Secret trusts in English law
Encyclopedia
Secret trusts in English law are a class of trust
defined as an unofficial arrangement between a testator
and a trustee
, made to come into force after death, that aims to benefit a person without having been written in a will. Normally, the property would be given to the trustee in the will, and he would then be expected to pass it on to the real beneficiary
. There are two types of secret trust — fully secret and half-secret — with different rules for each. A fully secret trust is one with no mention in the will whatsoever. For these to be valid, the person seeking to enforce the trust must prove that the testator intended to form a trust, that this intention was communicated to the trustee, and that the trustee accepted his office. Similar provisions are required for a half-secret trust, which is where there is a mention of the trust in the testator's will, but not of the trust's terms.
Because secret trusts are not found in wills, they should technically fall foul of the Wills Act 1837
, and be invalid. Despite this, the courts have chosen to uphold them as valid. Various justifications have been given for this; the traditional one is that if the courts do not recognise secret trusts, the trustee given the property in the will would be able to keep it, committing fraud. A more modern view is that secret trusts exist outside the will altogether, and thus do not have to comply with it. This debate is of importance when classifying the trust; if the traditional theory is correct, secret trusts are created by the courts, and thus constructive trusts
. If the more modern view is correct, the trusts exist without the court's permission, and are express trusts.
and a trustee
to benefit a person without having to specify that person in a will. Essentially, the trustee is given something in the will which he is then expected to give to the "real" beneficiary. Interestingly, these trusts are invalid under statute; Section 9 of the Wills Act 1837
provides that a will is only valid when:
As such, such trusts are not enforceable because they are invalid. Equity has been willing to accept their validity in the common law
to prevent the trustee committing fraud and keeping the property; justifications for this acceptance are debated. The courts recognise two forms of secret trust, each with their own rules. Fully secret trusts are trusts not referred to at all in the will, with the agreement made elsewhere. Half-secret trusts are trusts mentioned in some form in the will; its existence is disclosed, but not the terms. Alastair Hudson
, Professor of Equity and Law at Queen Mary, University of London
, suggests the potential for a third class of secret trust. This is where the dying person is encouraged not to make a will so that his property passes to the next-of-kin, on the agreement that the next-of-kin give effect to his wishes via a secret trust. If this is the case, the next-of-kin would be obliged to hold the property on trust and fulfil the dying person's wishes.
The secret trust was originally conceived to prevent fraud enabled by statute or the common law, in line with the equitable maxim that "equity will not allow a statute to be used as a cloak for fraud". In McCormic v Grogan, Lord Westbury
justified secret trusts, saying:
set out the test for proving the existence of a fully secret trust. This is:
For a fully secret trust to be valid, therefore, it must be proved that there was intention, that this was communicated to the trustee, and that the trustee accepted his obligations. Intention is one of the three certainties
, and applies to fully secret trusts in the same way as it does to other express trusts. There are additional rules that only apply to secret trusts; in Re Snowden, it was decided that where all the deceased intended was to impose a moral obligation on the trustee, that will not be enough to create a secret trust.
The second requirement is that both the secret trust and its terms are communicated to the trustee. This may be done at any point prior to death; without it, the secret trust is void. Exactly what must be communicated depends on the nature of the property and trust; if there are multiple beneficiaries for example, this will need to be communicated. In Re Boyes, Kay J came to the conclusion that communication requires allowing the trustee the chance to refuse his office; as such, it cannot be done after death. Lastly, the office of trustee must be accepted by the trustee. The two ways this can be done were laid out by Wood VC in Wallgrave v Tebbs, when he said:
Acceptance, therefore, can be communicated in one of two ways; either by the trustee directly stating his acceptance, or by implying it through not declining.
Communication must be either at or before the execution of the will; Sumner also held in Blackwell that "[a] testator cannot reserve to himself a power of making future unwitnessed dispositions by merely naming a trustee and leaving the purposes of the trust to be supplied afterwards". This is because for the trustee to be able to agree to the trust, he must know the full terms. Acceptance of the half-secret trust is again similar to fully secret trusts; it can be communicated either directly, or tacitly.
