In English law, secret trusts are a class of trust defined as an arrangement between a testator and a trustee, made to come into force after death, that aims to benefit a person without having been written in a formal will. The property is given to the trustee in the will, and he would then be expected to pass it on to the real beneficiary. For these to be valid, the person seeking to enforce the trust must prove that the testator intended to form a trust, that this intention was communicated to the trustee, and that the trustee accepted his office. There are two types of secret trust — fully secret and half-secret. A fully secret trust is one with no mention in the will whatsoever. In the case of a half-secret trust, the face of the will names the trustee as trustee, but does not give the trust's terms, including the beneficiary. The most important difference lies in communication of the trust: the terms of a half-secret trust must be communicated to the trustee before the execution of the will, whereas in the case of a fully secret trust the terms may be communicated after the execution of the will, as long as this is before the testator's death.
Secret trusts do not comply with the formality requirements (such as witnessing) laid down in the Wills Act 1837. Despite this, the courts have chosen to uphold them as valid. Although various justifications have been given for this, they are generally categorised as either based on preventing fraud, or as regarding secret trusts as outside (dehors) the operation of the Wills Act. The first is considered the traditional approach – if the courts do not recognise secret trusts, the trustee given the property in the will would be able to keep it for himself, committing fraud. The fraud theory utilises the equitable maxim that "equity will not allow a statute to be used as a cloak for fraud". A more modern view is that secret trusts exist outside the will altogether, and thus do not have to comply with it. Accepting this theory would undermine the operation of the Wills Act, since the Wills Act is designed to cover all testamentary dispositions. To avoid this problem, one approach has been to reclassify the secret trust as inter vivos ("between the living") but this creates other problems. There have also been attempts to conclude that half-secret trusts rest on a different basis to fully secret trusts, although this has been disapproved by the House of Lords, primarily on practical grounds.
This debate is also of importance when classifying the trust as either constructive or express, a matter of considerable debate. On one view, if the traditional theory is correct, secret trusts are created by the courts, and are thus constructive; if the more modern view is correct, the trusts exist without the court's permission, and are express trusts. However, a secret trust does not have to obey the separate formalities of the Law of Property Act 1925, even when it concerns land and one solution to this problem is to consider them constructive. Some commentators believe that half-secret trusts may fall into a different category to fully secret trusts in this regard.
Definition A secret trust is an arrangement between a testator and a trustee to benefit a person without having to specify that person in a will. The trustee is transferred property under the terms of the will which he or she then holds on trust for others.
The courts recognise two forms of secret trust. Fully secret trusts are trusts not referred to at all on the face of the will. Instead, an agreement made between the testator and trustees elsewhere. The trustee will instead be named only a beneficiary. In the case of a half-secret trust, the fact that the beneficiary holds as trustee only is declared on the face of the will, but not the other terms of the trust.
Alastair Hudson, Professor of Equity and Law at Queen Mary, University of London, suggests the potential for a third class of secret trust. This is where the dying person is encouraged not to make a will so that his property passes to the next-of-kin, on the agreement that the next-of-kin give effect to his wishes via a secret trust. If this is the case, the next-of-kin would be obliged to hold the property on trust and fulfil the dying person's wishes.
A secret trust must be contrasted with merely placing a moral obligation upon the beneficiary to deal with the legacy in particular way (as in Re Snowden 2 All ER 172) and must impose a binding obligation, without discretion to act within its terms or not.
Justification
The secret trust has proved difficult to reconcile with section 9 of the Wills Act 1837, which provides that a will is only valid when:
As such, such trusts are not enforceable because they are invalid. Equity has been willing to accept their validity in the common law to prevent the trustee committing fraud and keeping the property; justifications for this acceptance are debated.
In practical terms, there are several reasons why admitting the language of fraud to justify a fully secret trust, but not a half-secret trust, would be sub-optimal. This is considered one principal reason why the court in Blackwell v Blackwell established that both types of secret trust shared a single justification. A half-secret trust appears closer to fulfilling the formality requirements as laid down in the Wills Act, so the conclusion that it is less likely to be enforced seems contradictory. Also, such a rule would encourage fully secret trusts, with a wider possibility for fraud. It would also spark considerable litigation on whether a particular clause resulted in a fully secret or half-secret trust. Thus it may be argued that despite the difficulties, a half-secret trust should be enforced if fully secret trusts are.
