Equity Revision, Secret Trusts PDF

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Secret Trusts...

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SECRET TRUSTS 

Introduce the topic area – outline the doctrine of secret trusts and the underlying problems in their enforcement. courts do not want fraud.

Fully secret trusts Arise where on the face of the will no trust is disclosed and all that appears is an absolute gift/legacy to secret trustee, posing as the beneficiary. There is no indication at all that there is an arrangement outside the will, and reading the will is impossible to distinguish who the secret beneficiaries are. Re Snowden 1979 testators are advised to take practical precautions and make notes to be used as evidence (although not a legal requirement) as otherwise a trustee could take property absolutely, which frustrates a testator’s intentions and would be unconscionable to deny the beneficiaries their equitable interests. To create a valid full secret trust, there must be intention to create a trust, communication of intention from testator to trustee, and acceptance by the trustee. (Ottoway v Norman 1972) Intention- Testator must intend to impose a trust obligation not moral obligation. (McCormick v Grogan 1869) If legal, trust exists. If moral, gift exists. Re Snowden 1979 unsure how to leave property to his brother, will said ‘he shall know what to do with it’ (this is a moral obligation) but did not tell him and died. Per Megarry VC if obligation terms are uncertain, the more indefinite a legal obligation exists, rather a moral one. This is measured on the balance of probabilities. Communication- . FST communication to the secret trustee of the existence of the trust (Wallgrave v Tebbs 1855) and its terms (Re Boyes 1884) must take place any time before the testator’s death or else trustee may take absolutely. The intention and terms of the secret trust can be communicated either in writing or oral (Re Boyes 1884 testator communicated to solicitor he was going to leave property to him and said “I’ll let you know who to pass that onto”. Solicitor said ok. Terms were not communicated in his lifetime, but separate written documentation was found after he died saying he wanted the secret beneficiary to be his mistress. High Court said no valid secret trust as terms not communicated before death). If the trust is not communicated to the trustee in the testator’s lifetime, the trust fails, and the would-be trustee could take absolutely (which is why risky). Sealed envelopes- Communication by sealed envelope is acceptable, BUT the recipient must be aware of the trust, terms of it, and is willing to accept on this basis. It is an example of constructive communication. Use for both FST and HST. Re Keen 1937 communication of the terms of the trust might take place after the testator’s death if the trustee knew in general terms that he was expected to act as a trustee of the property ( per Lord Wright). A secret trustee must know in general terms what is accepted of them. CRITIQUE do you really know in general terms what is inside? No idea! Could be anything. Questionable ruling. Equity too flexible and gone too far. Can be used in modern terms e.g. email. Acceptance- the secret trustee must agree, usually expressly, but silence can be sufficient too as it is presumed. Moss v Cooper 1861. If you do not want to be a trustee, you must say no. Half secret trusts Arise where the existence of the trust appears on the face of the will, but it is not specified by the testator what the intended trusts are. Less risky, as there is evidence of outside the will agreements therefore the secret trustee can never keep the property as the named beneficiary in the will. If an HST fails, it will result back to the testator’s estate.

To create a valid half secret trust, there must be intention to create a trust, communication of intention and terms from testator to trustee, and acquiescence by the trustee. Blackwell v Blackwell 1929 Intention- refer to FST Communication- must be before or at the time of the execution of the will during the testator’s lifetime. (FST is anytime up until the death of the testator). The intention and terms must have already been communicated to the secret trustee and they accept before the will. “A testator cannot reserve to himself a power of making future unwitnessed dispositions” per Lord Sumner in Blackwell v Blackwell 1929. This avoids testators changing their mind, however in FST they can. Where communication occurs after the will, the trust will fail and the legatee will hold on resulting trust for the residuary estate - Re Keen 1937: before making the will, the testator handed a sealed envelope to one of the trustees containing the names of the proposed secret beneficiaries with instructions not to open the envelope until after his death. His will left £10,000 to his trustees and it mentioned it will be disposed of “as may be notified by him during his lifetime” to the trustees. The trustee opened the envelope after Mr Keen’s death. Farwell J held that he had failed to notify the trustees of the intended beneficiary of the trust during his lifetime, as he had promised to do in the clause in his will. The communication of the terms of the trust was inconsistent with the provisions outlined in the will. Moreover, to make future unattested dispositions is contrary to the Wills Act 1837. Moss v Cooper 1861 communication of both the intention and the terms of the trust requires that the trustee must be able to know with sufficient certainty the terms of the trust before the death of the testator. Re Bateman’s WT 1970 followed the above. Testator directed his trustees to pay the income out of part of his property “to such persons as shall be stated by me in a sealed letter to my trustees”. The words “shall be” indicated the possibility of later dispositions and so the trust failed as it allowed for future communication. Acquiescence- refer to FST Problems that can arise Secret trustees are not always obliged to pass on the property immediately to the secret beneficiary. They can use the property in their lifetime ( Re Gardner No1 1920). After their own death, the secret trustee then may be obligated to make provisions for the secret beneficiary and pass it on. If not, the secret beneficiary can make a successful claim for having an equitable interest in the property (Ottoway v Norman 1972) Can the secret trustee take a benefit?- Re Rees 1950 the position for HST is that secret trustees cannot take a benefit by introducing extrinsic evidence for this would contradict the testators will and therefore the trustee hold the property on a resulting trust for the testator’s estate. Express trusts cannot take benefit for yourself. Re Tyler 1967 however in FST there is no objection for the secret trustee to produce evidence that they were intended to benefit in accordance with the intention of the testator as there is technically no contradiction of the will. There is nothing on face of will that indicated a trust arrangement outside the will, so courts said it is fine to use extrinsic evidence to take a benefit absolutely. Co-ownership- HSTs can never be communicated after the will so there can never be any discrepancy for co-ownership. The below are on FST. Joint Tenants- (no words of severance exist in will eg ‘equally’) Re Stead 1900 both trustees are bound where the trust was communicated to one trustee before to the execution of the will. However, if the trust was communicated to only one of the trustees after the execution of the will, only he (the promisor) is bound. Argued to be arbitrary as it depends on the timing of communication before or after will excecution. This prevents fraud on the testator as there

