Justification for Secret and Half Trusts

INTRODUCTION

This question concerns secret and half-secret trusts. The quote by Viscount Sumner provides one justification for the existence of this type of trust. This paper will examine this justification by considering the problems that it causes and whether or not the disadvantages outweigh the benefits. The final third of the paper will consider whether the justification of fraud stands alone or is supported by alternative analysis.

SECRET AND HALF SECRET TRUSTS

It is first necessary to appreciate the nature of these trusts. The concept for both is similar, as indicated by the close resemblance in the names. A secret trust occurs when a settler bequeaths an apparent gift to an individual. This individual has been made aware of the intent that he or she be a trustee for other beneficiaries. It is a ‘secret’ because the trust is not apparent from the face of the will. A half secret trust occurs where the subject matter is left to the trustee, expressly on trust but there are no details on the face of the will as to the objects of the trust. As such, the trust is in part a secret, in part evident.

The justification for such trusts has been attempted on numerous occasions; the imperative instance in this essay is that of Viscount Sumner in Blackwell v Blackwell^[1]. The analysis was that absent such a trust the, would-be trustee would be uninhibited from abusing the intentions of the settler and laying a successful claim to the gift.

LEGAL CONCERNS

Before examining the potential advantages and pitfalls of this rationale, a word must be said about the need for a justification. This reason that any justification is required is the benefits that a secret and half secret trust accrue by being held in this format.

The general principle of trusts law is that if a trust is inter vivos then no formalities are required. If on the other hand the trust is declared by way or a written document, in this case a will, then there are specific formalities that need to be observed pursuant to the Wills Act 1837. The need for these formalities to be satisfied has been challenged, contested and consolidated in the law of England over a number of decades in a series of landmark cases.

Considering the nature of these formalities, it is evident that secret and half secret trusts comply with precisely none of these requirements. In essence they are deemed to be enforceable in the same way that an inter vivos trust is brought into being. In order for this to be palatable to the courts, a reason is needed for such an exception to the rules to exist.

PRACTICAL ADVANTAGES

The strongest argument in favour of the ‘prevention of fraud’ analysis is a consideration of the roots of secret and half secret trusts; indeed the root of all trust law. It evolved from the laws of equity and as such relied heavily on the ancient maxims of equity.

Possibly the most pertinent of these maxims is that which states that “equity looks to the intent rather than the form”^[2]. The meaning of this is simple; regardless of the legal necessity of fulfilling requirements, if the intention can be established then equity will deem it to be completed. This can be traced back to the initial development of equity where the purpose was to relieve the limited elasticity that had given the common law the flexibility of concrete. This maxim supports the theory of complying with the settler’s wishes rather than allowing the trustee to take the subject matter.

Equity also supports the reasoning with regards to the notion of the trustee’s conscience. From its earliest inception equity was distinguished by the focus on the phrase ‘conscience’. The fundamental principle at the heart of equity was that it would not permit the strict approach of the common law to take advantage of an individual by use of unconscionable methods. Again, this supports the reasoning of Viscount Sumner in his judgement that the court of conscience would not tolerate such conduct and the fraudulent possibilities must create a shield in the form of secret and half secret trusts.

Crucially the rationale explains the lack of real distinction between secret and half secret trusts. As Viscount Sumner explained in Blackwell^[3], there is very little difference between the substantive effects of the two trusts. The only difference is in the method of adoption rather than in result. If they are both seen as a measure to prevent fraud then there is a strong argument for having two trusts with differences not amounting to distinctions.

One counter argument can also be made against the argument that the absence of formalities leaves the secret and half secret trusts without any protections. This is in fact not the case. As with any inter vivos trust the secret or half-secret trusts must still comply with the three certainties. In a number of cases^[4] the courts have been prepared to strike down a trust of this type which was informal but did not leave sufficient certainty for the trustee to be able to succeed in dividing the estate^[5].

PRACTICAL DISDVANTAGES

While there are a number of advantages to this theory, there are a number of corresponding disadvantages. The first concern is that the case law extends beyond the remit of fraud and into alternative scenarios involving uncertainty and ambivalence. An example can be seen in Ottaway v Norman^[6]. Here the housekeeper, Norman, had been left property in a will. Upon Norman’s death it was alleged that there had been an agreement between Norman and the original settler that Norman would leave the property to Ottaway. On the face of the record there is no indication that the omission from the will was an attempt at fraud on the part of Norman, or that there was any similar intention. Yet Ottaway succeeded in claiming that there had been a secret trust. On the justification of preventing fraud alone, this should not have succeeded.

Evidential difficulties also engulf the rationale of Viscount Sumner. In McCormick v Grogan^[7] there was circumstantial evidence of an agreement; because the words were vague the court ruled that there had been no equitable fraud on the part of Grogan and that his conscience was not affected. The concern is that this involved the judiciary in an integral case-by-case analysis rather than setting out a clear and concise rule. Further evidential concerns arise from the case of Re. Keen^[8] where the factual dispute arose over the timing of the instructions handed to the trustee. The court drew a tenuous analogy to a captain of a ship under sealed orders; the sealed nature did not affect the governance of those orders. The obvious question is how a trustee can be deemed to have acted against the rule of conscience or fraudulently if he had no knowledge of the burden that he or she was going to be placed under. Yet in Keen^[9] the secret trust was deemed to be constructed.