Fraud theory The secret trust was originally conceived to prevent fraud enabled by statute or the common law, in line with the equitable maxim that "equity will not allow a statute to be used as a cloak for fraud". The "fraud" referred to is the denial of the existence of the trust by the intended trustee of the will, thus allowing him to apply it for his own purposes. Thus in McCormick v Grogan,(1869) LR 4 HL 82 Lord Westbury justified secret trusts, saying:
There have been two grounds on which this rule has been based. The narrower ground is that the trustee should be debarred from denying the existence of the trust because of his wrongful conduct at the time he made the undertaking, as identified by Lord Westbury in McCormick v Grogan. The wider ground extends to attempting to renege on the promise made during the testator's lifetime, even when his intention at the time of making the promise may have been to fulfill the testator's wishes. The wider ground appears to have been adopted by the Court of Appeal in Bannister v Bannister. 2 All ER 133 D. R. Hodge has argued that "acceptance of the narrower view would not only impose upon a person seeking to establish a secret trust the heavy onus of showing at what point of time the secret trustee decided to resile from his promise, but would also make the validity of the secret trust dependent upon what is in fact an irrelevant consideration".
Since allowing the trustee of the will to retain the property is at the heart of the "fraud", it is not clear why courts have considered the appropriate remedy to recognise a trust on behalf of others, rather than a resulting trust in favour of the estate (the residuary legatee). To this it has been argued that, since the testator is dead, a resulting trust is often reversing the beneficiary's claims since the testator cannot make any attempt to revoke or undo the trust terms. Save in case of a will and except the plain reading of clauses within the will, having admitted external evidence as operating under the proper introduction of the doctrine of incorporation by reference, a conclusive claim that it is necessary to observe further the formality requirement cannot be disregarded, because Will Act clearly set out the requirements of property transfer in case of failure has to be based on result trust that a party ultimately intended. The enforcement of the secret trust as a response to perceived fraud also opens the door to a further form of deceit, whereby the trustee funnels the trust monies to the wrong beneficiary.
Two further problems are apparent when considering the fraud theory in the context of half-secret trusts. Since the will mentions the trust, it is impossible for the trustee to deny the existence of the trust. Whether or not the intended beneficiaries can be ascertained, in case of inter vivo transaction, the trust-beneficiary cannot benefit personally and any meaning of fraud seems apparent because fraud requires an intention to act dishonestly. It appears to create an alternative route: the trustee may bring false oral testimony in favour of a third party who was not the intended beneficiary, a party that cannot benefit if the law did not uphold half-secret trusts in conclusion but it could operate without court's interference. Secondly, a half-secret trust ought to fail for uncertainty, being a trust with no terms, with a resulting trust to the residuary legatee. Under the rule of three uncertainties in private trust, half or fully secretly trust ought to fail because of lack of intentional element. Those in favour of its enforcement must therefore observe the imposition of resulting trust as required under three certainties rule, and the "fraud" theory seems insufficient to do so, since there is no sublet and significant impact for dishonest act and if otherwise fraud can be upheld; and therefore no conduct on the part of the trustee to warrant it. The deceased's intended disposition remains imperfectly constituted and the intended beneficiary's claim is thus weaker than the residuary legatee's. Whilst one response has been to suggest that whether a resulting trust or enforcement of the secret trust is most appropriate remedy is a question for the courts, subsequent cases have typically defined the automatic resulting trust, as in this case, as operating as a matter of law and not a question for the courts, and this should be settled by parliament legislation.
Alastair Hudson has also argued that the fraud argument is significantly flawed. The theory suggests that liability for the property comes about from fraud; in fact, liability comes about as soon as the trustee accepts the property to hold on trust, and so the fraud theory is not necessary to bind the trustee's hands.
Based on the fraud theory, secret trusts are sometimes classified as constructive trusts; the reason they do not have to follow the Wills Act 1837 is because they are created by the courts.
"Outside (dehors) the will" theory A more modern argument is that secret trusts are independent and operate outside the will. This would mean that the trust is not testamentary in nature but falls within the ordinary equitable jurisdiction of the court. The trust was created by the donor and trustee during the donor's life, and simply not constituted until his death; it does not have to follow the Wills Act, because it was not created by a will. This view was expressed by Megarry VC in Re Snowden, 1 Ch 700 where he said "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". This suggests that secret trusts are not constructive trusts but rather express trusts.