Two Modern Secret Trusts

Elizabeth Hailstone
Barrister

(From Issue 6,January 1999)

Mutual wills are apparently popular.  Cases on the law of secret trusts are few and far between.  Snell’s Equity 29th Edn at p108 states the fully secret trust principle thus:

“If a testator makes a gift of property to T without saying that he is to hold it on trust, and either before or after making his will tells T that he wishes him to hold the property on trust for P, T will be compelled to carry out the trust if T either expressly promises that he will do so or by silence implies it.”

The principle was applied to a non-testamentary disposition in Gold and Gilbert v Hill, reported in The Times on 24th August, 1998.

The case concerned the sum of $350,000 payable under a “life assurance and equity plan” taken out by a Mr Gilbert.  It had been designed specifically for employees of the company he worked for, and enabled him to nominate a beneficiary.  If he did not nominate a beneficiary, the policy proceeds would be paid into his estate.  Mr. Gilbert signed a “group enrollment card” on 6th September 1993.  On that the name of the “primary beneficiary” appeared as “Gold, Max”.  Opposite his name, in a column headed “entitlement” appeared “100%”.  In a column headed “relationship” was the word “Executor”.

Mr Gilbert was married to Antoinette and had made a will, under which she took his whole estate, through his solicitor, Mr Hill.  He made Mr Hill his executor by that will.  By 1993 he had transferred his affections to Carol and her two children.  Carol, Mr Gilbert and Mr Gold used to meet socially.  Mr Gold was her solicitor.  Over drinks before dinner, Mr Gilbert told Mr Gold that he was going to work in Nigeria, the firm was arranging very substantial insurance, he had left this to Mr. Gold and:

“If anything happens to me you will have to sort things out.  You know what to do – look after Carol and the kids.  Don’t let that bitch get anything.”

Mr Gilbert died in Nigeria in 1995.  Mr Gold and Carol sought a declaration that the nomination was effective and that Mr Gold held the policy proceeds in trust for her.

Mr Gilbert had had no property in the policy proceeds, and could not declare an express trust  over them. The nature of such a nomination had been considered by Megarry J in Danish Bacon Co. Ltd. v Staff Pension Fund Trust (1971) 1 WLR 248, where he said (p.257E) that a nomination under a policy of this kind did not create or transfer any immediate interest in the fund but was `wholly ineffective as a disposition or assignment so long as the nominator lives`.

Carnwath J held that the nomination was effective.  It was true that until death, there was no subsisting equitable interest capable of being disposed of, but “the true view is that the trust did not crystallise until the sum became payable on death.  Until then there is no subsisting equitable interest capable of being disposed of within the meaning of section 53(1)(c) of the Law of Property Act, 1925.”

The nomination was to someone not intended to take in his personal capacity.  The plaintiffs prayed in aid an analogy with the law relating to secret trusts, and cited the well known passage from Blackwell v Blackwell (1929) AC 318 where Lord Sumner said at pp334-5:

“The necessary elements on which the question turns are in­tention, communication and ac­quiescence.  The testator intends his absolute gift to be employed as he and not as the donee desires.  He tells the proposed do­nee of his intention and, either by express promise or by the tacit promise which is signified by acquiescence, the proposed donee encourages him to bequeath the money in the faith that his intentions will be carried out. For the prevention of fraud eq­uity fastens on the conscience of the legatee a trust, a trust that is, which otherwise would be inoperative.  In other words it makes him do what the will has nothing to do with, it lets him take what the will gives him and then makes him apply it as a court of conscience directs.  It does so to give effect to the wishes of the testator, which would not other­wise be effective.”

There was no question of fraud in the case and the analogy was strictly speaking one with the law relating to half secret trusts, where the will shows on its face that the donee is not intended to take beneficially. Carnwath J accepted that  the analogy was a useful one.

Uncertainty as to objects might have brought about a resulting trust for the testator.  Carnwath J said that there was potential ambi­guity in the words used

“but the general intention is clear, that is to provide help to Carol to look after herself and her children.  In legal terms it would be possible to interpret that in various ways (see for example Snell p. 113 -114) a gift to the three of them jointly, a gift to Carol in the expecta­tion (not legally enforceable) that she would use it for her and the children, or …a gift  to her on trust for her and the two children.  It would be unfortu­nate if the difficulty of distin­guishing precisely between these possibilities, which are probably of little practical dif­ference, should have the effect of defeating the gift altogether and producing a result directly contrary to Mr Gilbert’s intention …it seems to me that the most likely interpretation of Mr Gilbert’s intentions, as expressed in the enrollment card and elaborated by his conver­sation with Mr Gold was….that he should hold them as trustee for her to apply those moneys for the use and benefit of herself and her children”.

