Trust and Equity Law

Trust and Equity Law

Introduction

Wills Act function as an anti-fraud tool in ensuring the wishes of the testator abide by various formalities requirements[1]. S9 of the 1837 Wills Act directs that last wishes ought to be put down in writing, and that the testator must have signed it with two people present as witnesses[2]. Nonetheless, the secret trust acts as an exception to S9. Secret trusts are created by the most secretive and private citizens. In a secret trust, the settlor often directs the intended trustee to hold a property in trust for the intended beneficiary following the settlor's death despite the trust not having been formally mentioned in the will[3]. While the secret trust fails to meet the formality requirement as outlined in S9, the court usually upholds it, except where the supposed trustee declines to hold the property in trust. Secret trusts are of two kinds: fully secret trust and half secret trust. In a fully secret trust, a will lacks the terms of the trust and existence of the trust. On the other hand, in half secret trust, trusteeship is present but no beneficiary or terms are mentioned.   The case involves Mickey, a famous pop singer who seeks to exploit the secret trust by appointing his friend John to act as a trustee to a £500,000 legacy to his two illegitimate daughters, Abigail and Beth, while his nephew Gerry is to hold a £100,000 legacy in trust to his illegitimate son, Thomas. The paper discusses if Abigail, Beth and Thomas shall benefit from the legacies and if these kinds of trusts can be justified on the basis of the modern application of the trust instrument.

Secret Trusts

In case a testator intends to create a trust that will govern his estate after he has died, he needs to make sure that these wishes and their associated terms are expressed in his will[4]. S 9 of the 1837 Wills Act provides the formalities required in order to develop a valid will[5]. Once a testator passes on, his will is no longer a private document and is hence subject to public scrutiny[6]. However, the testator could desire to make provision, following his death, for what he might deem as some embarrassing object, like an illegitimate child or mistress[7], because he has no intention of disclosing such an object to the public[8]. As a means of avoiding the likely negative publicity that would accompany such a disclosure, the testator could  make a supposed gift by will to a trustee of his choice, on the understanding that the trustee would hold such a property in trust for the secret beneficiary[9]. This is the basis of secret trusts. 

This case revolves around the law relating to secret trusts. Essentially, secret trusts are of two kinds. In one type known as fully secret trusts, the trust, while operating with regard to a testamentary disposition, the testator fails to declare the details and facts of the trust in their will[10]. In a fully secret trust, the testator during his lifetime communicates the obligation of the trust to the trustee but details of such an obligation are often completely hidden 'on the face of the will'. The property is thus transferred to the trustee courtesy of the will while fully concealing the existence of a trust.

In the second type of secret trusts known as half-secret trusts, the trust declares the facts to it in the will, but fails to declare the identity of the beneficiaries[11][12]. In a half-secret trust, the will acknowledges or indicates that a trust exists[13].

However, the terms of such a trust are usually hidden 'on the face of the will'.  This means that the trustee takes the property bequeathed to him by the testator on trust but there has to be a valid communication from the testator to the trustee regarding the terms executed inter vivos, such as a disposition by will that the trustee must execute the will as directed. Therefore, supposing that a valid communication regarding the terms of the trust has taken place, the classification of secret trust in question is reliant on if the acknowledgement of the trust happened 'on the face of the will' or outside it.  Making this distinction is crucial as the two forms of secret trust will be affected by various rules. 

A number of justifications have been endevour to have been provided over the years to explain how secret trust operates and in particular, the debors the will theory and fraud theory. Fraud theory hinges on the principle that equity shall not allow an enactment to be used as a tool of fraud. Based on McCormick v Grogen[14], the fraud theory also prevents the trustee to a secret trust may not keep the property held in trust to a testator to themselves.

In contrast, the Debors theory recognises the lawful existence of a fully secret trust-in spite of the Wills Act-owing to the fact that fully secret acts are outside of a will[15], as opposed to a testamentary disposition, and as such are not categorised under s.1 of the 1837 Wills Act. In this particular question there seems to be issues regarding the validity of half-secret trusts and fully secret trusts. The paper will discuss each of these forms of secret trusts in turn.

