The Rationale for Half and Fully Secret Trusts

A description of fully secret trusts

A fully secret trust arises where a testator leaves money to a beneficiary who, on the face of the will, appears to take absolutely, but who is in fact a trustee for someone else. The trust is ‘secret’ because, whereas the will is public and can be seen once the testator dies, the terms of the trust are contained in another document which can remain private. A half-secret trust arises where the testator leaves property to a person who is expressed in the will to be a trustee, so it is clear that person cannot take the property absolutely.

The reason for such an arrangement are various, but the underlying motive of testators is to keep secret, for whatever reason, the dispositions that they make of their property at death. The will of a deceased person is a public document and family members and others will be able to find out who has received what under it. If the testator does not wish this to happen he may simply leave money to a ‘front’ whom he has previously instructed on the disposal of the property. Either written or oral evidence may be sufficient to prove the existence of the trust and contradict the express terms of the will. As with all trusts, the evidence must clearly show the intent to create a trust, to bind the beneficiary under the will to carry out the testator’s wishes.

The rules governing half-secret trusts appear to be the same as those for fully secret trusts except in one important aspect. The trusts arising under a fully secret trust may be communicated to the trustees any time before the property vests in them, i.e, at any time before the death of the testator. However, in the case of half-secret trust the communication must be before or at the same time as the will is made.

On the face of it, there might seem to be nothing objectionable about a testator wishing to keep secret some of the dispositions he makes on death. However, all such dispositions are supposed to comply with the provisions of the Wills Act 1837 s 9, i.e. that they must be contained in a valid, signed and attested will (unless they fall within the rules relating to statutory intestacy). Clearly, the fully secret trust does not comply with this. Secret Trusts are a means by which a testator is able to bypass the formality requirements laid down in the Wills Act 1837. As Dankwerts J^[1] put it, ‘the whole theory of the formation of the secret trust is that the Wills Act has nothing to do with the matter’. Fully secret trusts have certain testamentary characteristics they are valid, despite lack of testamentary formalities, because the trustee accepts the trusts during the settlor’s lifetime. On the face of the will, the beneficiary takes the property for himself. The provision of the secret beneficiary is expressed in the will to be a trustee, the true beneficiary under the trust is again not identified in the will.

The traditional view is that secret trusts are an example of the maxim that equity will not permit a statute to be used as an engine of fraud. If the beneficiary under the will has accepted the obligation to hold the property on trust for others it would clearly be fraudulent if he were later allowed to deny the trust on the ground that it was void in not complying with the statute. The difficulty with the fraud argument is that it is less easy to apply to half-secret trusts.

The rationale for half-secret trusts which emerges from the modern cases is quite distinct from the rationale of fraud prevention which underpins the cases on fully secret trusts. It is that half-secret trusts are effective only when they can be treated as having been incorporated in the will. It follows that they must precede the execution of the will and that inconsistency with the will renders the half-secret trust invalid. Thus, in relation to half-secret trusts, the Wills Act 1837 still has nothing “to do with the matter’.

The modern view as to the basis for secret and half-secret trusts is that they arise entirely outside the will and thus do not need to comply with the Wills Act. Sir Robert Megarry V-C^[2] acknowledged that fraud provided an historical explanation of the doctrine of secret trusts; the doctrine evolved as a means of preventing fraud. However, it was now clear that secret trusts may be established in cases where there is no possibility of fraud, and it becomes apparent that circumventing the Wills Act is clearly not the motive usually behind such trusts.

1)

The case in question relates to the issue of certainty of intention. What was the intention of the testatrix in this case. Was it to create a trust or an absolute gift?

A testatrix must make her intentions to create a binding trust clear. She must express herself in terms which are sufficiently certain in order that the trustees may know what they are obliged to do, and to enable the courts, if need be, to identify the obligations which it must enforce against the trustee. There are no hard and fast rules for determining whether words of disposition have created an absolute gift or a trust. Use of the word ‘trust’ is not foolproof of the donor’s intention. The test remains one of substance, to be applied on the facts of each case. In Re Kayford Ltd [1975] 1 WLR 279 Megarry J held^[3] that ‘it is well settled that a trust can be created without using the words “trust” or “confidence” or the like: the question is whether in substance a sufficient intention to create a trust has been manifested’. Whether or not a disposition was intended to take effect as a trust depends primarily upon the words used. As Goff LJ stated in Re Osoba [1979] 2 All ER 393, the court should ‘endeavour to ascertain his intention from the words he has used … in the light of such knowledge of relevant facts as we know he must have had’.

Here, the testatrix could be said to be ambiguous as to whether she intended an outright gift or a trust, since she appeared, on the one hand, to have given the residue of her estate right out to her husband, Parwinder, and on the other hand to have imposed a trust of part of it. This can be described as an exceptional case as a gift in this form encompasses features of both a gift and a trust. A will of this nature may be construed as a gift giving to Parwinder a life interest only with remainder to Meera and Surjit. Alternatively, a possibility of a ‘floating trust’ as suggested in Ottaway v Norman [1972] 3 All ER 1325 by Brightman J that a trust might be imposed is more likely, which is to say a trust suspended during the donee’s lifetime and only attaching to the remaining property on the donee’s death. Similarly, in Comiskey v Bowring-Hanbury [1905] AC 84 (HL), it was held that, upon a true construction of the words of the will (similar to this case), the disposition took effect as a trust, under which the wife (in that case) had a life interest…the superadded direction that the nieces (in that case) should acquire an interest in any event, showed that the wife was not intended to acquire an absolute interest in the estate.

