Secret Trust: Rationale Behind the Secret Trust - Essay Example

Secret Trust Rationale behind the Secret Trust 1 Introduction “He is the beneficiary of a generous trust set up by his father” his condition or obligation of one to whom anything is confided; responsible charge or office.” We can summarize the term trust in this manner. The trust property is something held by one party for the benefit of another and the first party is called as the trustee and second party is the beneficiary. The main intention behind the creation of trust is that the devisee or grantee shall convey it, or dispose of the profits, at the will, or for the benefit, of another; an estate held for the use of another; a confidence respecting property reposed in one person, who is termed the trustee, for the benefit of another, who is called the cestui que trust. Law of equity and trust confers the provision regarding the trust. It laid down several duties and responsibilities for the trustees. As said before, generally we can define the a trust as a capacity by which a person can transfer title of the specific property to another who agrees to hold or manage it for the benefit of a third person. But when a person transfers his property to another person by way of gift or any other manner and it is implied that the same is to be kept as the trust on behalf of the beneficiary, then what will be the status of such property. Law of trust dealt this, with the provision of secret trust. Whenever we analyze the scope of secret trust, the importance of scope of implied trust can not be excluded. Any description of trust includes an implied resulting or constructive trust and a bare trust. (1) (Sub-section (1) (a), Trust of land and Appointment of trustees Act 1996) an implied trust is based on the presumed intention of the parties at the time the property is acquired by the resulting trustee. That is the point at which the contributors beneficial interests crystallize. The beneficial shares are unaffected by subsequent conduct. This scope of implied trust has been rightly explained in ------------------------------------------------------------------------------------------------------------ 1. Trust of land and Appointment of trustees Act 1996, 2 in Cowcher v Cowcher (2).In the context of above, We shall examine the scope and rationale behind the provision of secret law under law of trust. Scope of secret trust A secret trust is an undercover arrangement between a testator and a trustee which operates outside the terms of the will. Equity enforces the settler’s true intentions to benefit a third party even though this is contrary to the provisions of the Wills Act 1837, which was itself based on long-standing principles of the old Statute of Fraud 1677. Until 1677, there was no formality attached to the making of the will. Before the enactment of the 1677 statute any person could deceive in the name of bequest as it was made on behalf of him. But 1677 statute put an end to this fraud play by laid down the provision of importance of signature and writing at the time of making Will. It was extended to all assets under the section 9 of the Wills Act 1837. Will’s Act is an anti-fraud provision. It imposes series of formalities that has to be complied with so as to ensure the will of the testator is being genuine and not fake. E.g. forbidding any gift which is made in favor of the witnesses and their spouses s15 (WA 1837) stipulation of compulsory requirement of codicil amendment of will.( sec.20,WA 1837) A secret trust arises when a testator wishes, for whatever reason, to transfer the benefit of property to a person without specifying that person as a legatee under his will. In consequence, an intimate is asked to act as trustee for this secret arrangement under which the confidant ostensibly receives a gift under the will which he is then expected to hold on trust for that third person. In these circumstances, equity will enforce a trust in favor of that intended beneficiary in spite of the fact that it breaches the Wills Act. The common reason of setting up secret trust is to avoid publicity, as wills are public ------------------------------------------------------------------------------------------------------------ 2. Cowcher v Cowcher [1972] 1 WLR 425 (CA) 3 documents, and to produce an ability to change minds without the need for a codicil. The common reason of setting up secret trust is to avoid publicity, as wills are public documents, and to produce an ability to change minds without the need for a codicil. Being an exception of sec.9, it signifies that informal evidence can be adduced to prove the declaration of the trust and thereby give effect to the trust even though it does not comply with the formalities. Here the question arises regarding the justification for admitting the ‘unreliable’ evidence by the court.(3)( Dudington.J,2006) In this regard in cases like Rochefoucauld v Boustead,(4) the court by applying the maxim of ‘equity will not permit a statute to be used as an instrument of fraud’, has taken the view that it would be a fraud on the part of the secret trustee to rely on the absence of statutory formalities in order to deny the trust and keep the property for himself which he well knew that the testator did not intend him to enjoy beneficially: A secret trust is one which does not indicate on the instrument which creates the trust, either that it is a trust at all – as in the case of a fully secret trust – or it does not indicate the terms of the trust – as in a half secret trust. Here the actual nature of the trust is unclear. It is in some respects an express trust because clearly the settler intends to keep the trust secret either wholly or partially. However