Evidential issues also exist. Because secret trusts are by definition secret, they are difficult to prove in court. The parol evidence rule
states that where there is written evidence, oral testimony cannot be introduced to the court if it contradicts that evidence. Since secret trusts are oral and normally exist outside of the will (a written document) this causes problems. In Re Keen, the issue came up, and the Court of Appeal
decided that the parol evidence rule extended to secret trusts, and such trusts could not be enforced if they contradicted written documents. More generally, the problem is proving that the testator intended to create a trust. As in McCormic v Grogan, the standard is high; the person trying to enforce the trust must show "most clearly and distinctly" that it exists.
. There are various theories on how to justify secret trusts, and whether to classify them as express trusts or constructive trusts
. The traditional one is that it is a mechanism to prevent fraud by statute. Under this rule, secret trusts would be constructive trusts; the reason they do not have to follow the Wills Act 1837 is because they are created by the courts. This is a difficult argument with which to justify half-secret trusts, because since the will mentions the trust, fraud is not directly possible. In addition, Alastair Hudson
submits that this argument is significantly flawed. It suggests that liability for the property comes about from fraud; in actual fact, liability comes about as soon as the trustee accepts the property to hold on trust, and so the fraud theory is not necessary to bind the trustee's hands.
A more modern argument is that secret trusts are independent and operate outside the will. The trust was created by the donor and trustee during the donor's life, and simply not constituted until his death; it does not have to follow the Wills Act, because it was not created by a will. This view was expressed by Megarry VC
in Re Snowden, where he said "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". This suggests that secret trusts are not constructive trusts but rather express trusts. A third view is that fully secret and half-secret trusts should be "split" and analysed differently from each other. Fully secret trusts are constructive trusts, because they exist to prevent fraud. Half-secret trusts are not, because their mention in wills makes fraud unlikely; they are instead express trusts.
English trusts law
English trusts law is the original and foundational law of trusts in the world, and a unique contribution of English law to the legal system. Trusts are part of the law of property, and arise where one person gives assets English trusts law is the original and foundational law of trusts in the...
defined as an unofficial arrangement between a testator
Testator
A testator is a person who has written and executed a last will and testament that is in effect at the time of his/her death. It is any "person who makes a will."-Related terms:...
and a trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
, made to come into force after death, that aims to benefit a person without having been written in a will. Normally, the property would be given to the trustee in the will, and he would then be expected to pass it on to the real beneficiary
Beneficiary
A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example: The beneficiary of a life insurance policy, is the person who receives the payment of the amount of insurance after the death of the insured...
. There are two types of secret trust — fully secret and half-secret — with different rules for each. A fully secret trust is one with no mention in the will whatsoever. For these to be valid, the person seeking to enforce the trust must prove that the testator intended to form a trust, that this intention was communicated to the trustee, and that the trustee accepted his office. Similar provisions are required for a half-secret trust, which is where there is a mention of the trust in the testator's will, but not of the trust's terms.
Because secret trusts are not found in wills, they should technically fall foul of the Wills Act 1837
Wills Act 1837
The Wills Act 1837 is an Act of the Parliament of the United Kingdom that confirms the power of every adult to dispose of their real and personal property, whether they are the outright owner or a beneficiary under a trust, by will on their death...
, and be invalid. Despite this, the courts have chosen to uphold them as valid. Various justifications have been given for this; the traditional one is that if the courts do not recognise secret trusts, the trustee given the property in the will would be able to keep it, committing fraud. A more modern view is that secret trusts exist outside the will altogether, and thus do not have to comply with it. This debate is of importance when classifying the trust; if the traditional theory is correct, secret trusts are created by the courts, and thus constructive trusts
Constructive trusts in English law
Constructive trusts in English law are a form of trust created by the courts primarily where the defendant has dealt with property in an "unconscionable manner", but also in other circumstances; the property will be held in "constructive trust" for the harmed party, obliging the defendant to look...
. If the more modern view is correct, the trusts exist without the court's permission, and are express trusts.