is the possibility of the testator being unduly influence before the excecution of the will in favour of the only communicated trustee, as the other trustee would not be fixed. Instead, they are both bound which prevents fraudlent acts. However if after the will, there is no possibility of inducement as the testator has already decided before the conversation happens. Byrne Perrins ‘Can you keep half a secret?’ 1972 has argued that rather than have an arbitrary hard and fast rule, the distinction should be on the facts of any individual case as to whether the testator was genuinely induced to leave it to both joint tenants. Tenants-In-Common- (words of severance exist in will eg ‘take equally’). The two trustees have separate interests, not jointly. It does not matter when the communication takes place, provided that the trust is communicated and accepted by each co-owner individually The secret beneficiary pre-deceases the testator- The doctrine of lapse would apply and the secret beneficiary would die without an interest, as they only have mere spes or hope of enjoying the property until the testator has died as the testator can change their mind. The doctrine of lapse is applied where the beneficiary dies before the gift is made, so the gift lapses and results to the settlor’s estate to be distributed under the Intestacy Rules. Alternative authority in Re Gardner No2 1923 Romer J – one niece pre-deceased the testatrix and her estate brought a claim arguing she had a beneficial interest, not mere hope of one, and therefore her interest existed to pass. ARGUED Mohamed Ramjohn ‘Equity and Trusts’ 2015 must be wrongly decided, as the trust did not exist when the beneficiary died. It is an ‘absurd decision’ Mohamed Ramjohn ‘Unlocking Trusts’ 2013. UNLIKELY TO BE FOLLOWED AGAIN. Evidence of the au dehors theory in practice here with secret trusts operating outside the testators will and independent from the Wills Act 1837. By passing on the dead beneficiary’s interest, this result would have been impossible if the trust were governed by the Wills Act 1837. The secret trustee pre-deceases the testator- FST Re Maddock 1902 where the secret trustee predeceased the testator, the trust would fail, and the trustee’s interest would lapse and result back to the testator. Per Cozens-Hardy J in obiter, the ‘personal obligation’ that binds the trustee to the testator does not exist. HST Re Smirthwaite 1871 the maxim ‘equity will not allow a trust to fail for want of a trustee’ applies. The Courts can appoint a new trustee provided that the terms of the trust are ascertained/established. The trust will not lapse. Application of The Wills Act 1837 Section 15- Beneficiaries Section 15 Wills Act 1837 provides that a witness to a will cannot take a benefit, which prevents fraud. This problem arose in Re Young 1950, where a chauffeur was a witness to the will, and when it came about, he was also a secret beneficiary. Applying Section 15 should make the secret beneficiaries interest void. However, he could take a benefit under the secret trust. Dankwerts J said the Wills Act here is not an obstacle. The Courts showed judicial support for the au dehors theory here, arguing that secret trusts operate outside of the will and are not testamentary trusts, but rather express inter vivos therefore need not comply with the Wills Act. It did not matter that he was a witness. Application of The Wills Act 1837 Section 15- Trustees With HST, where the will makes it clear that the trustee is to take as a trustee (and so does not benefit personally), the secret trust will not fail. Cresswell v Cresswell 1868. The secret trustee is not taking the benefit as they are not keeping it for themselves, they will be passing it onto the secret beneficiary therefore it is fine. Again, this is outside the ambit of Section 15 and showing evidence of the au dehors theory.

