A recent Court of Appeal decision has brought secret trusts back into the legal spotlight, highlighting their complexities and the challenges they pose in estate disputes. This case delves into the nuances of secret trusts, particularly focusing on the requirements for their creation and the evidentiary hurdles involved.
What is a secret trust?
A secret trust arises when a testator leaves property to a legatee under a Will, with the understanding that the legatee Will hold the property on trust for a third party. The key feature of a secret trust is that its terms are not disclosed in the Will itself, making it “secret”. There are two primary types:
- Fully secret trusts (FSTs): The Will appears to make an absolute gift to the legatee, with no mention of a trust. The existence and terms of the trust are communicated separately during the testator’s lifetime.
- Half secret trusts (HSTs): The Will indicates that the legatee is to hold the property on trust, but the beneficiary is not named, leaving the terms of the trust undisclosed.
The essential elements for a valid secret trust include:
- Intention: The testator must intend to create a trust, not merely a moral obligation;
- Communication: The testator must communicate the trust’s terms to the trustee;
- Acceptance: The trustee must accept the obligation to hold the property on trust; and
- Reliance: The testator must rely on the trustee’s acceptance when making the Will.
In this case, the deceased had a history of aggressive tax avoidance and had previously made provisions in his Will for his siblings. However, his final Will excluded them, and he entered into a civil partnership shortly before his death, which his brother argued was a strategy to save inheritance tax.
Robert claimed that Alan had verbally assured him that he would receive a share of the estate, suggesting the existence of a secret trust. The Court had to determine whether a valid secret trust existed, despite the absence of explicit terms in the Will.
In June 2024, the High Court granted summary judgment in favour of the civil partner, dismissing the claim on the grounds that it had no reasonable prospect of success.
However, the Court of Appeal overturned that decision, ruling that:
- The contemporaneous documents did not speak with one voice, meaning there was ambiguity in the evidence.
- An intention to avoid inheritance tax does not preclude the creation of a secret trust.
- There was a real prospect that further evidence at trial could support the claim.
- Summary judgment was inappropriate where disputed issues of fact—especially those involving oral discussions—were central to the case.
Legal implications and challenges
The case underscores several critical issues in secret trust disputes:
- Evidentiary challenges: Secret trusts often lack written documentation, relying on oral communications and the trustee’s acceptance. This can lead to difficulties in proving the trust’s existence and terms.
- Fraud prevention: The doctrine of secret trusts aims to prevent fraud by ensuring that trustees cannot claim property for themselves when they have agreed to hold it for another. This principle was highlighted in Rochefoucauld v Boustead (1897), where the Court imposed a constructive trust to prevent the legatee from benefiting at the expense of the intended beneficiary.
- Impact of the Wills Act 1837: The Wills Act requires Wills to be in writing, signed by the testator, and witnessed. Secret trusts, which often lack written evidence, challenge these formal requirements, leading to debates about their validity and enforceability.
Conclusion
Overall, the case serves as a poignant reminder of the complexities surrounding secret trusts. While they offer a means to distribute assets discreetly, they also pose significant legal challenges, particularly regarding proof and compliance with statutory requirements. This case reinforces the need for clarity and caution when considering secret trusts in estate planning, even though the outcome of the trial is still awaited.
For those involved in estate planning or facing potential disputes over secret trusts, seeking legal advice is crucial to navigate these intricate issues effectively.
How can we help?
Lesley Harrison is an Associate in our expert Dispute Resolution team, specialising in inheritance disputes and disputes over property.
If you are the beneficiary of a Trust and have reason to believe that the trustees are in breach of their duties and powers please contact Lesley or another member of the team in Derby, Leicester, or Nottingham on 0800 024 1976 or via our online enquiry form.
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