The General Rule in Probate Law

Equity & Trusts

According to the general rule in Probate Law, a testator who wishes to leave property in a trust after his death must express his intention in a will. A secret trust arises when a testator wishes to leave property to a beneficiary who he does not wish to publicly name. He makes a will to leave the property as a gift to a named beneficiary but informs them of his wishes that they are to hold the property in question, on trust, for the unnamed beneficiary. Secret trusts tend to be associated with a will, although have been created upon intestacy where the settlor has made arrangement with an intestate successor. Doctrinal difficulties regarding the recognition of secret trusts have arisen because of their apparent contravention of the requirements of the Wills Act 1837, s 9. This requires all testamentary dispositions to be in writing and signed by the testator and witnesses.

There are two types of secret trusts: fully secret and half-secret; each has to satisfy a different set of rules to be valid. A fully secret trust is where there is no mention in the will of the trust and its terms. Generally in these types of trusts oral evidence of agreement between testator and trustee is adequate but intention of the testator must have been to create such a trust. This intention should have been communicated by the testator to the trustee; and the trustee should have accepted expressly or impliedly. The validity of fully secret trusts, as long established, was accepted (obiter) in McCormick v Grogan by the House of Lords. A half-secret trust is where its existence appears in a formal will but its terms do not. The testator must have intended to create this type of trust; the trust itself and its terms must have been communicated to the proposed trustee prior to the execution of the will, the intended trustee should have accepted office of trustee and terms of the trust.

I will review and analyse how secret trusts operate and whether their justifications are sufficient by examining the different theories of secret trusts and how they have been applied by the judges I will also look at how secret trusts are classified and their criticisms.

The operation of secret trusts does not comply with the Wills Act 1837; s 9, as applied via s1 of the Act to “any…testamentary disposition” Testamentary dispositions are property transferred, by the legal owner, by means of a will. There are three ways how the breach of a statute could be justified. The first is that secret trusts are an application of the maxim that equity will not allow a statute to be used as an instrument of fraud. The second is that secret trusts are express trusts arising outside the will therefore do not have to comply with s 9 of the Wills Act 1837, the maxim that equity fastens a trust upon his [the trustee’s] conscience applies. The third is that secret trusts operate as constructive trusts which arise in circumstances where there has been some kind of ‘wrong’, the courts will impose such a trust on the holder of legal title.

To analyse these justifications in more detail, we have to look at the theoretical basis of secret trusts. There are three theories associated with the doctrine of secret trusts. The first is the traditional view – the Fraud theory, this underpinned the initial cases of secret trusts. By applying the fraud maxim, it would be a fraud on the part of the secret trustee to rely on there not being any statutory formalities in order to ignore the trust and keep the property for himself which he clearly knew the testator did not intend it to be for him to beneficially enjoy. This theory applies more to fully secret trusts, since in a half-secret trust the fact of the trust is plain from the will. Critchley states “…on the face of the will in a half-secret trust ….there is an express trust with no terms. This must fail for uncertainty and from the construction of the document “ It might be more suitable to impose a resulting trust, so that the trustee holds the property for the testator’s estate; although applying the maxim equity looks at intent not form, the testator probably didn’t intend for the people who stand to gain from such a trust to benefit.

In McCormick v Grogan, Lord Westbury stated “… being a jurisdiction founded on personal fraud, it is incumbent on the Court to see that a fraud, a malus animus, is proved by the clearest and most indisputable evidence”. If a court utilises the fraud theory and finds that there was a secret trust then a finding of fraud requires a higher standard of proof; that of Criminal law – beyond reasonable doubt. Whereas in Re Snowden Megarry V. C. held “that in order to establish a secret trust where no question of fraud arises, the standard of proof is the ordinary civil standard…”

In Blackwell v Blackwell, Lord Viscount Sumner described as “[seeming] to be a perfectly normal exercise of general equitable jurisdiction” whereby the “Court of Conscience” does not allow the secret trustee to retain legally owned property. The court of conscience to which he refers is equity; and he explained the equitable obligation of the secret trustee as acting on his conscience therefore compelling the trustee to perform the testator’s intentions. The fraud theory is integral to the argument of this binding obligation whereby if the testator retains the property himself the fraud is committed.

Whilst Lord Viscount Sumner’s theory may amount to sufficient justification for the existence of the fully secret trust it is a different matter regarding the half-secret trust. In the instance of half-secret trusts, Lord Viscount Sumner’s consideration of the obligation binding in equity is still applicable but the prevention of fraud aspect of the theory is no longer relevant. There is less opportunity for fraud because in the half-secret trust it is clear from the will that the legatee holds on trust but it is not stated for whom. Consequently, if there can be no fraud it is unclear how they arise because the fraud theory cannot explain their existence.