Consequences of failure of secret trusts  The property is dealt with in one of two ways – The named legatee takes absolutely (Usually in FST as no indication on face of will that outside arrangement exists) • Walgrave v Tebbs (1855) – The named legatee would be required to hold the property on resulting trust for the testator’s residuary estate (Usually HST as face of will indicates trustee cannpt take absolutely) • Re Boyes (1884) Theories for enforcing secret trusts Fraud Theory (the traditional view)- The traditional view  “Equity will not allow a statute to be used as a cloak for fraud’” – Thynn v Thynn (1684) – McCormick v Grogan (1869) – Blackwell v Blackwell [1929] First key theory. – “Equity will not allow a statute to be used as an instrument for fraud’” – Early cases thynn, mccormick- stop secret trustee from keeping property themselves in FST as fixed with an equitable obligation. For them to say theyre on the will therefore im keeping it would be using the wills act as a statute to commit a fraudulent act. – Issue with this, is that it cannot apply to HST as no possibility for trustee to keep property themselves as on the face of the will it says that there is an alternative arrangement. Fraud Theory The fraud theory is based on the maxim: equity will not permit a statute to be used as an instrument of fraud. The operation of fraud theory aims to prevent any denial of trust based on unsatisfactory statutory formalities. [5] In this way prevents the intended trustee from keeping the property of the settlor for his own good while depriving that of the beneficiaries. This theory gained main support from the case Rouchefoucauld v Boustead [6] . Although the theory seems to be a fair justification for the operation of secret trust, it is not without flaw. Firstly, it would be difficult to attest the evidence brought about by the claimant. Secondly, the theory fails in half secret trust on the fact that trusteeship is identified in the will and there could be no benefit to the trustee even though the trust fails by the operation of resulting trust as suggested by Blackwell v Blackwell [7] . The rationale underpinning why secret trusts are enforced: Fraud vs the ‘dehors’ the will theories The cases thus far have shown a desire by testators to set up a trust by using a separate document to convey its terms to the trustees. Sometimes the testator might instead wish to communicate the terms of the trust to the trustees orally as opposed to in writing. But whether the communication is oral or written, the difficulty is the same: unless there is a written document, signed by the testator and duly witnessed by at least two witnesses, s 9 of the Wills Act 1837 will not have have been fulfilled. The prima facie conclusion from this is that any trust which is set out by the testator orally or in a document which does not comply with s 9 is that it cannot be valid. And yet, as has been shown in Ottaway v Norman, such trusts are valid. The reason why equity will recognise such a trust was first explained by the House of Lords in McCormick v Grogan.15 The facts concerned the will of Abraham Craig. He contracted cholera and, on his death-bed, sent for his friend, Mr Grogan, the defendant. He explained to Mr Grogan that he had left all of his property to him. Mr Grogan was to find his will in a desk with a letter with it. Mr Craig never asked for agreement from Mr Grogan to the letter or its contents. After Mr Craig’s death, Mr Grogan found the will and the letter. The letter contained a long list of friends and relatives to whom Mr Craig wanted his money to be left. It contained the following words towards the end: I do not wish you to act strictly as to the foregoing instructions, but leave it entirely to your own good judgment to do as you think I would if living, and as the parties are deserving, and as it is not my wish that you should say

anything about this document there cannot be any fault found with you by any of the parties should you not act in strict accordance with it. Mr Grogan made a number of payments to some of the individuals named in the letter. But he declined to make a payment to others, one of whom was the claimant in the case. James McCormick brought an action claiming that Mr Craig had established a trust in his letter and that, as such, Mr Grogan was obliged to pay him the £10 per year for the rest of his life that Mr Craig had awarded him. The Irish court of first instance declared that the letter did give rise to a trust binding on Mr Grogan. The Court of Appeal in Chancery in Ireland reversed that decision. Mr McCormick appealed to the House of Lords. The House of Lords held that there was no trust on the facts of the case. All Mr Craig had done was to leave a guide for Mr Grogan as to what he should do with the property. The very words used by Mr Craig, giving Mr Grogan freedom and discretion over the choice of the ultimate recipients of the property, showed that he was not imposing any form of obligation on Mr Grogan to distribute the property to particular individuals or a class of them. What is interesting, though, is that the House of Lords discussed the rationale underpin-ning secret trusts. Lord Westbury explained that a court of equity would enforce a secret trust due to the maxim that equity would not allow a statute to be used as an instrument of fraud. If a trustee denied that a trust existed simply because the testator had not complied with the requirements of s 9 of the Wills Act 1837, equity would intervene to recognise the trust.

On the issue of classification of whether ST are express or constructive, this does tie to the theories but only becomes pertinent when there is a secret trust of land because of the different formalities for express and constructive trusts when it comes to land. If you were to include a discussion of classification it would be in that context.

moreover it would allow the Wills Act 1837 to be used as a instrument of fraud

Instrument of fraud, wills act statutory provision if applied would not allow us to enforce secret trust. Secret trustee agrees to requests to act as a secret and pass on to secret beneficiary. Once dead prima facie transfer to tina what if she says I took property under will

therefore I keep it, the statue would be used as an instrument of fraud. Once she has accepted it would be unconscionable of her to keep it.

:a trust will fail if it allows for future

communication : a trust will fail if it allows for future communication

: a trust will fail if it allows for future communication...