Secret Trusts

Secret Trusts

Parties to a Secret Trust

Settlor/Testator: The person Who sets up a secret trust.

Secret Trustee:  Who promises to hold the property for someone else’s benefit. (Secret Beneficiaries)

Secret Beneficiary: For whose benefit, the trust is created/declared/imposed.

A testator may make a gift which is absolute on the face of his/her Will, but where it is actually intended that the person should hold the gift on trust for a someone else, a secret beneficiary.

Secret Trusts are formed for a number of reasons. Most commonly they are used to provide for illegitimate children, mistresses, tax avoidance, to hide the identity of the true beneficiary but most importantly, they are formed where a person tries to dispose of their property or sets up a trust orally and ignore the requirements of a written will. (please refer to Wills and Probate Chapter).

Important Note

Courts have regarded the breaking of a promise by the secret trustee as “fraud” and have enforced secret promises made by secret trustees by imposing a trust on the trustees. However, despite the difficulty and lack of writing, courts have enforced these oral promises in order to prevent Fraud.

Example

Alan appointed his friend Billy as trustee and advised him orally that on his death his house must go to his mistress, £50, 000 at Barclay’s bank to his illegitimate son Brando and £200,000 to his illegitimate son Collie. Alan then transfers his property to Billy. This will be a secret trust as nobody except Billy knows that the property is not for him to keep, but to pass on to the secret beneficiaries.

Functioning of Secret Trusts

Secret trusts do not fully comply with the writing requirements of the Will Act 1837. They work outside of the rules of Will.

Examples

  • Section 15 of the Wills Act states that the person who has witnessed a will cannot be a beneficiary, however under a secret trust the witness if he is also secret beneficiary (which he/she may not be aware of the fact at that particular time that he/she is a beneficiary) can have the property left for him under a secret trust.
  • Adam signed a will made by John as a witness. However, upon the death of John, it was discovered that he has been left £100,000 under a secret trust to Adam. He can claim the money as a secret beneficiary. Under the rules of Will Adam is not allowed to take the money, but under secret trust he does.

Procedure

To set up a secret trust there are three conditions to be fulfilled. These are as follows

  • Intention (Settlor) to set up a secret trust
  • Communication (Settlor) of secret trust to Secret Trustee
  • Acceptance of the obligation by Secret Trustee

Full Secret Trust

A fully secret trust exists where:

  • There is an outright legacy/gift on the face of a will
  • The existence of the trust and the identity of the beneficiary are communicated to the secret trustee during the testator’s lifetime
  • The secret trustee accepts these obligations, expressly or impliedly
  • The wording of the will indicates that the property is left to the “secret trustee”. On the face of the will the term clearly suggests an outright gift, however, the secret trustee knows that the gift is not intended for him/her and he is a secret trustee. It binds the conscience of the secret trustee as it may prove difficult for the secret beneficiary to enforce the trust. Burdon of proof is on the secret beneficiary to prove that a secret trust exists. It is important to note that the standard of proof that a trust was intended is the balance of probabilities.

Example

Simon wanted to provide for his son Mike and Mistress Mischa and his will states

  • £50,000 to my friend Harris
  • My BMW car to Sarah

As you can see from the above example, there is no inclination or hint that it is a secret trust. But Harris and Sara may have been communicated and accepted the obligation separately or in private to hold the property not as an outright gift but as trustees for Mike and Mischa.

Intention

There must be a clear intention on behalf of Settlor to form a trust.

Communication to Secret Trustee

  • Communication may be oral or in writing
  • Communication of secret trust to secret trustee must be made during the lifetime of the testator (settlor who is dead now)
  • If the intended trustee came to know about the gift after the death of Settlor, there is no trust and supposed trustee takes the property absolutely
  • In addition to the creation of the trust, the actual terms of the trust must also be communicated during Testator’s Lifetime
  • Communication in an envelope not to be opened until after the testator’s death will suffice if it is known to contain the terms of the trust and is accepted as such

Example

Simon wanted to provide for his son Mike and Mistress Mischa and his will states

  • £50,000 to my friend Harris (Harris only came to know after the death of Simon that he is a secret trustee. In such case Harris takes £50,000 and he is under no obligation to transfer the money to the secret beneficiary).
  • My BMW car to Sarah (Sarah was communicated during the life of Simon that the BMW is for Simon’s son, Sarah is bound by her conscience and will be forced to transfer or handover the BMW to Mike as he was the intended beneficiary and she agreed to such arrangement)

Acceptance of Obligations

The secret trustee must agree to carry out the secret trust.