it seems to operate outside certain formalities – in particular legislation relating to wills – which suggests that it is an implied trust. Types of Secret Trust Since secret trusts cannot be arised inter vivos, they are usually testamentary trusts although in principle they could also arise where an heir takes under the rules of intestate succession. One of the prominent features of trust is, it can be raised from either trust deed/covenant as said before or by the Will, i.e. a testamentary trust is a trust created by a Will or a codicil to a Will. A testament is a Will. ---------------------------------------------------------------------------------------------------------3.John dudington, Essentials of Equity and Trusts Law, 2006, Ch.8, Publ.by Pearson books ISBN13: 9780582894068 4. Rochefoucauld v Boustead 1897 1 ch 196 4 A testamentary trust is a fully secret trust is where a testator leaves property absolutely to a legatee under his or her will. There is no evidence of the trust on the face of the will. The secret trust arises only because the testator has impressed the property and the donee with the trust. The donee is conscience bound to give effect to the trust because the testator has indicated the trust to him or her before death. The donee therefore knows that he or she does not take the property absolutely under the will but only as a trustee. (Macdonald, eJTR 2006) In a fully secret trust, the will of a testator will not mention whatsoever of a trust. However, the testator will have declared that a legatee who under the will takes absolutely, is in fact a trustee and is to hold on trust for a third person. Neither the existence nor the terms of the trust are disclosed in the will. However, the existence and terms of the trust must be communicated to the trustee prior to the testators death. The scope of fully secret trust rightly explained in the case Ottoway v Norman (5) as the intended trustee must accept the office of trusteeship and acquiesce to the terms of the trust. The same will have occurred in a half-secret trust; the only difference being that the will discloses the existence of the trust though not the objects. For a valid half secret trust the existence and terms of the trust must be communicated to the trustee before the creation of the will. The scope of half secret trust is given in the case Blackwell v Blackwell (6) as the intended trustee must have accepted office and acquiese to the terms of the trust.(7)( Costigan ,P.G,1915) -------------------------------------------------------------------------------------------------------- 5. Ottoway v Norman 1972 ch 698 6. Blackwell v Blackwell [1929] AC 318 7. George P. Costigan, Jr, Constructive Trusts Based on Promises Made to Secure Bequests, Devises, or Intestate Succession, Harvard Law Review, Vol. 28, No. 4 (Feb., 1915), pp. 366-393 5 Requirements for a secret trust If the trust is secret then there must be some evidence of it to be enforceable. This evidence may be oral or written but must – as with express trusts – clearly indicate an intention to create a trust. But here it is to be noted that an expression of a mere hope or “predatory” words is not sufficient. In the case of Re Snowden, the deceased left property to her brother in the hope that he would do with it what he thought she would have wanted. And it was held that it is not to be sufficient to give a clear indication of intention to set up a trust. Scope of communication (9) Besides evidence of intention there must be communication of the trust to the trustee – otherwise his or her conscience will not be bound. Thus the legatee must know before or at the time of receiving the property that he takes it as a trustee. The rules on communication are different depending on whether it is a fully secret or half secret trust. In the case of a fully secret trust it is sufficient if communication takes place sometime before the property vests in the trustees. In Blackwell v Blackwell (10,) it was held that the case of a half-secret trust, the communication must occur before or at the same time as the will is made. It was indicated obiter in Blackwell that a testator cannot reserve to himself to make future un witnessed dispositions of his property – i.e. not in compliance with the legislation governing wills. However the testator does just this in a fully secret trust. And it is to be that any changes to the trust or its terms must also be communicated to the trustee. In Secret Trust the trustee must also agree either expressly or implicitly .The silence may be sufficient to hold as trustee. In the case of Wallgrave v Tebbs (11) there had been no previous communication to Mr Martin and Mr Tebbs that ------------------------------------------------------------------------------------------------------------ 9. Michael Haley, Lara Mc Murtry Equity and Trusts, ch.5 Publisher: Sweet & Maxwell Publication Date: 01/09/2006 ISBN: 9780421599208 10. ibid 6 11. Wallgrave v Tebbs (1855) 2 K & J 313 6 they were to hold as trustees. The issue emerged only after the testator’s death. It was held that if the donee has been told that he is to hold on trust but not the terms then he holds as a trustee but on resulting trust for the estate. Rationale behind the secret trust If a testator makes a gift of property to T without saying that he is to hold it on trust, and either before or after making his will tells T that he wishes him to hold the property on trust for P, T will be compelled to carry out the trust if T either expressly promises that he will do so or by silence implies it. The purpose of the section 9 of the Wills Act 1837 is, we can say, to prevent fraud. A testator may want to avoid the formality requirements, for