Definition
A secret trust is an unofficial arrangement between a testatorTestator
A testator is a person who has written and executed a last will and testament that is in effect at the time of his/her death. It is any "person who makes a will."-Related terms:...
and a trustee
Trustee
Trustee is a legal term which, in its broadest sense, can refer to any person who holds property, authority, or a position of trust or responsibility for the benefit of another...
to benefit a person without having to specify that person in a will. Essentially, the trustee is given something in the will which he is then expected to give to the "real" beneficiary. Interestingly, these trusts are invalid under statute; Section 9 of the Wills Act 1837
Wills Act 1837
The Wills Act 1837 is an Act of the Parliament of the United Kingdom that confirms the power of every adult to dispose of their real and personal property, whether they are the outright owner or a beneficiary under a trust, by will on their death...
provides that a will is only valid when:
As such, such trusts are not enforceable because they are invalid. Equity has been willing to accept their validity in the common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...
to prevent the trustee committing fraud and keeping the property; justifications for this acceptance are debated. The courts recognise two forms of secret trust, each with their own rules. Fully secret trusts are trusts not referred to at all in the will, with the agreement made elsewhere. Half-secret trusts are trusts mentioned in some form in the will; its existence is disclosed, but not the terms. Alastair Hudson
Alastair Hudson
Alastair Hudson is an English barrister and legal academic. He is a National Teaching Fellow, a Fellow of the Higher Education Academy, and a Fellow of the Royal Society of Arts...
, Professor of Equity and Law at Queen Mary, University of London
Queen Mary, University of London
Queen Mary, University of London is a public research university located in London, United Kingdom and a constituent college of the federal University of London...
, suggests the potential for a third class of secret trust. This is where the dying person is encouraged not to make a will so that his property passes to the next-of-kin, on the agreement that the next-of-kin give effect to his wishes via a secret trust. If this is the case, the next-of-kin would be obliged to hold the property on trust and fulfil the dying person's wishes.
The secret trust was originally conceived to prevent fraud enabled by statute or the common law, in line with the equitable maxim that "equity will not allow a statute to be used as a cloak for fraud". In McCormic v Grogan, Lord Westbury
Richard Bethell, 1st Baron Westbury
Richard Bethell, 1st Baron Westbury PC, QC , was a British lawyer, judge and Liberal politician. He served as Lord Chancellor of Great Britain between 1861 and 1865.-Background and education:...
justified secret trusts, saying:
Fully secret trusts
Fully secret trusts are awkward because of the lack of knowledge; it becomes difficult to prove fraud. In Ottaway v Norman, Brightman JJohn Brightman, Baron Brightman
John Anson Brightman, Baron Brightman was an English Chancery barrister and judge, ultimately of the House of Lords.-Early life and career:...
set out the test for proving the existence of a fully secret trust. This is:
For a fully secret trust to be valid, therefore, it must be proved that there was intention, that this was communicated to the trustee, and that the trustee accepted his obligations. Intention is one of the three certainties
Three certainties
The three certainties refer to a rule within English trusts law on the creation of express trusts that, to be valid, the trust instrument must show certainty of intention, subject matter and object...
, and applies to fully secret trusts in the same way as it does to other express trusts. There are additional rules that only apply to secret trusts; in Re Snowden, it was decided that where all the deceased intended was to impose a moral obligation on the trustee, that will not be enough to create a secret trust.
The second requirement is that both the secret trust and its terms are communicated to the trustee. This may be done at any point prior to death; without it, the secret trust is void. Exactly what must be communicated depends on the nature of the property and trust; if there are multiple beneficiaries for example, this will need to be communicated. In Re Boyes, Kay J came to the conclusion that communication requires allowing the trustee the chance to refuse his office; as such, it cannot be done after death. Lastly, the office of trustee must be accepted by the trustee. The two ways this can be done were laid out by Wood VC in Wallgrave v Tebbs, when he said:
Acceptance, therefore, can be communicated in one of two ways; either by the trustee directly stating his acceptance, or by implying it through not declining.
Half-secret trusts
The requirements for a half-secret trust to be valid are similar to those for fully secret trusts, and were laid out in Blackwell v Blackwell, where a testator gave five trustees pieces of property, instructing them (in the will) to hold on to this property as they had been asked. Prior to the testator's death, the trustees had all been told what to do with the property. Lord Sumner said that:Communication must be either at or before the execution of the will; Sumner also held in Blackwell that "[a] testator cannot reserve to himself a power of making future unwitnessed dispositions by merely naming a trustee and leaving the purposes of the trust to be supplied afterwards". This is because for the trustee to be able to agree to the trust, he must know the full terms. Acceptance of the half-secret trust is again similar to fully secret trusts; it can be communicated either directly, or tacitly.
