Submitted by: Charlotte Wood
“[I]n relation to secret trusts, it is said that to allow the defendant to claim beneficial rights in property which they knew was intended to be held for the benefit of third parties not mentioned in the will would be a fraud. Therefore, secret trusts exist to prevent that fraud.”
(Alastair Hudson, 2017)
With reference to relevant law, critically evaluate this perspective.
Alastair Hudson argues that “secret trusts exist to prevent fraud”[1], whilst to some extent this is the case, it is a topic of discussion that has significant commentary by numerous academics, demonstrating how the existence of the secret trust has not been enough to prevent fraud in its entirety; a view which best reflects my own. The two main theories being examined when forming an opinion on this area of law is the fraud theory and the dehors the will theory, both of which are interlinked but are of the utmost importance when considering whether the secret trust has succeeded in preventing “the defendant to claim beneficial rights in property which they knew was intended to be held for the benefit of third parties”[2]. It is also important to consider the nature of the secret trust in the 21st century and whether its functions are applicable in a modern day setting.
Secret trusts are testamentary, as first established as a means to bequest assets to women and to leave land on trust for a charity as the statutes at the time prevented this from being allowed. In Katherine, Duchess of Suffolk v Herenden[3], the court held that this was a valid trust and that Herenden was bound as a trustee to hold the estate on trust for the Duchess of Sussex. This case first established the secret trust as if the statute was enforced, it would mean that Henderson would have been allowed to commit fraud and avoid the obligations which became binding as soon as he made the promise to be a trustee. This case was affirmed in McCormick v Grogan[4] where Lord Hatherley LC held that the secret trustee ‘apparently may be held in law to take the whole interest’ with the obligation to hold it in trust ‘fastened upon his conscience.’ Therefore confirming that the function of secret trusts is to prevent the trustee from defrauding the testator. Hudson would argue that this case demonstrates how the creation of the secret trust has prevented fraud[5], however subsequent cases which will be considered in due course indicate that the secret trust is not as easy as it may appear as a devise to prevent fraud.
The Fraud theory considers the possibility that the trustee denies the existence of the trust which would result in the secret beneficiary from being defrauded. Hudson would argue that the secret trust prevents this[6], however as the testator is now deceased and due to the nature of the secrecy involved in these types of trusts it would be difficult for the secret beneficiary to argue their proprietary entitlement without revealing their identity. It can be argued that the secret beneficiary is only denied their benefit as the testator has failed to comply with the formalities of Article 5 of The Wills and Administration Proceedings (NI) Order 1994[7] (TWAP) or The Wills Act 1837[8] for cases tried in England and Wales. In this instance this may mean that the trust has not been properly put into effect, it would be difficult for the beneficiary to argue against the trustee’s decision to deny the existence of the trust, as they would most likely need to use statute to be able to assert their legal benefit to the estate. In spite of this, the beneficiary would not be able to use this statute as ‘equity will not allow a statute to be a cloak for fraud’ and to use the statute would acknowledge the testators reluctance to comply with statute. As a direct result of this equitable maxim it is clear that there is still a possibility for fraud to occur despite the existence of secret trusts. The Fraud theory states that there are three potential instances in which fraud can be committed within the secret trust which are the denial of trust by the trustee, the failure of the testator to comply with the formalities of TWAP[9] or the Wills Act 1837[10] and the secret beneficiary who can assert their entitlement over the property despite the testators failure to comply; these three potential claims of fraud signal that Hudson was ambitious in his claim that stated “secret trusts exist to prevent fraud”[11], and that in reality fraud is still an issue which needs to be addressed.
In relation to half-secret trusts, Hudson[12] could argue that there is no possibility of fraudulent gain for the half-secret trustee as they are holding the property on trust for the residuary estate, so as a result of this cannot claim to be a beneficiary under the trust. This was held to be the case in Re Keen[13], where the court held that the half-secret trustee could not claim to be a beneficiary upon failure of the trust.