2)

According to Lord Langdale MR in Knight v Knight (1840) 3 Beav 171, the courts will not acknowledge that an express trust has been created unless the three certainties are shown. These are a certain intention to create a trust (i.e, words and conduct which create an imperative obligation); certainty as to the subject (property) of the trust; and certainty as to the object (beneficiaries or purposes) of the trust. The three certainties must be satisfied for the protection of the trustees. The three certainties must also be satisfied for the benefit of the court. It is obvious that the testator must make hiss intentions clear in order to create a binding trust. The motive behind the testator’s will is not relevant here as long as it is clear that a trust has been made out.

In the above case, all three elements have been satisfied. It is clear that a trust is intended as trustees have been appointed; a class of beneficiaries have been identified; and the subject matter of ₤200, 000 was specified. It will be inferred quite easily that the first 100 people are to share the money equally.

3)

The issue here concerns certainty of subject matter.

The general principle is that where the division of property, and hence the identification of beneficial interests, is left to some individual who is no longer able to make the choice, then the court cannot exercise that choice since it has no way of knowing how the choice would have been exercised. In this case, the testator has specified a method of choice, which has become impossible due to the Charles inability to make a choice, thereby identifying the property that will be subject of the trust. It would appear that the gift to the motor museum would be held to fail for uncertainty, because in the absence of Charles’ choice, it cannot be said with certainty which of the cars would be subject of the trust to the motor museum. The case of Boyce v Boyce (1849) 16 Sim 476, provides a classic example of this situation. Here, the testator left two houses to trustees to convey one each to Maria and Charlotte. Maria was to pick ‘whichever she may think proper to choose or select’, the remaining house to go to Charlotte. Maria died without having made her selection. It was held that Charlotte’s interest failed for lack of certainty as it was not clear which house she was to take.

The law surrounding interests in the family home arises in several contexts. Generally, the issue encompasses the position where two or more people are involved in the acquisition of a home in which they plan to live. In some of the cases, the courts have used the principles of resulting trusts to provide a solution, while in other situations the concept of the constructive trust has been applied. This area of law has proved to be a difficult area for several reasons. First, it has been uncertain how the legal rules apply in these cases and, second, there is often a tension between what appears to be ‘fair’ and the decision made after applying the legal principles. A typical situation arises when two partners decide they want to live together. One partner offers all the financial contribution in terms of mortgage repayments, initial deposits, money for redecoration, etcetera, whilst the other partner offers nothing financially, but takes care of the home in terms of improvements, painting, renovation etcetera. After a number of years, they decide to separate. It is probable that the latter partner will not be entitled to any beneficial interest at all. If this is so many will argue that the law needs to be changed as it fails to recognise the patner’s ‘rights’ and does not reflect the expectations of modern day society.

Those involved in disputes of this kind may be a married couple, a cohabiting couple (a male and a female or two males or two females) or two or more people who together simply decide to get a house to live. In the light of the uncertainty, the parties should always agree what their rights in the property will be in advance of a purchase and ensure that the conveyance or transfer reflects, in writing, the agreement. The key questions to be answered are in what circumstances can an interest in property be obtained? Does there have to be an express agreement as to how the beneficial interest is to be held or can an agreement be inferred from the conduct of the parties? What sort of behaviour will the courts accept as indicating an agreement? Can the assistance with improvements to the house constitute acceptable evidence of an agreement? Can indirect contributions to the purchase price of a property entitle the contributor to a share in the beneficial interest? Can the payment of the household bills and/or looking after the house and family, without any other ‘contribution’ be sufficient to entitle one to a share in the beneficial interest? Can the courts impose or discover the intention to create a trust where no such intention actually exists in order to do justice in a particular case? If it is decided that there is a trust under which the beneficial interest is held for both of the parties, what is the size of each of their shares? Once it is established that an interest exists, then it would need to be quantified. The position has been made clearer by the analysis of the law contained in the judgement of Lord Bridge in Lloyd’s Bank v. Rosset [1990] 1 All ER 1111. He laid down the ground rules for establishing a beneficial interest in property standing in the name of another.

In Gissing v. Gissing [1970] 2 All ER 780, the court stated that one way in which a beneficial interest could be found, apart from under an express agreement, is if there is evidence of ‘a common intention’ that the interest should exist. A general criticism of this contention is that it ignores the realities of most relationships. What the courts really seem to be doing, particularly in the case of the inferred agreement is to look back at the way the parties have behaved and then discover an agreement as to ownership which in reality was never made because the parties never had the issue of ownership in their minds. However, it is submitted that in the light of a legal battle as to interests in the property the courts have to resort to equity and make sense of the situation applying the law as best as it can bearing in mind a most often difficult situation. It is my submission that the way that law has dealt with this area is admirable albeit with gradual progression.

Making minor improvements to the family home will not be sufficient on its own to entitle the person responsible to a share of the beneficial interest: Pettitt v Pettitt [1969] 2 All ER 385. It is submitted that the law has adequately dealt with this area of law. Every case is considered individually on its merits.

BIBLIOGRAPHY

Barton J L, ‘Trusts and Convenants’ (1975) 91 LQR 236

Edwards R, Stockwell N., ‘Trusts and Equity’, Financial Times Pitman Publishing, 4^th Edition

Hanbury and Martin, ‘Modern Equity’, 16^th Edition, Oxford University Press

Watkin T.J, ‘Doubts and Certainties’, (1979) 8 AALR 123

Watt G, ‘Law of Trusts’, Blackstone Press 3^rd edition 2001

WORD COUNT: 2,505 WORDS

Footnotes

^[1] Re Young (1951)

^[2] Re Snowden [1979] All ER 172

^[3] At page 282