By Aoife Taggart
5. “[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.
This essay will critically evaluate the perspective that secret trusts exist to prevent fraud. In doing so, it will analyse the validity of the fraud justification for secret trusts and compare it with other justificatory arguments such as the ‘dehors-the-will’ theory and the ‘incorporation by reference’ doctrine.
This essay will first consider why secret trusts may arise in Equity. Firstly, a need for a secret trust may arise when a testator wishes to leave a gift to someone whom they do not wish to name in their will. In this scenario, a testator will ask a third party if they will agree to receive a gift in the will as if for their own benefit. However, the third party will actually be required to hold the gift on trust for a party that is not named in the will. Secret trusts may also benefit indecisive testators who can defer the final decision about who is to receive the gift without having to rewrite their existing will. These intentions can be achieved through two types of secret trusts. A fully secret trust does not appear on the face of the will at all, but a half secret trust will be apparent on the face of the will, with an instruction that the gift has been left to the third party for purposes that have been communicated to them. The courts have recognised that secret trusts need not comply with the formalities for the creation of a valid will set out in the Wills Act 1837, or the Wills and Administration Proceedings (Northern Ireland) Order 1994. In Re Young, Danckwerts J stated that for a secret trust ‘the forms required by the Wills Act are entirely disregarded.’ [1] Instead, three requirements are needed as shown in Ottaway v Norman to create a valid secret trust: intention, communication of that intention and express or implied acceptance of the obligation. [2] If a fully secret trust fails, there is an absolute gift to the primary donee. If a half secret trust fails a resulting trust will occur, with the gift returning to the testator’s estate, as it is clear that the trustee should not receive the property beneficially. [3] Thus, in the past, the courts have allowed for this conflict with statutory obligations through a number of different justifications.
The traditional justification for secret trusts is that they exist to prevent fraud. This theory originates from one of the maxims of equity that ‘equity will not permit a statute to be used as an instrument of fraud.’ This maxim is shown to be upheld throughout the case law, for example it was stated in McCormick v Grogan (1869) that ‘an Act of Parliament should not be used as an instrument of fraud’.[4] Viscount Sumner clarified that this was a ‘perfectly normal exercise of general equitable jurisdiction’ in Blackwell v Blackwell. [5] Therefore, fraud theory generally prevents legatees who hold a property on trust for another from relying on the formalities set out in the Wills Act 1837 to invalidate the trust, as to do so would require using that statute as an instrument in fraud. Although ‘fraud’ was originally understood under the narrow definition of ‘deception’ in McCormick v Grogan, [6] it is now applied under a broader definition and is not always required for the recognition of secret trusts. [7]
Although fraud theory has been traditionally accepted by the courts as a justification for secret trusts, some limitations to it have been found. Case law has been shown to extend beyond situations of fraud as a justification. For example, concern was raised in McCormick v Grogan, [8] where the argument rested on circumstantial evidence of an agreement, that the courts were required to analyse cases on a case-by-case basis, without setting out a comprehensive rule. In Re. Keen [9] another concern was raised about how a trustee can be considered to have carried out fraud even if they had no knowledge of the burden they were going to be placed under. Rickett points to the decision of Hammond J in Brown v Pourau [1995], [10] from New Zealand as an achievement in the denouncement of fraud as a requirement for secret trusts. Rickett further argues that because secret trusts are express trusts, the recognition and enforcement of them should not require any action that differs from other express trusts. [11] In agreement with this line of thought, Critchley suggests that fraud could be prevented more efficiently with a strict enforcement of the Wills Act 1837. [12]
One of the strongest arguments against the fraud theory is that it does not adequately cover half secret trusts, [13] because, as the trust is apparent on the face of the will, it is harder for the trustee to commit fraud. Even if they were to commit fraud, the trustee would not receive the property, unless they were otherwise entitled to the testator’s residuary estate. However, Hodge argues that secret trusts do not exist to avoid this fraud, but rather a general fraud which is committed by reason of the failure to observe the testator’s intentions and the beneficiaries’ beneficial interest. [14]
An alternative, more modern theory that can justify the existence of secret trusts and their infringement of the Wills Act 1837 is the ‘dehors-the-will’ theory. This theory analyses secret trusts as express trusts that are validly declared during the testator’s lifetime, [15] that are created following communication by the testator and acceptance by the trustee. Although these trusts are not constituted until after the testator’s death, [16] they are not necessarily testamentary trusts. Instead, because they have been created inter vivos, it is only that the constitution that occurs on death and automatically once property has been transferred by the executors to the trustee. Mee is a proponent of this justification and reasons that as half-secret trusts operate dehors-the-will, the broad principles of equity should govern the determination of any inconsistencies on a case-by-case basis. [17] Judicial support for this doctrine can be inferred from Viscount Sumner’s reasoning in Blackwell v Blackwell, that “I do not see how the statute-law relating to the form of a valid will is concerned at all.” [18] Later cases often rely on Lord Sumner’s reasoning, but it has been noted that his argument may contain some inconsistencies. [19]
However, there are also significant limitations to this theory. One limitation of dehors-the-will is the ability to declare a trust while a testator is still alive, even though the trust is not constituted until after their death. This appears to allow for the creation of a future property trust, with no knowledge of whether the property will still belong to the testator’s estate in the future. However, such trusts of future property are generally not accepted by the courts. [20] Critchley argues here that a further declaration of trust should be required when the property is acquired. [21] Critchley further argues that since Cullen v Attorney-General for Northern Ireland, [22] a confusion has arisen between the meaning of “outside the will” and “outside the Wills Act”. The mistake that has been made subsequently to the judgement is from the reasoning in the case, that because the secret trust took effect outside the will it was therefore not a “gift by…will or testamentary judgement” has been wrongly applied to the very different legal context of the formality requirements. [23]
One further theory that has advanced as a justification for half secret trusts is the ‘incorporation by reference’ doctrine. Where their Lordships had seemingly agreed in Blackwood v Blackwood [24] that fraud theory applies to fully and half secret trusts, Matthews argues that there should be a distinct separation between their justifications as it is very difficult for a trustee to commit fraud on a half secret trust, [25] and that this is alluded to in Lord Buckmaster’s reasoning in Blackwood v Blackwood. [26] This theory would allow for part of a testament to be expressed in a document failing to comply with the formality requirements.