Practice
There are a variety of practical rules in these trusts' use, which span both fully secret and half-secret trusts. If a testator alters the terms of the trust or the trust property, he must inform the intended trustee; if not, as in Re Colin Cooper, the trustee will be permitted to keep the newly added property. Where the trustees are co-owners of the property, informing them of the trust's terms or amendments becomes complicated. If they hold the property as tenants-in-common, only those tenants who were informed of the trust are bound to follow it. Where they hold the property as joint tenants, they are all bound by the trust if even one tenant accepts it before the testator's death. Where they hold the property as joint tenants and some accept it, but only after the testator's death, only those who accepted it are bound. This area has been called "rather illogical".Evidential issues also exist. Because secret trusts are by definition secret, they are difficult to prove in court. The parol evidence rule
Parol evidence rule
The parol evidence rule is a substantive common law rule in contract cases that prevents a party to a written contract from presenting extrinsic evidence that contradicts or adds to the written terms of the contract that appears to be whole...
states that where there is written evidence, oral testimony cannot be introduced to the court if it contradicts that evidence. Since secret trusts are oral and normally exist outside of the will (a written document) this causes problems. In Re Keen, the issue came up, and the Court of Appeal
Court of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...
decided that the parol evidence rule extended to secret trusts, and such trusts could not be enforced if they contradicted written documents. More generally, the problem is proving that the testator intended to create a trust. As in McCormic v Grogan, the standard is high; the person trying to enforce the trust must show "most clearly and distinctly" that it exists.
Justification and classification
Because secret trusts are (by their very nature) not mentioned in wills, they should technically fall foul of the Wills Act 1837Wills Act 1837
The Wills Act 1837 is an Act of the Parliament of the United Kingdom that confirms the power of every adult to dispose of their real and personal property, whether they are the outright owner or a beneficiary under a trust, by will on their death...
. There are various theories on how to justify secret trusts, and whether to classify them as express trusts or constructive trusts
Constructive trusts in English law
Constructive trusts in English law are a form of trust created by the courts primarily where the defendant has dealt with property in an "unconscionable manner", but also in other circumstances; the property will be held in "constructive trust" for the harmed party, obliging the defendant to look...
. The traditional one is that it is a mechanism to prevent fraud by statute. Under this rule, secret trusts would be constructive trusts; the reason they do not have to follow the Wills Act 1837 is because they are created by the courts. This is a difficult argument with which to justify half-secret trusts, because since the will mentions the trust, fraud is not directly possible. In addition, Alastair Hudson
Alastair Hudson
Alastair Hudson is an English barrister and legal academic. He is a National Teaching Fellow, a Fellow of the Higher Education Academy, and a Fellow of the Royal Society of Arts...
submits that this argument is significantly flawed. It suggests that liability for the property comes about from fraud; in actual fact, liability comes about as soon as the trustee accepts the property to hold on trust, and so the fraud theory is not necessary to bind the trustee's hands.
A more modern argument is that secret trusts are independent and operate outside the will. The trust was created by the donor and trustee during the donor's life, and simply not constituted until his death; it does not have to follow the Wills Act, because it was not created by a will. This view was expressed by Megarry VC
Robert Megarry
Sir Robert Edgar Megarry FBA PC QC was a British lawyer and judge.Originally a solicitor, he requalified as a barrister and also pursued a parallel career as a legal academic. He later became a High Court judge and served as Vice-Chancellor of the Chancery Division from 1976 to 1981...
in Re Snowden, where he said "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". This suggests that secret trusts are not constructive trusts but rather express trusts. A third view is that fully secret and half-secret trusts should be "split" and analysed differently from each other. Fully secret trusts are constructive trusts, because they exist to prevent fraud. Half-secret trusts are not, because their mention in wills makes fraud unlikely; they are instead express trusts.