  • Acceptance may be express or by acquiescence.
  • Silence can be a valid acceptance

Half Secret Trust

The wording of the will indicates that there is a trust, they are not completely secret. The trustees are named in the will. A trust is declared in the will. It is only the terms of the gift and the identity of the beneficiary which remains secret. (unlike a full secret trust which simply provides for an outright gift). As the secret trustee is named in Half Secret Trust so he cannot keep the property for himself.

Example

Simon wanted to provide for his son Mike and Mistress Mischa and his will states

  • £50,000 to my friend Harris to hold upon a trust and disposed of to a person as notified by me to Harris.
  • My BMW car to Sarah to keep as trustee and distribute to such person as I have notified to Sarah separately.

In both examples, there is a clear declaration of Trust, it is only the identity of the beneficiary and any terms are not disclosed and kept secret.

Intention

For a valid Half Secret Trust, the Testator must have an intention like full secret trust, there must be acceptance of the trust from the trustees and the acceptance must be Communicated to the settlor.

Communication

The communication of the half-secret trust obligations must be done before or at the time of making a will. (unlike full secret trust which is during the lifetime of testator)

 If the communication is made after the writing of the will, there will be no trust and the trustees will hold the property on resulting trust for the Estate of deceased (Testator).

Example

Simon wanted to provide for his son Mike and Mistress Mischa and his Will states

  • £50,000 to my friend Harris to hold upon a trust and disposed of to a person as notified by me to Harris (but Simon failed to inform Harris before or at the time of will). There will be no Trust at all and £50,000 will go to the estate of Simon.
  • My BMW car to Sarah to keep as trustee and distribute to such person as I have notified to Sarah separately. (Sarah came to know about half secret trust after the death of Simon, again there will be no trust and BMW will go to estate of Simon)

Changes to Secret Trust

Any changes to a secret trust are permitted as long as they are communicated in the proper way to the secret trustees, which will allow the secret trustees either to accept further obligations or reject them.

Example

Simon wanted to provide for his son Mike and Mistress Mischa. His will states £50,000 to Harris. (Now he wants to increase the cash from £50,000 to £100,000 and does not want to give away BMW, terms of his new will are as follows

  • £100,000 to my friend Harris to hold upon a trust and disposed of to a person as notified by me to Harris.
  • My CD collection and paintings to Sarah to keep as trustee and distribute to such person as I have notified to Sarah separately.

These new terms must be communicated and should be accepted in lines with the rules on communication and acceptance mentioned above, in order to be valid. If they are not communicated and accepted then the trustees in a half-secret trust will only transfer £50,000 to the secret beneficiary and the remaining £50,000 will go to the estate of Simon.

If it is full secret trust, the secret trustee will only transfer £50,000 and will keep the remaining £50,000 for his self as he is only aware of £50,000 and only plausible explanation could be that the testator (Simon who is dead now) wanted Harris to keep the remaining £50,000.

Important Terms

Settlor:  Person who sets up a trust while he is alive.

Testator: Person who had established a trust but is now dead.

Trustees: who hold the legal title of the property in order to transfer it to the beneficiary or distribute the trust property to the beneficiary as per the instruction of Settlor/Trustee.

Disclaimer

While every effort has been made to ensure the accuracy of the information provided in this article, it does not constitute legal advice and cannot be relied upon as such. Each legal case and issue may have unique facts and circumstances, as a result legalally does not accept any responsibility for liabilities arising as a result of reliance upon the information provided. For further help and guidance, you can always rely on and seek advice from our experienced lawyers.