The critical argument against the rationale stems from half-secret trusts. Despite Viscount Sumner’s protestations, there is a substantial difference between the two trusts. The key is that in a half secret trust there is no feasible way for the legatee to lay claim to the money; on the face of the will they are a trustee. If the trust fails then the money will revert to the estate rather than pass to the trustee. Simply applying the Blackwell rationale will not suffice as it leaves half secret trusts a shell, with no possible arguments in support. There is a possible mitigation of this argument. Re Dale (deceased)^[10] proposed an analysis that even where there was no gain for the trustee, a fraud had the potential to be committed against the settler and/or intended beneficiary. This rather wide approach has some merit but can be seen as a somewhat fabricated theory conceived to evade the criticism without defeating it.

The key concerns with the analysis though have arisen out of the alternative analyses that now hold greater sway than the prevention of fraud notion. Indeed Hanbury goes as far as to state that; “it is not sufficient to say…that secret trusts are based upon the essential elements of intention, communication and acquiescence”^[11].

ALTERNATIVE ANALYSIS

While the Viscount Sumner analysis has drawbacks, as well as advantages, it is irrelevant unless an alternative theory has been provided. Such an alternative has in fact been developed through the stare decisis of the courts. In Cullen v Attorney-General for Northern Ireland^[12] the courts first developed the notion that secret and half-secret trusts were enforceable, not because they were part of the will, but because the trust was established outside the purview of the will. The will was merely additional evidentiary proof^[13] of the intent of the parties. This avoided the concerns over the lack of formalities as they are only required for trusts that are contained within the will.

The precise theory was ironically developed in the same case in which Viscount Sumner proposed his ‘fraud’ theory; Blackwell v Blackwell^[14]. Lord Warrington in a separate opinion suggested that the crucial relationship was that between the settler and the trustee. Because the trustee had accepted the responsibilities, equity would enforce them. It can be argued that this theory also has an element of prevention of fraud inherent in it; the crux though is clearly on the relationship rather than the presence of fraud.

Confirmation and use of this theory was evident from Re Young^[15]. Here the witness to a will had received a beneficial interest of £2000 through a half-secret trust with the settler’s wife as the trustee. Had the trust been constructed through the will it would have been a void trust as witnesses to a will are unable to benefit under s15 of the Wills Act. The court ruled that the half-secret trust had nothing to do with the will because the objects were not identified. There was no question of fraud on the part of the trustee; it was merely a question of whether the bequest was valid.

The trend of a number of analyses being used to support secret and half-secret trusts is further illustrated by the original theory that was used to support such trusts. Neither of the two that have been discussed was mentioned; instead the mechanisms were used in order to provide for people who were considered illegitimate and that would result in complications by the standard issue laws. Such a theory lacks validity since the introduction of flexibility in the Family Law Act 1987. Nonetheless this historical perspective clarifies the fluid nature of analyses in this area of trust law.

CONCLUSION

In conclusion, at the end of the examination of the ‘prevention of fraud’ justification, it is clear that there are points in favour and against the argument. Overall though the conclusion must be that by itself it is an insufficient justification, in particular when considering half-secret trusts. Thus a fair reflection would be to say that these trusts are partly to prevent fraud and partly to enforce the accepted responsibility accepted by the trustee.

BIBLIOGRAPHY

Hanbury J‘Modern Equity’ 16^th Edition

Published by Sweet and Maxwell

Pearce R/Stevens J‘The Law of Trusts and Equitable Obligations’ 2^nd Edition

Published by Butterworths

Todd P ‘Cases and Materials on Equity & Trusts’ 3rd Edition

Published by Blackstone Press

Watt G‘Law of Trusts’ 3^rd Edition

Published by Blackstone Press

The Wills Act (1837)

Blackwell v Blackwell [1929] AC 318

Cullen v Attorney-General for Northern Ireland (1866)LR 1 HL 190

Re. Boyes (1884) 26 Ch 531

Re. Dale (deceased) [1994]Ch 31

Re. Keen [1937]Ch 236

Ottaway v Norman [1972]Ch 698

Re. Young [1951]Ch 344

1

Footnotes

^[1] [1929] AC 318

^[2] Hanbury at 28

^[3] ibid n1

^[4] Re. Boyes (1884) 26 Ch 531

^[5] ibid

^[6][1972] Ch 6 98

^[7] (1869) LR 4 HL 82

^[8] [1937] Ch 236

^[9] ibid

^[10] [1994] Ch 31

^[11] Hanbury at 161

^[12] (1866) LR 1 HL 190

^[13] Naturally only in the case of half-secret trusts.

^[14] Ibid n1

^[15] [1951] Ch 344