Secret and Half Secret Trusts Commentary Flashcards
Why does there need to be a justification for secret and half-secret trusts?
Secret and half secret trusts allow the strict formalities of the Wills Act to be avoided.
The Fraud Theory
Secret and half secret trusts should be recognised to prevent a fraud being perpetrated on the intended beneficiaries if a legatee, having agreed to hold property on trust, fails to do so.
The traditional explanation based on maxim: Equity will not permit a statute to be used as an instrument of fraud
Would be unconscionable to allow the secret trustee to take beneficially.
Evaluation of Fraud Theory
- Not relevant to the half secret trust because the trust is apparent on the face so there is little scope for the trustee to defraud the beneficiaries, , except where he might assert that communication of the terms of the trust occurred after the will had been executed.
Even then, there is no scope for trustee to benefit from the HST failing, unless he is otherwise entitled to the testator’s residual estate (by RT).
BUT this assumes a restrictive interpretation of the fraud theory. If it were interpreted as encompassing unconscionable conduct it could be used to justify the recognition of HSTs.
• Sometimes framed as preventing ‘fraud on the beneficiary’, or
• Fraud lies in defeating testator’s wishes /defrauding the intended beneficiary: Blackwell.
- Trustees can be considered to act unconscionably when they seek not to be bound by their undertaking to the testator to hold property on trust for another.
- The trust could then be reorganised to prevent such unconscionable behaviour from occurring.
Blackwell v Blackwell
Such a principle was effectively recognised.
Testator had left money in his will to 5 legatees to be applied for the benefit of people whose names had been communicated to them.
• Before executed the testator had informed the trustees orally that the money was to be used for the benefit of his mistress and illegitimate son.
HELD: This was a valid trust. Specifically recognised that the Wills Act did not purport to interfere with the equitable jurisdiction, which ensures that, where a bequest is made in a will without revealing who the beneficiary is, evidence outside the will can be adduced to establish the identity of the beneficiary.
Sumner: In both cases [fully and half secret trusts] the testator’s wishes are incompletely expressed in his will. Why should equity, over a mere matter of words, give effect to them in one case and frustrate them in the other?
• Ie, the fraud theory explains fully secret trust, and once we have accepted that we will validate fully secret trusts it would be nonsensical to invalidate half secret trusts.
Perhaps the best approach as it is pragmatic. Logical, but not intellectually satisfactory.
The crucial trigger for the exercise of this equitable jurisdiction was considered to be communication and acceptance of the trust by the legatee:
It follows that the essential condition for recognising a half secret trust is that the testator has communicated the purpose of the trust to the legatee, who then either acquiesces or promises to comply with this purposes, and the testator then relies on this by executing the will.
• Ie, this operates as a form of estoppel because of the key requirements of communication, acceptance and reliance.
• It will then be unconscionable for the legatee not to fulfil the undertaking.
This satisfactorily explains why the HST is recognised and why there are particular requirements for communication.
‘Dehors the will’ theory
Problems with the fraud theory have led to attempts to find alternative. ‘Dehors the will’ theory views the secret trust as an express trust that is validly declared during testator’s life – inter vivos.
• Fully constituted when property vests in the secret trustee after testator’s death.
• These trusts arise independently of the will by reason of the personal obligation accepted by the legate.
• Not constituted until the subject matter of the trust is vested in the trustee by the executor, following the testator’s death, it does not follow that they are testamentary trusts, because they have already been created inter vivos- it is only the constitution that occurs on death and automatically once property has been transferred by the executors of to the trustee.
Therefore, the secret trust exists outside (‘dehors’) the will and is not subject to the formalities of the Wills Act.
- Support in Re Snowden, Blackwell, Young.
Re Snowden
Megarry: 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 according to its tenor, but then fastening a trust on to the property in the hands of the recipient.
Evaluation of dehors the will theory
Is testator really intending to create inter vivos trust?
- The fact that the trust is declared while the testator is alive but is constituted only following death means equity will allow the trust to bind property in the testator’s estate that may have been acquired after the trust had been declared.
• This contravenes the usual rule that it is not possible to declare an immediate trust of future property.
• BUT this could instead be treated as a trust of the testator’s promise to leave future-acquired property to the trustee, rather than a trust of the property itself. - Ignores what testator is clearly intending to do. Alleges an intention of the testator that does not fit with reality. The testator is not intending to create a lifetime trust.
• He is intending to create a testamentary trust.
• Critchley: These simply aren’t testamentary dispositions. This theory does not stack up.