Gift on Trust to Gerry, holding for Thomas

Mickey instructs his nephew Gerry to hold the property in trust for his illegitimate son, Thomas. While making his will in which he bequests a £100,000 legacy to Gerry, Mickey does not put any limitations as regards the manner in which Gerry can use his gift. From the will, it would appear to as though Mickey has apparently bequeathed Gerry an absolute gift. As a result, any claim that Thomas may have to this money may only come about under a fully secret trust. In this case, a fully secret trust shall arise in the event that, “despite an apparently absolute gift, the testator has communicated his intention to the legatee that the property should be held for another, which expressed desire has been accepted by the legatee[16].” From the case under review, it is quote obvious that Mickey intended to create a trust.  This position is supported by Margulies v Margulies 2000[17] where the Judge ruled that the intended beneficial interests of the testator should be certain.  In addition, the trustee must acknowledge this obligation prior to the death of the testator. When these conditions have been fulfilled, there is a higher likelihood that the secret trust once approved, will most likely favour the willful beneficiary. It is quite clear from the case that Gerry has accepted the trust obligation, and this acts as the basis for the development of a potential fully secret trust. As per Re Keen(1937)[18], Gerry's acceptance could either assume the from of acquiescence or silence.

Nonetheless, prior to his death, Mickey tries to annul the intention of his secret trust and fall back on the position to have the money bequeathed to Gerry to hold in trust as an absolute gift to him. This was after Mickey had a disagreement with his illegitimate son Thomas after he had posted poor results in his second year law exams. Consequently, Mickey had directed Gerry to keep the money he held in trust for Thomas to himself. This raises the pertinent question regarding when a fully secret trust become available. In case, for instance, the fully secret trust becomes available the minute the trustee agrees to be obligated to the trust, then Gerry is obliged to hold the money in trust for Thomas. Once a trust has been developed this effectively perfects the beneficiaries’ rights[19]. However, in case the secret trust becomes available upon the death of the testator, then evidently the implied trust may be annuled at any time before the occurrence of such an event, thus paving way for the development of alternative arrangements.

The first context, which could potentially allow Gerry to lay claim to the £100,000 legacy, is seemingly enticing since it stops Mickey from exploiting fully secret trusts to change his testamentary dispositions without having to draft another will. While this enables secret trusts to steer clear of the 1837 Will Act[20] in their development, there is also the risk that secret trusts could also be used to sidestep the requirement that a will has to be in writing by granting ”the testator a power of unattested disposition right up to his death”[21]. This view of secret trusts is quite evident in decisions arrived at in Sonley[22] and Re Gardiner[23]. Nevertheless, it is important to note that Re Gardener has been the subject of significant academic criticism, while Sonley is expressly described as a half-secret trust.

From the second context, we can view the secret trust as becoming available upon the testator's death and meaning that it can be annuled until then. This view is supported by judgement Blackwell v Blackwell[24]. The rationale behind this view hinges on the premise that the communication between the testator and trustee when the testator was alive and their acknowledgement to execute the will constitute a transfer of gift or inter vivos declaration of trust. In addition, the trust can only be constituted once the testator dies, effectively passing the property over to the trustee. Accordingly, the settlor could annul the trust before his death. Assuming this is the superior view) (although it permits the property to be subjected to oral post-testamentary dispositions), there is a clear indication that Mickey could annul the trust held by Gerry in favour of Thomas.

Moreover, it appears from the facts of the case that Gerry is to benefit as the ultimate beneficiary of the property in the form of an absolute gift, in line with what has been indicated on the face of Mickey's will. In the event that the revocation turns out to be effective, things could remain this way. We could also be inclined to argue that Gerry is to become the new beneficiary in line with the secret trust, meaning that he is actually holding the trust on his own behalf, a position that has been supported by Irvine v Sullivan[25]. Accordingly, Gerry could very well lay claim to his legacy. This is a clear indication that Mickey could annul the trust held by Gerry in favour of Thomas. Moreover, it appears from the facts of the case that

Gift on Trust to John, holding for Abigail and Beth

It is very clear from the case that Mickey intended John to hold the property bequeathed to him in trust. Therefore, regardless of the conclusion arrived at regarding the beneficiaries who can finally lay claim to the £500,000, it is very clear that John cannot be a beneficiary. She can only hold the property from Mickey's estate in trust. This position has been supported by various cases, including Re Keen[26] and Re Rees[27]. Nevertheless, if at all Abigail and Beth are to claim this property, they will be required to first establish a half-secret trust namely, the circumstances under which Mickey communicated the details of the trust to John, and his acceptance of these details before the will was executed, or at the same time that the will was executed[28]. The first problem in regards to the facts emerge because while Mickey requited John to act as a trustee to, holding for Abigail and Beth, prior to the date of the will, John only accepted after Mickey had executed the will. A number of possibilities thus emerge from this situation.

The first possibility has to do with the strict nature of the communication rule applied and the invalid nature of the half-secret trust. While this constitutes a perfectly defensible outcome, it appears quite harsh under the circumstances.