example, because he wishes the identity of the beneficiary to remain secret. The rationale behind allowing the doctrine is to prevent the trustee that the property has been bequeathed to committing a fraud by keeping the property or dealing with it in matter that is not in equivalence with the wishes of the testator. A secret trust is a trust implied by law because here the equity will not allow the legatee under the will to take beneficially because his or her conscience is bound. This is an application of the maxim “Equity will not allow a statute (here the Wills Act) to be used as a cloak for fraud”. One of the reasons for recognizing the secret trust may be historical in as much as executors of wills were originally permitted to retain a certain portion of the estate. Another argument is that secret trusts – at least today – operate outside the Wills Act entirely. The will operates separately from the trust. This has the advantage that the standard of proof required to establish the secret trust is the ordinary civil standard of proof and not the higher standard of proof historically required to establish fraud. (12) (M L R Association, 1912) by supporting this theory, in the case ------------------------------------------------------------------------------------------------------------ 12. Michigan Law Review Association, Wills: Validity: Fraud, Michigan Law Review, Vol. 10, No. 3 (Jan., 1912), pp. 250-251 doi:10.2307/1274440 7 Re Young (13), it was held that a witness to a will may take beneficially under a secret trust – which would be impossible if the Wills Act was to apply. Similarly in the case of Re Gardner (14), the intended beneficiary had died before the testator. Under the normal rules relating to testate succession if a legatee or heir deceased before the testator the gift will lapse. Here however it did not because the beneficial interest was held to have vested at the time the trust was created, which was before the beneficiary’s death. It is to be remembered that if the secret trust is not an express trust then it avoids some of the formalities which express trusts have to comply with especially with reference to land. A secret or half secret trust enables the settler to keep secret certain beneficiaries. Whereas the will is a public document, the trust is not. Such secret beneficiaries may be illegitimate children who are ineligible to inherit under the rules of inheritance, a mistress or lover or second wife whom the settler did not want his family to find out about, or a recipient of his charity who he did not wish to advertise. A secret trust might also be used to avoid restrictions on the disposition of certain property to certain people. (15) (Dudington.J, 2006) The scope of secret trust has always been remarked as it involves a wide departure from the policy which induced the Legislature to pass the Statute of Frauds. But this departure is justified by equity’s jurisdiction as the ‘court of conscience.’ The earliest judicial explanation for the existence of secret trust doctrine is that it exists to prevent fraud by the secret trustee; and this idea is explained most fully by the House of Lords in McCormick v Grogan (16) as it is only in clear cases of fraud that this doctrine has been applied - cases in which the Court has been persuaded that there has been a fraudulent inducement held out on the part of the apparent beneficiary in order to lead the testator to ----------------------------------------------------------------------------------------------------------- 13. Re Young [1950] 2 All ER 1245 14. Re Gardner [1923] 2 Ch 230(14 15. ibid 3 16. McCormick v Grogan 1869 LR 4 HL 82 8 confide to him the duty which he so undertook to perform. Moreover in fully-secret trusts, unless evidence of the trust is admitted contrary to the provisions of the wills act, the intended trustee will be able to take the property beneficially and will profit from his own misconduct, so this justification for the enforcement of these trusts on this basis does seem valid. Modern concept on rationale behind the secret trust (17) Many modern commentators counter the contention that the courts, in upholding secret trusts, are deviating from this policy, by arguing that secret trusts operate outside of this act. The Wills Act, as we have seen, applies to testamentary dispositions, and some have argued that it does not apply to secret trusts, for these are in fact inter vivos trusts. The modern concept postulates two distinct stages in the creation of a valid secret trust; with the trust being created by the communication of the trust to the proposed trustee and his acceptance of it, but the trust remains incompletely constituted until the property is vested in the trustee upon the death of the testator. The trust is enforced not under the will, but because of the previous agreement. Judicial support for this modern theory that secret trusts operate ‘en dehors’ of the will can, and has, been found. In Blackwell v Blackwell,(18) it was said that there can not be a statute-law relating to the form of a valid will is concerned at all and so the trusts are governed not by the rules of probate but by the rules of the law of trusts. This notion had already been referred to in the cases like Cullen v Attorney-General (19) and Re Snowden.