The second theory is called the “Dehors” (French for outside) the will Theory which is the modern view. This is the view that secret trusts arise outside the will and consequently do not have to comply with section 9 of the Wills Act 1837. As stated in Blackwell v Blackwell with reference to half-secret trusts and subsequently reiterated in Re Snowden. Sir Robert Megarry V.C. acknowledged that with regards to the doctrine of secret trusts, fraud was an adequate historical explanation and the doctrine had evolved around preventing fraud. Nevertheless, he made it clear that secret trusts could be ascertained in cases where there was no fraud, and the basis of a secret trust was that it operated outside the will, but attached a trust onto the property in the recipient’s hands. In Re Gardner, the beneficiary from under a half-secret trust predeceased the testatrix, under normal circumstances this gift would have lapsed but held that it passed on to her personal representatives; this decision was criticised. Since the fully secret trust does not operate within the will, the beneficiary of the secret trust could witness the will; this was the case in Re Young. This could not happen if the trust operated within the will because according to s 15 of the Wills Act 1837 a witness cannot be a beneficiary. The major advantage to this theory is that there is no contravention of the Wills Act 1837 since these trusts are not concerned with the will.

Despite this, s 1 of the Act refers to “any testamentary disposition”, so to get around this issue the secret trusts are viewed as inter vivos trusts. In Cullen v Attorney-General for Ireland, Lord Westbury pointed out “…where there is a secret trust …the title of the party claiming under the secret trust…is a title dehors the will, which cannot be correctly termed testamentary.” The dehors the will theory has been criticised since if the secret trust is operating outside the will it must be operating within the scope of trust law and for that reason should comply with the rules and formalities of trust law. Yet these trusts also contravene trust law because they bind property which is not yet acquired. Although if the trust is deemed to be an inter vivos trust; whereby it is created by communication from testator to the secret trustee with due acquiescence and is only completely constituted when the testator dies and the property vests in the secret trustee. This way there is compliance with the law of trusts because once the secret trustee is in actual possession of the property it is no longer just an expectation.

The third theory is that the doctrine of secret trusts is part of the law on Incorporation by Reference, which is derived from Probate Law. This states that a document can be incorporated into a will by reference, but only if the document exists at the time the will is executed; this prevents testators creating unattested codicils (amendments to the will). Matthew’s view is that incorporation by reference is the correct basis of half-secret trusts. Although, it has to be said that the reference has to be a written document, whereas it is usually oral testimony that is utilised in the case of secret trusts, which does not make any sense as to why this theory would be seen as relevant. However, Matthews argues that this could be an explanation of the discrepancy surrounding the admissibility of evidence as to the time of the terms of trust communication.

In more modern times, there have been endeavours to try to link the fraud theory with the dehors the will theory, to create one logical, combined principle. Hodge clearly outlined this; saying that if a secret trustee goes back on his promise it would not only be fraud on the testator but also on the secret trust beneficiaries.

Many difficulties arise in connection with the proper classification of secret trusts. It has not yet been conclusively determined whether they are express trusts or constructive trusts. This has an impact on what formalities should apply to the creation of such trusts, in particular the application of s 53(1)(b) of the Law of Property Act 1925 where the trust property is land. In Ottaway v Norman a fully secret trust of land did not comply with the statutory requirements which provide there has to be evidence in writing; it was classified as a constructive trust and not an express trust therefore it was held the trust was valid. If the trust would have been an express one, it would have failed for the lack of written evidence. Therefore, this means that fully secret trusts may in fact be implied trusts, namely constructive, which are found to be in existence by the courts rather than expressly created.

With regards to Lord Danckwerts’ statement, it only provides some justification for the operation of secret trusts; although in my opinion the secret trust does not wholly operate outside the Wills Act. Both the fraud theory and the dehors the will theory are not flawless. Although the fraud theory can resolve the fully secret trust, it fails to explain how it applies in the half-secret trust. It also fails to communicate put across why unreliable evidence is admitted. Nevertheless, the dehors theory is no better as it fails to explain both fully secret and half-secret trusts. In Blackwell v Blackwell their Lordships’ opinion was equally divided in the question whether the fraud theory or the dehors theory should be applied. For these reasons I would tend to agree with David Hodge that the combination of the two theories would work better at providing adequate justification for the operation of secret trusts.