The general rule, of course, is that all claims relating to the property of a deceased person must be scrutinised with very great care.  There must be clear and satisfactory evidence: Re Cleaver (Deceased) (1981) 2 All ER 1018 per Nourse J at p. 1024j.  The evidence is  crucial.  This is shown in the case ofKasperbauer and Griffith v Griffith and Ors, unreported, Court of Appeal 21st November 1997.

The case concerned the destination of a house worth £350,000, but subject to a mortgage of £171,000, and a death in service gratuity of £113,000.  The testator was a surgeon who had given long and esteemed service to the NHS.  His first wife, by whom he had a son and daughter, had died.  When he knew that he was dying of cancer he married again.  Under his NHS pension scheme his widow would get a pension of £20,000 p.a. and the gratuity.  Under the rules of the scheme he had the power to di­rect the gratuity, which was produced by insur­ance, away from his widow and into his estate.  He did not exercise that power.

On the 14th February 1993 he called his son and daughter and the daughter’s husband to a formal meeting at the house throughout which, as the judge found, the new wife was present.  At the trial she and her daughter had come up with “alibi” evidence, which was rejected.  The occa­sion was described in evidence as a sad and sol­emn one.  In unqualified terms the surgeon told them what would happen after his death.  His will would be laid out so as to leave the house to his widow.  She would then use the death gratuity to reduce the mortgage so far as it would go.  She would sell the house within a year of his death and divide the proceeds between the son and daughter.  If she decided that she wished to stay in the house she would buy them out at a valuation.  The widow in fact had ample means to do this.  The testator said on this occasion that this would “avoid or minimise” tax.  The son interposed strongly to say that it would be better if all this were written down and the tax paid, but the testator said that he did not want that, the new wife knew what she had to do and could be trusted.  She said nothing throughout, but showed no signs of surprise or dissent.

Shortly afterwards the testator told his intended executors that his widow would use the gratuity towards paying off the mortgage, and then divide the property into three, retaining one share for herself, and in May 1993 he told both the son and daughter of the change of plan, explaining it by saying that his wife had been losing money from her business because she had been looking after him.  They were unable to prove that he communicated this change to his wife.

The testator then employed his solicitor, Dr Bur­rows, to make his new will.  He told her that he was giving the house to his widow as an outright gift  “to save tax”, and that she would divide it three ways or buy the children out.  The solicitor took this as a reference to future PETS.  She was told nothing of the meeting of 14th February.  The testator said that his wife knew what she had to do.  In one telephone conversa­tion he spoke the words

“….realise it is up to her whether to pass share back to the children after my death, but feel she will do so.”

By his will he gave the house free of mortgage to the widow, and told her he had done so.  He died within a year of the marriage and the widow said she knew nothing of any arrangement and the house and gratuity were hers.

The son and daughter failed in their action on a secret trust.  At first instance Chadwick J found that the testator `intended that his widow should carry out the wishes he had expressed at the meeting.  But the remark he had made to his so­licitor that it was “up to her” whether to carry them out was

“the best evidence of his intention, which was to make the expression of his wishes at the meeting not le­gally binding….I am satisfied that (the widow) understood that the testator expected that she would make provision for (the son and daughter) out of his estate.  She knew that was his wish.  But, in so far as the matter was discussed in any detail between husband and wife (as to which there is no evi­dence) she could not have under­stood that the testator was seeking to impose an enforceable obliga­tion upon her. That, as I have said, was not his intention.  I reject the contention that the use of the words `she knows what she has to do` in the context of the meeting of 14th February 1993, is evidence of an intention to impose an enforce­able obligation; or that her silence at that meeting is to be construed as acceptance of an enforceable obligation.  The matter rested on the trust which existed between husband and wife.  There was no intention to create legal obligations between them.”

Addressing the factual issues in the appeal, Peter Gibson LJ said:

“The question remains whether there was evidence on which the judge could properly come to the conclusion which he did – that the testator did not have the fixed and firm intention to impose upon the widow the obligation, which would become binding on her if she took the house under the will on the death of the testator, to give effect to the testator’s wishes declared at that meeting.

 

To my mind, the phrase which the testator repeated (that the widow knew what she had to do) is equivocal and is at least consistent with the belief and intention on the part of the testator that his expressed intentions imposed only a moral obligation on her.  Plainly there was evidence on which the judge could come to that conclusion.  It is to my mind strongly supported by Dr Burrows’ attendance notes and her oral evidence.

 

True it is that that Dr Burrows was never told of the meeting of 14th February.  Nevertheless the words used by the testator…of an outright gift, coupled with the testator’s realisation that it was up to the widow whether to pass a share back to (the son and daughter) after the testator’s death, are plainly indicative of the fact that the testator regarded the obligation on the widow to be only a moral one.  It is supported by the language used by the testator to Mr Havens (one of the executors) that there had to be a certain amount of trust.  There was ample evidence before the judge that the testator did not intend to impose an enforceable obligation on his widow.”