Critchley argues that the above justification is weak when applied to half secret trusts, since the cases cited in evidence are not wholly supportive of Matthew’s analysis. Additionally, Critchley points out that the elements of communication and acceptance inter vivos, which are currently necessary to show for half secret trusts, would be missing from this incorporation by reference doctrine. Critchley finishes her analysis by saying that this justification would be stronger if half secret trusts were limited to written communications, but that this would lead to a further discrepancy between fully and half secret trusts. [27]
From evaluating the fraud theory, dehors-the-will, and even the incorporation by reference doctrine, it appears that there is no single sufficient justification for the continued existence of secret trusts, as it is constitutionally unjustifiable for the courts to create an exception to an apparently clear and mandatory statutory provision. However, following a survey carried out in November 2001, it was recognised that secret trusts are perhaps more useful than ever before, with respondents to the survey providing a wide variety of circumstances that they had found the secret trust appropriate. However, the conclusion of the survey also noted that there is a real need to finally resolve some of the more enduring issues relating to secret trusts, such as the classification and justification for them to exist. [28] Evidently, although there remains a need for a clear justification for them, secret trusts remain an essential area of the law of Equity, and in their enforcement, the courts seek to give effect to the testator’s final intentions when possible. This can be considered to reflect one of the original purposes of equity – to do justice where a strict enforcement of the legal rules and statutory requirements would result in an unfair result.
[1] Re Young [1951] Ch 344. [2] Ottaway v Norman [1972] Ch 698. [3] Re Pugh’s Will Trusts [1967] 1 WLR 1262. [4] McCormick v Grogan (1869) LR 4 HL 82. [5] Blackwell v Blackwell [1929] AC 318,334. [6]McCormack v Grogan (1869) LR 4 HL 82. [7] Re Snowden [1979] Ch 528. [8] McCormick v Grogan (1869) LR 4 HL 82. [9] Re Keen [1937] Ch 236. [10] Brown v Pourau [1995] 1 N.Z.L.R. 352. [11] Rickett, ‘Thoughts on secret trusts from New Zealand’ [1996] Conv 302,306. [12] P. Critchley, ‘Instruments of fraud, testamentary dispositions, and the doctrine of secret trusts’ (1999) 115 [13] E. Challinor ‘Debunking the myth of secret trusts?’ [2005] Conveyancer 492 [14] Hodge, “Secret Trusts: The Fraud Theory Revisited” [1981] Conv. 341. [15] Oakley, Constructive Trusts, 3rd edn (London: Sweet and Maxwell, 1996), p. 262. [16] Rickett, ‘Thoughts on secret trusts from New Zealand’ [1996] Conv 302,306. [17] J. Mee ‘Half-secret trusts in England and Ireland’ (1992) Conveyancer 202. [18] Blackwell v Blackwell [1929] AC 318,334.. [19] Moffat, Trusts Law: Text and Materials (3rd ed., London, 1999), Ch.4. [20] Re Ellenborough [1903] 1 Ch 697. [21] P. Critchley, ‘Instruments of fraud, testamentary dispositions, and the doctrine of secret trusts’ (1999) 115 [22] Cullen v Attorney-General for Northern Ireland (1866) LR 1 HL 190. [23] P. Critchley, ‘Instruments of fraud, testamentary dispositions, and the doctrine of secret trusts’ (1999) 115 [24] Blackwell v Blackwell [1929] AC 318,334. [25] Matthews, “The True Basis of the Half Secret Trust?” [1979] Conv. 360, at pp.362, 370. [26] Blackwell v Blackwell [1929] AC 318,334. [27] P. Critchley, ‘Instruments of fraud, testamentary dispositions, and the doctrine of secret trusts’ (1999) 115 [28] R. Meager, ‘Secret Trusts – do they have a future?’ [2003] Conv. 203.