• BUT it is still a popular theory.
A unified theory of secret trusts?
Though half and fully secret trusts are different in that one can be seen on the face of the will the better view is that they are not different.
• Both express trusts that arise dehors-the-will.
• Both types should be recognised to prevent fraud in the wide sense of unconscionable conduct in betraying the undertaking made to the testator.
• It follows that the requirement for both types of trust should be the same:
- An intention to create a trust
- Communication of the terms to the trustee before testator’s death, and
- Acknowledgement of acquiescence of the trust by the trustee.
Why are secret trusts valid?
Difficult to see why since both theories have severe issues.
- Throwback to earlier times/sympathy for desire for secrecy?
Watt: ‘The secret trust has probably been of most use to the man wishing to make provision for his mistress or illegitimate children after his death. Perhaps sympathetic to the gentleman’s dilemma, perhaps mindful of the risk that provision might not otherwise be made the judges of the Chancery Division allowed him to create a secret trust.’
• Ie the kind of relationships that in the old days, and even now, that people want to keep secret.
• BUT simply acknowledging that there is sympathy involved does not deal with the problem. Why should they be ignored simply because of this?
• The desire to keep certain beneficiaries off the face of the will should perhaps not be considered sufficient reason to avoid formalities- especially because illegitimate children can now claim from the testator’s estate. - A theoretically unjustifiable but pragmatic concession?
Webb & Akkouh: ‘The search for a convincing account of the basis of secret trusts is looking rather desperate. … [I]f we cannot find a satisfactory justification for secret trusts then it follows that, despite the wealth of cases upholding such trusts, we should no longer give effect to them.’
• Ie, pragmatic concession. Simply accepting that it is what the courts do.
• They argue we perhaps shouldn’t uphold them- either formalities should matter or they shouldn’t. there should not be a middle ground. - Testator may be indecisive on who should benefit from their estate do may wish someone else to make the decision on their behalf
As in Snowden. Not an acceptable reason for avoiding the formalities. The Wills Act exists to prevent such informal arrangements in distribution of the estate.
Possible solution: to require the communication of the key terms of both half secret and fully secret trusts before the will is executed, since this would ensure the policy of maintaining secrecy would be preserved, but would prevent the secret trust from being used where the testator is indecisive as to who should be benefited.
Challinor, ‘Debunking the myth of secret trusts’ [2005]
Secret trusts are a covert device by which courts avoid statutory formalities of the Wills Act 1837 and, therefore, subvert the underlying policy. No logical rationale may be discerned as to the reasons for upholding secret trusts. [The doctrine’s] continued existence, divorced from its original function and context, can no longer be justified’.
“The aim of this article is to assert the unpalatable fact, unpalatable at least in the eyes of positivist lawyers, that secret trusts are a covert device by which the courts avoid the statutory formalities of the Wills Act 1837 and, therefore, subvert the underlying policy of the Wills Act. That is the reason why no logical rationale may be discerned as to the reasons for upholding secret trusts. The doctrine of secret trusts was first applied as a valid use of the courts equitable jurisdiction, but its continued existence, divorced from its original function and context, can no longer be justified.”
(rest of art in other notes)
Law Commission Consultation Paper 231 (July 2017) ‘Making a Will’
“We are aware of the need to balance competing objectives. On the one hand, formalities represent a barrier to people writing wills. A person’s wishes may be defeated because he or she has not executed a document in the correct form, since a will that does not comply with formality requirements is invalid … On the other hand, if formality requirements are not effective, then there is a risk of wills being accepted as valid that do not in fact represent the testator’s wishes; for example, because the will has been forged, the testator did not appreciate that a document would be given effect as a will, or because the testator was subjected to undue influence”
Making a Will LC drawing of fuller
“Formality requirements are considered to perform four main functions.
(1) An evidentiary function: This evidentiary function is particularly important as the will may have been executed decades before the testator’s death and its validity challenged only after his or her death.
(2) A cautionary function: formalities alert the testator to the serious nature of making a will and cause them to think carefully about what they want to achieve with their will. This function might also be understood as one of “consumer protection” or of preventing a party from creating a legally binding document inadvertently
(3) A channelling function: formalities mean that a will provides a well-defined means of passing property on death and testators are channelled towards a well understood, standard method of accomplishing their ends.
(4) A protective function: formalities can assist in shielding the testator from fraud and undue influence when making their will. For example, a signed document is more difficult to forge than an unsigned document and the presence of disinterested witnesses could protect the testator from pressure exerted by a beneficiary.