The testator had said that he wished to avoid tax.  Significantly, Peter Gibson LJ said:

“…as was widely known and the testator undoubtedly knew, if he wanted to avoid inheritance tax entirely he could not give his children more than what came within the nil rate band, but anything given to his wife would escape inheritance tax on his death.  I do not expect the testator knew the law of secret trusts nor every detail of the inheritance tax legislation, but I find it hard to believe that an intelligent man, such as the testator undoubtedly was, would be so naïve as to think that the tax free gift to the wife would remain exempt…if she was placed under an enforceable obligation owed to the children to transfer to them the property given to her.”

And:

“(The appellants) sought to rely on a dictum of Mr Justice Hoffman in Sekhon v Alissa (1989) 2 FLR 94, 99 that the law does not readily accept that the parties intended to distin­guish between legal and moral obligations.  But the circumstances of a particular case may compel the court to consider whether that very distinction was intended by the parties concerned, and this seems to me to be such a case.”

As to the law, the Court of Appeal referred to the mutual wills case of Re Cleaver (supra) where Nourse J said at p.1024:

“Cases of mutual wills are only one example of a wider cate­gory of case, for example secret trusts, in which a court of equity will not permit a person to whom property is transferred by way of gift, but on the faith of an agreement or clear understanding that it is to be dealt with in a particular way for the benefit of a third person, to deal with the property inconsistently with that agreement or understanding.  If he at­tempts to do so, after having received the benefit of the gift, equity will intervene by imposing a constructive trust on the property which is the subject matter of the agreement or understanding…I would emphasise that the agreement or understanding must be such as to impose on the donee a legally binding obligation to deal with the proprty in the particular way and that the two other cer­tainties, namely those as to the subject matter of the trust and the per­sons intended to benefit under it, are as essential to this species of trust as they are to any other…..As in this case the principle difficulty is always whether there was a legally binding obligation or merely what Lord Loughborough LC in Lord Walpole v Lord Orford (1797) 3 Ves 402,419, described as an honourable obligation.”

However Lord Walpole v Lord Orford was a case about mutual wills.  Mutual wills depend upon contract. The constructive trust comes into it only because the beneficiaries cannot sue on the contract.  The secret trust doctrine grew up at least two hundred years ago because of the requirement for writing for testamentary dispo­sitions.  The promise made by the ostensible donee may be purely gratuitous.  Is it not a ques­tion of what the ostensible donee has promised to do rather than what the testator has `imposed` upon him?  Of course the donee’s promise may be to the effect “I will pass it on if I want to”, or “I will not be legally bound by this” ; but if the answer  to a request, which is likely to be made in precatory terms to the effect “will you accept a gift on trust for T”, is an unconditional  “yes”, surely the donee’s word is his bond if the testator makes his absolute gift in reliance on it’ and dies in the belief that the donee will carry out his wish.  Presumably the court of conscience will not permit the ostensible donee to betray the testator and the intended beneficiaries on the basis that only an honourable obligation was intended. Certainly it is the themes of reliance and betrayal which run through the old cases.  In  Re Gardner (1920) 2 Ch. 523 at p 530 War­rington LJ said:

“     The question really is this: can the husband, who as a result of the particular form in which the testamentary disposi­tion of the wife is made, takes at law for his own benefit the cor­pus of her personal estate, properly refuse to carry into ef­fect a wish as to the disposition of that property expressed to him by the wife before her death and assented to and accepted by him? The principle upon which the jurisdiction of the court is based is stated in extremely clear lan­guage by Lord Davey in French v French (1902) 1 IR 172, 230: ‘The basis of the jurisdiction…is of course that the testator has died, leaving the property by his will in a particular manner on the faith and in reliance upon an ex­press or implied promise by the legatee to fulfil his wishes’”.

It is interesting that in the appeal in Re Goodchild (1997) 1 WLR 1216 , where it was argued that the moral obligation/ legal obligation dichotomy was inappropriate in the context of mutual wills Leggatt LJ points out at p1224D:

“..the reason why, if mutual wills are to take effect, an agreement is necessary is that without it the property of the second testator is not bound, whereas a secret trust concerns only the property of a person in the position of the first testa­tor”.

Finally, it is worth mentioning that Inheritance Tax Act 1984, section 143 is aimed at precatory trusts, although the section is one left over from capital transfer tax days, and sits strangely with the PET regime.  A PET which a widow is legally bound to make is of course no such thing.  But one wonders whether arrangements or agreements which are in fact binding under the secret trust fraud doctrine (no-one will ever know about them if the donee honours them) do not in practice precede some PETs made a decent interval after the testator’s death.

© Elizabeth Hailstone 1999

Albion Chambers, Bristol