to amount to sufficient justification for the existence of the fully secret trust. However there are difficulties in applying this theory to the half secret trust. Whilst the unconscionablity is still relevant here the possibility and likelihood of fraud is very much less since the will displays the trust situation for all to see. Partly for this reason the fraud theory has been extended; the fraud being the general fraud on the testator and on the beneficiary; Hodge (1981). An alternative and more recent view is that the secret trusts are operating outside the will (this is also known as the dehors the will theory); Re Snowden [1979].[24] This approach was considered in Blackwell v Blackwell [1929].[25] By this mechanism the secret trusts should not fail because the details were not in writing. Secret trusts are described as being inter vivos trusts. The point of communication and acceptance between testator and secret trustee marks the point of creation of the trust and this trust is only properly constituted when the testator dies. This approach has had some subsequent support for instance in Re Young [1951][26] a secret beneficiary by being able to witness the will illustrates that the arrangement was not confined to the written requirements of a will, specifically s.15 of the Wills Act 1837. In the half secret trust to which the fraud theory does not apply and the unconscionability doctrine becomes less applicable there is uncertainty about how such a trust can exist. The nature of the requirement for the communication of a half secret trust being required before the will is made[27] might be connected with the concept of “incorporation by reference” of a document that already exists; Johnson v Ball (1851).[28] However if a future document is referred to for incorporation the trust will not comply with the Wills Act 1837 and will therefore fail. The dehors the will theory can be criticised because if a secret trust is not within the will and is therefore not within the constraints of the law of wills or propate then the secret trust must instead be subject to the rules of trust law; Challinor, 2005. There are however a number of important was in which the secret trusts are not compatible with trust law either. When property is not yet acquired but is the subject of the secret trust this is contrary to trust law. An expectancy cannot be the subject of a valid trust. The dehors the will theory is supported in Re Gardner (No 2) [1923][29] but not in Re Maddock [1902].[30] In the latter case a secret trust failed because the secret beneficiary died before the testator. This failure illustrates that the rules relating to a will were still having an effect on the secret trust. The dehors the will theory does not provide a comprehensive explanation of the secret trusts; Kincaid, 2000. Regarding trust law if the secret trusts are operating outside the will there is still the perplexing issue of what types of trusts these are. The majority view as described by Moffat, 2005[31] is that both types of secret trust are express trusts. However Sheridan, 1951 classes fully secret trusts as constructive. If the secret trusts are express then they ought to comply with trust law regarding s53(1)(b) and s.53(1)(c) Law of property Act. A half-secret trust concerning land has to be evidenced in writing Re Baillie (1886).[32] Clearly the fully secret trusts do not comply with this requirement and therefore they are more likely to explained as implied trusts. There remains a lack of clear distinctions as to when these trusts are constituted and when they take effect; Ottoway v Norman [1972][33] and Re Gardner (No 2).[34] Conclusion The secret trusts remain a facility now used more by the indecisive when making a will rather than by those who require secrecy. The present arrangement whereby a fully secret testator need not detail the trust before the will is made may be some encouragement to the testator who is slow to make up his mind; Moffat, 2004).[35] This problem could be eliminated by using the rule in the half secret trust whereby the trust must be detailed before the will is made. The justification for the existence of these trusts has long presented difficulty. Classifying the different types of secret trust as one has contributed to the problem. Whilst there are a number of theories they all encounter inconsistencies with recognised principles of law. The functioning of these trusts does defy the strict rules of the Wills Act 1837 and whatever justification is accepted for this it still contravenes the basic concept that the details of a will must be evidenced in writing. Bibliography Books Hayton DJ 2004 Hayton & Marshall Commentary and Cases on The Law of Trusts and Equitable Remedies 11th edition London Thomson Sweet and Maxwell Moffat G 2004 Trusts Law Text and Materials 3rd edition Cambridge, Cambridge University Press Articles Challinor E Debunking the myth of secret trusts 2005 Conveyancer and Property Lawyer 2005 492 Hodge, Secret Trusts: The Fraud Theory Revisited 1981 Conv 341 Sheridan 1951 67 LQR 314 Kincaid D The Tangled Web: The Relationship between a Secret Trust and the Will 2000 Conveyancer and Property Lawyer 420 Wilde D Secret and Semi-secret Trusts: Justifying Distinctions Between the Two 1995 Conveyancer and Property Lawyer 366 1

Footnotes

[1] Ottaway v Norman [1971] 3 All ER 1325 [2] Re Keen [1937] Ch 236 [3] Wallgrave v Tebbs [1972] 2 K & J 313. [4] Moss v Cooper (1861) 1 J&H 352 [5] Wallgrave v Tebbs [1972] Ch 698 [6] McCormack v Grogan (1869) LR 4 HL 82 [7] Moss v Cooper (1861) 1 S & H 352 [8] Wallgrave v Tebbs (1855) 2 K & J 313 [9] Re Maddock [1902] 2 Ch 220 [10] Re Smirthwaite (1861) LR 11 EQ 251 [11] Blackwell v Blackwell [1929] AC 318 [12] Re Bateman’s Will Trusts [1970] 1 WLR 1463 [13] Creswell v Cresswell (1868) LR 6 EQ 69 [14] Re Edwards [1948] Ch 440. [15] Re Gardner (No 2) [1923] 2 Ch 330 [16] Gold v Hill [1999] 1 FLR 54 [17] Re Young [1951] Ch 344 [18] Blackwell v Blackwell [1929] A.C. 318 [19] McCormick v Grogan (1869) LR 4 HL 82 [20] Re Snowden [1979] 2 WLR 654 [21] McCormick v Grogan (1868) LR 4 HL 82. [22] Lord Westbury in McCormick v Grogan (1869) LR 4 HL 82 [23] Blackwell v Blackwell [1929] A.C. 318 [24] Re Snowden [1979] 2 All ER 172 [25] Blackwell v Blackwell [1929] AC 318 [26] Re Young [1951] Ch 344 [27] Blackwell v Blackwell [28] Johnson v Ball (1851) 5 De G & Sm 85 [29] Re Gardner (No 2) [1923] 2 Ch 330 [30] Re Maddock [1902] 2 Ch 220 [31] p 119 [32] Re Baillie (1886) 2 TLR 660. [33] Ottoway v Norman [1972] Ch 698 [34] Re Gardner (No 2) [1923] 2 Ch 330 [35] p 124
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