Define: Secret And Half Secret Trusts

Secret and half-secret trusts are legal arrangements used in estate planning to ensure that certain assets are distributed according to the wishes of the testator (the person making the will), even if those wishes are not explicitly stated in the will itself.

In a secret trust, the testator includes a beneficiary in their will without explicitly identifying them as such. Instead, the testator leaves the assets to the trustee, with instructions to hold them for the benefit of the secret beneficiary. The trustee is then obligated to carry out the testator’s wishes and transfer the assets to the beneficiary as directed.

In a half-secret trust, the testator discloses the existence of the trust in the will but does not identify the beneficiary. Instead, the testator leaves the assets to the trustee, with instructions to hold them for the benefit of an unnamed beneficiary. The trustee is then required to follow the testator’s instructions and transfer the assets to the intended beneficiary.

Both secret and half-secret trusts are subject to specific legal requirements, including the need for the testator to communicate their intentions to the trustee and for the trustee to accept their role as trustee. These trusts are often used to maintain privacy, protect beneficiaries, and provide flexibility in estate planning. However, they can be complex legal instruments and may require careful drafting and execution to ensure their validity and enforceability.

The secret trusts comprise both (fully) secret trusts and half secret trusts. They are a relic of a bygone era and do not conform to established trust principles. Their prior purpose has largely disappeared with the changing patterns and expectations of social behaviour. They do, however, find a limited place with the testator, who is hesitant and cannot make up his mind. Some explanation of the similarities and differences between the two types of secret trust will lead to an evaluation of why they might be justified.

Description

The fully secret trust is not apparent from the face of the will, which subsequently becomes a document available to the public following probate after the testator’s death. In previous centuries, people were embarrassed about mistresses and illegitimate children and wished to provide for them following their own deaths, but in a way that did not embarrass their families. This problem was largely solved by the use of secret trusts. Although often the two types of secret trusts are dealt with together, this creates some difficulties because they are so different, even to the extent that they break different convention rules. Lord Viscount Sumner said in Blackwell v. Blackwell [1929] that once the trustee agrees to the testator’s intentions, “the proposed donee encourages him to bequeath the money in the faith that his intentions will be carried out.”

The two types of secret trusts share some rules, such that the secret trustee must accept the trust. This acceptance can be express or implied; see Wallgrave v. Tebbs [1972]. The secret trustee must be under a legally binding obligation; a purely moral one is inadequate (McCormack v. Grogan).

Some rules the secret trusts do not share are indicative of their different natures. Most importantly, for a fully secret trust, the terms of the trust may be communicated to the secret trustee at any time up to the point of the testator’s death, whereas for a half-secret trust, this must be done by the time the will is made. If communication does not happen before the testator dies, the secret trustee retains the property for himself. Communication is still effective even if it is done through a sealed envelope that contains the details of the trust [re Keen, 1937]. Where the secret trustee dies before the testator, the outcome depends on whether it was a secret trust or a half-secret one. For a fully secret trust, as in Re Maddock [1902], the trust fails. This occurs because, on the face of the will, there is no trust, just a beneficiary (who was intended to be the secret trustee), and the rule is such that the beneficiary must survive a testator. However, the contrary view was given in Blackwell v Blackwell [1929]. In a half-secret trust, where the trustee pre-deceases the testator, the existence of the trust is already apparent from the face of the will. Equity steps in here since “equity will not allow a trust to fail for want of a trustee”; Re Smirthwaite (1861).

Practical And Legal Problems

To be valid, a will must strictly comply with formalities. According to Section 9 of the Wills Act 1837, a will must be in writing and signed in the presence of two independent witnesses who also must sign. The secret trusts partially avoid these formalities since property ultimately passes to the secret beneficiaries upon the death of the testator but the details of these are not in a signed and witnessed will. The will is being used since it deposits the property with the secret or half-secret trustee, yet the will does not detail the identity of the ultimate beneficiary. In some respects, the secret trusts are not so much operating outside of the will (since they require the will in order to become effective) as outside the formalities required of a will; they are acting outside the Wills Act 1837. Following on from this idea, according to Section 25 of the Wills Act 1837, the beneficiary must survive the testator. This does not apply to fully secret trusts. This is a further example of how the secret trust contravenes statute surrounding a will. In Re Gardner (No. 2) [1923], the secret trust is made and the beneficial interest is created before the testator dies. This is perplexing since a will only becomes effective upon death, with the testator at liberty to change it right up to this point.

Lord Hatherley in McCormick said that where a person takes property from the testator, knowing and agreeing to give that property to another, he “will be fixed as trustee with the performance of such instructions.”

