SECRET TRUSTS

Question 1

What is a secret trust

Answer 1

• An example of constructive trusts
• One of the main rationales for equity is that the common law has an obsession with formalities
  
  • The common law is very concerned with formalities because they have an element of justice in them that comes from the clarity, the fact that all cases are all treated alike and the predictability
    
    • Important for the autonomy of the individual, so that they know where they stand regarding the law
• Crucial for efficiency, to ensure that contracts are cheap
• Sometimes, the emphasis common law places on formalities is exaggerated and this leads to results that are against the moral intuitions of the community
  
  • It has been shown that if people feel that the law does not align with their moral intuitions, they alienate themselves from the law
  • There is a strong interest in the legal system to make sure that the law is aligned with the moral intuitions of the public; there is a sense in which the common law forgets about this (so focused on the rule of law and clarity that it does not realise that its results alienate the community)
• Equity intervenes in the common law (rather than easing the formalities) rights of the parties where the formalities lead to morally unpalatable results

Question 2

Formalities of making a will

Answer 2

• This constructive trust is about the formalities of making a will
• The law of making wills is particularly formal
  
  • They are intensive – the courts enforce the law quite rigidly; any little deviation from the formality will undermine the will – the person is not there anymore so we cannot ascertain what they meant by their statement, all we have is the document
  • You must be absolutely sure that the document represents what the deceased wants
  • If you cannot ascertain what they wanted, there is a default and it is that it will go to the next of kin
• In English law, the testamentary freedom is extremely important
  
  • It was the only thing that was changed in property law when the English occupied Quebec
• In a will, a property right is created upon death

Question 3

S9 Wills Act

Answer 3

The courts insist that these formalities very strictly

If the formalities are not complied with, the property goes back to the estate (i.e. the next of kin if the will is invalid)

If just a particular part of the will is failing, that does not mean the whole will is invalid, it is just that the particular property will go back to the estate; it goes to the residuary of the will

Question 4

Secret trusts

Answer 4

• The testator leaves property for the recipient, however C promises to hold this property on trust for B
  
  • You cannot see the trust or the details of the trust in the will, but the trust is created by the promise
  • B has a right against C under a ‘secret trust’
• The existence of the trust or the terms of the trust are not in writing (not in writing and there are no witnesses to them), hence the secrecy
• The only way to transfer property is if it is writing, but often the trust is not created in writing and it is not attested by two people
  
  • If we let it happen, then we are bypassing the formalities of the Will Act

Question 5

Ottaway v Norman

Elements of the claim

Answer 5

• “The essential elements which must be proved to exist are:
  
  • The intention of A to subject C to an obligation in favour of B
  • Communication of that intention to C; and
  • The acceptance of that obligation by C either expressly or by acquiescence”

Per Brightman J

• You must prove that the deceased intended to crate the trust, that the intention was communicated, and that the trustee agreed to become a trustee for C

Question 6

Fully secret trust

Answer 6

• Neither the existence nor the terms of the trust are clear from the will; the property is given by a will to C absolutely without any mention of a trust
• All you see in the will is that a gift is given to someone; both the identity of the beneficiary and the existence of a trust are secret
• It is a trust because before the death the donee and the deceased agreed that the donee would not take the beneficial interest, that they are just donee of the legal interest and that they would hold the property for someone else

Question 7

Half secret trust

Answer 7

There is a trust on the face of the will (it says that the donee holds the property on trust) but it does not say under what terms (for whom)

The fact that there is a trust is evident on the will

We do not know who the trust is held for and under what conditions this is so

Question 8

McCormick v Grogan

FACTS

Answer 8

A fully secret trust

FACTS: the deceased makes a will, he leaves his property to Mr Grogan (but never tells him anything) and on his death bed tells him that he should hold the property on trust for a few people. Grogan says “is that right?” and the deceased replies “I will not have it any other way.” He said he will leave a letter with the will that will instruct him as to what to do with the money. One of the gifts was for Mr McCormick. The trustee, (Grogan) was given a lot of discretion as to how he will apply the instructions and gives him freedom from liability. Grogan does not give money to McCormick, who argued that he was the beneficiary of a secret trust and so should have been given the money

Question 9

McCormick v Grogan

HELD

Answer 9

• Every creation of a property right by death should be in writing with two witnesses
• This is a transfer of property upon death, and the trust only takes effect once Grogan becomes a trustee (on the will).
• There is a severe breach of the provisions of the Wills Act, but nevertheless the HoL holds that there is a trust (even though there weren’t that many precedents: “it has long been established”)
• The common law right is for Grogan to be the fully-fledged owner; the common law does not recognise the trust
• Equity interferes in the property rights of the parties
• Reason for the ruling: unless a fully secret trust was recognised, there is a danger that fraud will take place