The second possibility is that John had signaled his acceptance of the trust on 25 June, when Mickey telephoned him, prior to executing his will.  Such a possibility appears unjustifiable going by the facts. Even the claim by Moss v Cooper[29] that silence could be interpreted as acceptance may not be applicable.

The third possibility is taking the strong position on the erroneous nature of the communication rule regarding half-secret trusts and that the right strategy is to be found in the assimilation of half-secret trusts and fully secret trusts under common law jurisdictions[30]. This seems like a very enticing possibility, particularly as it does not constitute a wholly compelling account for the variation between these two forms of trust[31]. Nonetheless, sadly, Re Keen[32] provides succinct explanations on the issue.

The final possibility hinges on the premise that there is no evidence to support the claim of a violation of the communication rule.  It is important to establish communication and acceptance prior to executing a will, or at the same time as when a will is being executed. Moreover, communication and acceptance processes that start before the will is executed and ends subsequently is defined as 'simultaneous' for purposes of this case[33].

Supposing that both the communication of the trust and its acceptance were made in a justifiable manner, other problems could face Abigail and Beth. There may be the implication that the terms of the will and the terms of trust are in opposition, something that Re Keen[34] forbids. On the other hand, this position is fulfilled by adopting the previous argument regarding the communication of the details and their acceptance happening simultaneously[35][36]. In the same way, while John does not have access to the exact details of the trust at the point of accepting, which were contained in a safe and which John only had access to following Mickey's death, we could safely infer that communication regarding the means of how the beneficiaries would be identified is acceptable[37]. However, such communication ought to have happened at the appropriate time and in case the testator no longer has the power to alter the details of the trust. Accordingly, in the event that Mickey did not have a key to the safe that contained exact instructions on how John would pay legacy to Abigail and Beth, meaning that he cannot alter the identify of the beneficiary following the execution of his will, only then can John claim the  £500,000. 

Conclusion

Mickey had the powers to revoke the trust held by Gerry on behalf of Thomas and from the facts of the case he did actually request Gerry to retain this gift.  Accordingly, Gerry can lay claim to his legacy as the ultimate beneficiary. On the other hand, John can only claim the 500,000 that he is holding in trust for Abigail and Beth if Mickey had not altered the identity of the beneficiaries following the execution of his will.   

Bibliography

Books

Baskind E, Osborne E and RoachL, Commercial Law (Oxford University Press 2016)

Covey S, The Speed of Trust: The One Thing that Changes Everything (Simon & Schuster 2008)

Davies P, Equity and Trusts: Text, Cases, and Materials (Oxford University Press 2016)

Moffat G, Trusts Law: Text and Materials (5th edn) (Cambridge University Press 2009)

Pearce R, Stevens J and Barr W, The Law of Trusts and Equitable Obligations (OUP Oxford

2010)

Pettit P, Equity and the Law of Trusts (Oxford University Press 2014)

Ramjohn M, Q&A Equity & Trusts (Routledge 2014)

Stone R, The Modern Law of Contract (Psychology Press 2005)

Virgo M, The Principles of Equity and Trusts (Oxford University Press 2012)

Watt G, Todd & Watt's Cases and Materials on Equity and Trusts (Oxford University Press 2013)

Watt G, Trusts and Equity (Oxford University Press 2014)

Watt G, Equity and Trusts Law Directions (Oxford University Press 2016)

Journal articles

P Birks, 'The Content of Fiduciary Obligation' (2002) 16 Trust Law International 34

M Conaglen, 'The Nature and Function of Fiduciary Loyalty' (2005) 121 Law Quarterly Review 452

EJ Weinrib 'The Fiduciary Obligation' (1975) 25(1) University of Toronto Law Journal 1

Case Laws

Blackwell v Blackwell [1929] AC 318

Irvine v Sullivan [1869] LR 8 Eq 673

Margulies v Margulies 2000 WL 362514 (1999–2000) 2 ITELR 641

Marley v Rawlings [2014] UKSC 2, [2014]2 WLR 213.

McCormick v Grogan (1869) LR HL 82 11

Milroy v Lord [1862] EWHC J78

Moss v Cooper (1861)

Pennington v Waine (2002)

Re Gardner No. (1923) 2 Ch

R E Keen [1937] 1 Ch. 236; 106 L. J. Ch. 177

Re Rees [1950] Ch 204

Sonley v. Clockmakers' Co (1780) 1 Bro CC 81; 28 ER 998

Acts

Wills Act 1837