The Fraud

The fraud occurs when the secret trustee keeps the property for himself. To an even greater extent, the fraud is where the secret trustee encourages the testator to leave the property by will, with him agreeing to hold it on trust. By this assurance, the testator complies. This was described by Lord Hatherley in McCormick fraudulent inducement held out on the part of the apparent beneficiary in order to lead the testator to confide to him the duty which he so undertook to perform.” Subsequently, the secret trustee retains the property for himself. These scenarios are possible in a fully secret trust. The secret trusts work because of the well-known equity maxim that “equity will not allow a statute to be used as an instrument of fraud.” If the secret beneficiary challenges (with adequate evidence) the secret trustee, the court will not allow the trust to fail because it is not in writing and not complying with the Wills Act 1837. In McCormick v. Grogan, the function of the secret trust was described as the secret trustee fulfiling his obligation to the testator and avoiding fraud. 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 than for most other civil claims. In re Snowden, Megarry V-C considered the anomalous situation where there was no question of fraud and felt that the usual standard of proof (on the balance of probability) applied. The required standard of proof may vary according to the situation deduced from the facts of the case.

Justification

In Blackwell, Lord Viscount Sumner described it 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 described the equitable obligation of the secret trustee as acting on his conscience, thus pressuring the trustee to perform the testator’s intentions. Integral to the argument of this binding obligation is the fraud theory, whereby if the testator retains the property himself, fraud is committed. While Lord Viscount Sumner’s theory may well amount to sufficient justification for the existence of the fully secret trust, it is another matter regarding the half-secret trust. For the half-secret trust, 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.

In the half-secret trust, it is clear from the will that the legatee holds the trust, but it is not clear for whom. There is less opportunity for fraud in this situation. Therefore, since there can be no fraud, it is unclear how they arise; certainly, the fraud theory cannot explain their existence. In Blackwell, both secret trusts were said to be outside the Wills Act of 1837. Here, in a half-secret trust (unlike the situation concerning a fully-secret trust), the beneficiaries have to be named in communication before or at the time that the will is made. As in the case of fully secret trusts, a sealed envelope containing the instructions suffices, and the same rules apply regarding acceptance by the trustee. In Johnson v. Ball (1851), this was described as “incorporation by reference” to an existing document. However, if this refers to a future document, it contravenes the Wills Act of 1837.

The most recent theory is the “outside the will” theory, which is also known as “dehors the will,” and it arises because of the obligation on the legatee. Although the quote in the question in the extract from Blackwell refers to the fraud, it was Lord Viscount Sumner’s dicta in this case, subsequently summarised in Re Snowden, that gave rise to the dehors the will theory. Since a fully secret trust does not operate within the will, the beneficiary of the secret trust could witness the will (Re Young, 1951). This could not happen if the trust operated within the will since, according to the Wills Act 1837, a witness cannot be a beneficiary. The major advantage of the dehors-the-will theory is that there is no conflict with the Wills Act 1837 because the secret trusts are not concerned with the will. However, Section 1 of the Wills Act 1837 refers to any testamentary disposition. To circumnavigate this aspect, secret trusts are viewed as inter vivos trusts. Clearly, dehors the will really needs to mean dehors the Wills Act.

The dehors-the-will theory has been criticised (see Challinor, 2005), since if the secret trust is operating outside the will, it must be operating within the region of trust law and should therefore comply with the rules and formalities of trust law. However, the secret trust also breaks trust law since it binds property that has not yet been acquired, which is prohibited by the law of trusts. The secret trust can get around this problem. Secret trusts are also described as inter vivos trusts; the trust is created by communication from the testator to the secret trustee with due acceptance, and the trust is only completely constituted when the testator dies and the property vests in the secret trustee. By this route, there is compliance with the law of trusts since the trust is not constituted until the testator dies and the secret trustee is in actual possession of the property, so it is no longer just an expectancy. While there is some support for the dehors theory, this is not universal. The case of Re Maddock [1902] runs contrary to this theory because the trust failed since the secret beneficiary died before the testator; the case supports the secret trust taking effect upon death.

Controversy surrounds the types of trusts created. Moffat (2005) explains that the majority of textbooks treat them both as express trusts. Mainly because the half-secret trust is apparent from reading the will, the express trust describes the half-secret trust well. Express trusts need to comply with the s53(1)(b) and s53(1)(c) Law of Property Act. Non-compliance did not cause a problem in Ottoway v. Norman [1972] Ch. 698, and if the trust had been an express one, it would have failed for non-compliance with this statute. Therefore, this problem means that fully secret trusts may instead be implied trusts, probably constructive trusts, which are found to be in existence rather than expressly created.

This site contains general legal information but does not constitute professional legal advice for your particular situation. Persuing this glossary does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

This glossary post was last updated: 13th April, 2024.