Question 10

McCormick v Grogan

Narrow interpretation

Answer 10

• Fraudulent scheme to induce the deceased to make a will in the defendant’s favour, promising her to make her wishes good, while intending all the while to take the gift to himself
• If you have a naïve testator, the trustee can take advantage of them
• The person who argues that a trust should be found should show that the trustee convinced the deceased not to write a will, and that they never had any intention of acting as a trustee

Question 11

McCormick v Grogan

Wide Interpretation

Answer 11

• The defendant is ‘fraudulently’ refusing to comply with the agreement he had with the deceased, and upon which she relied
  
  • Effectively allows the testator to avoid the strictures of the Wills Act. but this is how the law developed
• Re Gardner: “if he (the secret trustee) were disposed of it in any other way he would be committing a breach of trust, or as it has been called in some of the cases, a fraud”
• Testators now have an option to use a human legatee as an unattested will
• The trustee did not initiate the gift themselves, but they are keeping it to themselves
• This is the way the law has developed
  
  • Any promise, and reliance on the promise, is enough to undermine the formalities of the Wills Act

Question 12

Blackwell v Blackwell

FACTS

Answer 12

A’s will gave £12000 to five people to invest and apply the income “for the purposes indicated by me to them” and with a power to pay £8000 of the capital to “such person or persons indicated by me to them” with the balance to be paid to the trustees.

The deceased gave detailed oral instructions to C, one of the five and all five knew and accepted his basic intentions before he signed the will.

On same day the will was signed, C signs a memorandum specifying the identity of the beneficiaries, B1 and B2.

A’s residuary legatees challenge the validity of the trust of the £12000

Question 13

Blackwell v Blackwell

HELD

Answer 13

C holds on trust for the intended beneficiaries; half secret trusts are a way of bypassing the Wills Act

The courts recognise that there is also an obligation here that they are willing to enforce

Question 14

Blackwell v Blackwell

Why not on RT to A’s estate? Is there a risk of fraud?

Answer 14

• Lord Buckmaster: C “cannot defraud beneficiaries for whom he has consented to act by keeping the money for himself … the real beneficiaries are equally defrauded in both cases”
  
  • Hopelessly circular
• Viscount Sumner: dehors the will theory – the half secret trust is inter vivos, but it is not constituted until the death of the testator. Therefore, they operate outside the Wills Act
  
  • There is a condition that the trust will only be constituted upon the death of the testator, which is why it operates outside the Wills Act

Question 15

Half Secret Trusts sidestepping the formalities of the Wills Act?

Answer 15

• Express trust: statute cannot be used as an instrument of fraud
  
  • Intention to create a trust which was not expressed in required form (i.e. the will formalities) + fraud = trust
• Constructive trust: actions of the parties + detrimental reliance = trust

Question 16

Why we enforce HSTs

The ‘outside the will’ theory

Answer 16

• Re Snowden: “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”
  
  • Assumes what it wants to prove – all informal gifts are outside the Will, which is why they are informal and thus have no formality
• The problem: every informal testamentary disposition is outside the will, otherwise it is a will
  
  • A properly formal gift upon death is the will
  • They do not operate outside the will, but rather outside the Wills Act
• Secret trusts are testamentary dispositions
  
  • S9 Wills Act applies to “any testamentary disposition”
  • Testamentary – any gift upon death that will take place that is revocable and ambulatory
    
    • Revocable – can be revoked before death
    • Ambulatory – takes effect and fixed on death, not before
• Trusts on future property are invalid

Question 17

Why we enforce HSTs

Pragmatic reasons

Answer 17

• Assuming that there is a risk of fraud with fully secret trusts, then it looks strange if the mention of the word trust in the will ensures that the trust is not enforced
• Viscount Sumner in Blackwell: “in both [FST and HST] 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?”
  
  • This is an exercise of filling gaps in wills
• There may be a judicial basis for enforcing FHS and not HST but that would ridicule the law

Question 18

Communication timing

Answer 18

• There must be intent to create the trust, communication and acceptance of the trustee
• FULLY SECRET TRUST: communication of the existence and terms of the trust must be before the settlor’s death
• HALF SECRET TRUST: the details of the trust must be communicated to the trustee, and accepted by them, before or at the same timeof the execution of the will
• It is more difficult to enforce HST because there is an extra condition (that the terms of the trust will be communicated at the time or before the will), whereas we are generous with FST
• Most commentators think this is a silly distinction

Question 19

Incorporation by reference

Answer 19

• A common law doctrine
• A will can refer to a document, and if it is in existence at the time the will is signed, it becomes part of the will
• Paul Matthews: “the rule in HST regarding the time of the expression or communication of the trusts is that same as that regarding the time of coming into existence of material to be incorporated by reference into the text of the will”
• Were judges confused as between the two or thought they were too similar in practice to distinguish between then?
  
  • Document IBR and HST are exercises in completing gaps in the will
  • If we allow HST to be communicated like FST they will have precedence over document IBR, even though the latter are in writing