(20) With regard of the Dehor theory, the above case laws enumerates that 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. ----------------------------------------------------------------------------------------------------------- 17. ibid 3, 15 18. ibid 6, 10 19. Cullen v Attorney-General 1999 115 LQR 631 20. Re Snowden 1976 AII ER 172 9 The decision in Re Young,(21) further elaborated the scope of secret trust with the evaluation that a beneficial interest under a secret trust could be upheld even though the beneficiary was a witness to that will, was upheld on the ground that gifts under secret trusts were not taken under wills. It was held in this case when considering sec.15 Wills Act 1837 with reference to a legatee who has witness the will, it might be that the beneficiary is actually taking as trustee under a secret trust and not beneficially. The dehor theory (22) also invited some criticism in the view of not justifying the fully secret trust and half secret trust. If the word ‘will’ is interpreted narrowly, it is correct because in such case a will is just a signed witnessed written document and the trust must arise outside the will. However, sec. 9 does not only mean written document. As per sec.9 of Will’s Act we can read the provision as ‘no written document shall be valid unless it is a written document’. Moreover if Will has a broader meaning – it is the intention of testator as to how to deal with his property after his death. Since secret trust is testamentary dispositions, it is also a part of the testator’s will. Sec.9 is merely an evidential provision which stipulates what evidence can be admitted to prove the intention on testator’s death, and signed witnessed writing is the required evidence to prove the validity of the testator’s will. Doctrine of Incorporation by Reference (23) Even though the doctrine of Incorporation by reference in the secret trust is criticized as it applies to written document, whereas oral evidence will be admitted in case of secret trust, one may argue IR is another limb which is able to justify secret trust. It is provided that the document which is referred to is written, in existence at the date of the will, and the will also refer to it . ------------------------------------------------------------------------------------------------------------ 21. Re Young 1950 2 ALL ER 1245 22. ibid 3, 15, 17 23. Michigan Law Review Association, Wills: Doctrine of Incorporation by Reference, Michigan Law Review, Vol. 5, No. 8 (Jun., 1907), pp. 717-718, doi: 10.2307/1271762 10 When secret trust are considered as express trusts, they should be subject to sec. 53(1)(b) of the LPA1925. That is, the trust should be declared in writing. However, oral instructions to create a fully secret trust of land have been enforced by the court. If secret and half-secret trusts genuinely take effect `outside the will, then it ought to be unobjectionable for a witness to take a benefit under the secret trust. However, such an outcome is highly objectionable under principles of probate law. There is a question arises regarding the secret trust whether the trustee of a secret or half-secret trust can be a beneficiary? Although logically this is an unobjectionable, in Re Rees (MLR Association, 1907) it has been decided to the contrary. There is no particular logical reason for this, except that if a professional trustee were to benefit under a half-secret trust, he would have to prove the terms of the trust. The opportunity for fraud would be considerable. The problem does not arise in ordinary testamentary trusts, because the terms of the trust are public. From the above discussions it can be summarized that even though the scope of secret trust revolve around a bundle of criticisms, the law of trust always rendered a positive view on the scope and rationale behind the secret trust. Conclusion Secret and half-secret trusts are invented by English. They have come into existence on the slender of grounds, and been nurtured over the years because nobody seems to have the heart to put them out as it is deep rooted in the field of trust. That they continue to exist reflects the fact that English people prefer compromise to radical change. On balance these trusts probably do more harm than good, and their very existence causes all kinds of anomalies which the courts have chosen to ignore. ****************************** ------------------------------------------------------------------------------------------------------------ Bibliography Books and Authors 1. Costigan, George P., Jr, Constructive Trusts Based on Promises Made to Secure Bequests, Devises, or Intestate Succession, (Feb., 1915) Harvard Law Review, Vol. 28, No. 4, pp. 366-393 2. Dudington, John, Essentials of Equity and Trusts Law, (2006), Ch.8, Publ.by Pearson books, ISBN13: 9780582894068 3. Goldworth, J, The Law of Trusts and Equitable Obligations, 4th edn Oxford University Press, Oxford ISBN-10: 0-19-928535-7; ISBN-13: 978-0-19-928535-8 PP 4. Haley, Michael; Mc Murtry, Lara, Equity and Trusts, (2006) ch.5 Publ. Sweet & Maxwell Publication Date: 01/09/2006 ISBN: 9780421599208 5. Michigan Law Review Association Wills: Doctrine of Incorporation by Reference, (Jun., 1907), Michigan Law Review, Vol. 5, No. 8, pp. 717-718, 6. Penner J. E, the Law of Trusts, (2006), Fifth Edition, ISBN-13: 978-0-19-928843-4, 31 August 2006 7. Wyndham .E, White Secret Trusts: Admissibility of Evidence, (Mar., 1939),The Modern Law Review, Vol. 2, No. 4, pp. 319-321, Blackwell Publishing Statutes 8. Law of property Act 1925 9. Trust of land and Appointment of trustees Act 1996 10. Trustee Act 2000 11. Wills Act 1837, Journals and Publications 12. Macdonald, A eJTR (2006) Testamentary Trusts: Not Just “Another” Trust Table of Cases 1. Blackwell v Blackwell [1929] AC 318 2. Cowcher v Cowcher [1972] 1 WLR 425 (CA) 3. Cullen v Attorney-General 1999 115 LQR 631 4. Re Gardner [1923] 2 Ch 230(14 5. Re Snowden 1976 AII ER 172 6. Re Young [1950] 2 All ER 1245 7. Rochefoucauld v Boustead 1897 1 ch 196 8. McCormick v Grogan 1869 LR 4 HL 82 9. Ottoway v Norman 1972 ch 698 10. Wallgrave v Tebbs (1855) 2 K & J 313 Read More