The dehors the will theory argues that a secret trust exists to avoid TWAP[14] or the Wills Act 1837[15] as it is an inter vivos declaration by the testator meaning that the trust arises dehors the will. Article 5 of TWAP[16] or Section 9 of the Wills Act 1837[17] states that for a valid trust it must be in writing, signed by the testator and attested by two witnesses; academic commentary from Critchley[18] argues that secret trusts can be seen as an ‘infringement on this provision’ and to some extend suggests that their existence does not prevent fraud but instead opens the law up to multiple potential claims of fraud. This idea contradicts that of Hudson’s[19] more idealistic belief that secret trusts “prevent fraud” as Critchley[20] would argue that the existence of Secret trusts themselves constitutes fraud, whereas Hudson[21] views them as a preventative measure against fraud. The dehors the will theory again reasserts that the secret beneficiary cannot rely on statute to argue their interest in the property because of the equitable maxim that ‘equity will not allow a statute to be used as a cloak for fraud’.
In relation to the existence of secret trusts in the 21st century, it has been argued by Challinor that “secret trusts are a relic of older days and their continued existence seems an anomaly” as equity has expanded too far[22], suggesting that secret trusts have no function in modern society so do not act as a means to “prevent fraud”[23] as Hudson suggests. Secret trusts have also been criticised as being archaic as the original common use for this category of trusts was for benefitting mistresses and illegitimate children which is not entirely applicable in the present day. This is a view supported by Meager who states that ‘secret trusts appear to be viewed with cynicism because of the insurmountable problems which can potentially arise should the trustee choose to fraudulently deny the existence of the trust’[24], which again reiterates that the existence of a secret trust does not mean that fraud will not occur. This further demonstrates the flaws in Hudson’s statement as the existence of secret trusts appear to instead open up the law to other potential areas of fraud which can occur.
To conclude, Hudson’s statement that “secret trusts exist to prevent fraud”[25] is an idealistic and somewhat optimistic concept that sadly is not true in reality. To suggest that the existence of secret trusts is enough to prevent fraud in its entirety is an idea that is rebutted by the fraud theory which demonstrates how the testator and the secret beneficiary can be defrauded due to the secret trust not following the legal requirements of TWAP 1994[26] or the Wills Act 1837[27]. This demonstrates that secret trusts in this instance have given rise to the instances in which fraud can occur. Similarly, in the dehors the will theory, it is suggested that the secret trust does not have to operate in line with statute as it is made inter vivos and operates dehors the will, determining that the secret beneficiary again cannot rely on statute to protect them should the trustee decide to deny the existence of the trust; This allows an act of fraud to be committed as ‘equity will not allow a statute to be used as a cloak for fraud.’ It has additionally been argued that the function of secret trusts in the 21st century is unnecessary and is in fact outdated due to the change in culture and popular opinion. The main argument being that secret trusts create more problems and opens up the law to new potential claims of fraud to be committed, which goes against Hudson’s statement that “secret trusts exist to prevent fraud”[28]; whilst it may be argued that the purpose of a ‘secret trust is to prevent fraud’[29] it is almost indisputable that they fail in this function having considered the two main theories and further academic criticism.
Bibliography
Case law
Katherine, Duchess of Sussex v Herenden (1560)
McCormick v Grogan (1869) L.R. 4 H.L. 82
Re Keen [1937] 1 Ch 236
Legislation
The Wills Act 1837
The Wills and Administration Proceedings (NI) Order 1994
Secondary sources
E. Challinor, ‘Debunking the myth of secret trusts?’ (2005) Conveyancer 492
P. Critchley, ‘Instruments of fraud, testamentary dispositions, and the doctrine of secret trusts’ (1999) 115 LQR 631
R. Meager, ‘Secret Trusts- do they have a future?’ (2003) Conveyancer 203
[1] A. Hudson (2017) [2] ibid [3] (1560) [4] (1869) L.R. 4 H.L. 82 (Lord Hatherley) [5] N-1 [6] ibid [7] The Wills and Administration Proceedings (NI) Order 1994, A 5 [8] The Wills Act 1837 [9] N-7 [10] N-8 [11] N-1 [12] N-1 [13] [1937] 1 Ch 236 [14] N-7 [15] N-8 [16] N-7 [17] N-8, s 9 [18] P. Critchley, ‘Instruments of fraud, testamentary dispositions, and the doctrine of secret trusts’ (1999) 115 LQR 631 [19] N-1 [20] N-18 [21] N-1 [22] E. Challinor, ‘Debunking the myth of secret trusts?’ (2005) Conveyancer 492 [23] N-1 [24] R. Meager, ‘Secret Trusts- do they have a future?’ (2003) Conveyancer 203 [25] N-1 [26] N-7 [27] N-8 [28] N-1 [29] Ibid