Secret trusts – Rawstron v Freud [2014] EWHC 2577

 In Wills

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Case Summary from LawSkills | Private Client specialist trainersA secret trust can be created by a testator who leaves property (by his Will or by intestacy), on the strength of an undertaking given by the person who takes that property, to hold it when received on trust for a third party. It is long established that the court will enforce performance of the undertaking given for the benefit of the third party.

Why might someone want to use a secret trust? It gives the testator a way to conceal the true object of his gift, even though a Will’s contents enter the public domain through its publication following probate being granted.

Historically, this was a popular device in the nineteenth century, when many a testator had a mistress and/ or illegitimate children for whom he wished to provide. Many of the cases still cited as authority in this very particular area of trust law date from that time. Indeed, one of the main cases cited in the most recent case of Rawstron v Freud [2014] EWHC 2577 (on which more below) was Saltmarsh v Barrett, concerning a Will dated 11 October 1830. The existence of a recent case, however, reveals that secret trusts are still very much used today, and it is still necessary to both understand their nature and how they work.

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Secret trusts depend on the operation of equity to be effective. As Snell writes:

‘Secret trusts are a device by which the express intention of a person to make a testamentary gift may be enforced despite the testator’s failure to comply with the formalities for the execution of a will or testamentary disposition under the Wills Act 1837. They demonstrate the rationale of preventing the fraudulent reliance on the statutory formalities as a justification for denying the enforceability of the secret trustee’s expressly undertaken obligation.’  (Snell’s Equity, 32nd Ed, ch 24)

It is almost inevitable that the existence of a secret trust will only be capable of proof by evidence which does not comply with the Wills Act: the whole purpose of its creation will be to exclude the identity of the beneficiary from the formally attested documents admitted to probate. Evidence of such a trust is likely to be either oral or contained in a document which has not been properly signed or attested. The existence of secret trusts is therefore outside both the letter and the spirit of the Wills Act, and justification has long been sought for their existence, both as an academic construct and when considered by the courts.

There are two schools of thought on the theoretical justification for the existence of the doctrine of secret trusts.

  1. The first theory is that their enforcement is an application of the principle that statute must not be used as an instrument of fraud. There has, however, been considerable judicial disagreement as to the nature of this fraud.
    • Some would argue the fraud is contained in the ability of the intended trustee to take the property beneficially if the trust fails. In the case of a half-secret trust, however, the trustee would not in any event take the property beneficially (unless coincidentally taking as a residuary beneficiary or beneficiary on intestacy) if the trust failed, so this fraud would only be relevant in the case of a fully secret trust.
    • Others would argue that the fraud is on the testator, in failing to observe his intentions, and on the potential beneficiaries in depriving them of their interest. While this justification can at first sight seem appealing, it has been argued that its argument is circular. One refers to the ‘wishes of the testator’ and to ‘beneficiaries’, but these references beg the question. They can only be described in such terms if evidence outside the terms of the Wills Act is admitted to prove them so. If one accepts this argument, this justification can work for neither fully nor half-secret trusts!
  2. The alternative justification for secret trusts as a whole, and the one which usually finds favour in modern examinations of the doctrine, is the secret trust is a form of trust – either constructive or express – which operates outside the Wills Act, and need not therefore be concerned with that statute’s formalities. Most would now advocate that secret trusts operate wholly outside the Will or intestacy in question.

Rawstron v Freud [2014] EWHC 2577

This recent case concerned the use of an arcane construct – the secret trust – in a Will, something which many might have thought was no longer employed in the preparation of modern Wills. Pleasingly for solicitors practising in this area, consideration of this topic was undertaken in part by applying the principles recently enunciated in Marley v Rawlings [2014] UKSC 2, [2014]2 WLR 213.

The Claimants asked the Court to consider, as a preliminary point, whether a Will contained a valid secret trust, or if, as the Defendant argued, the gift of the residue was instead to be construed as a potential half-secret trust, the validity of which would then have to be assessed against the more rigorous requirements demanded of such trusts.

The facts

Richard Spearman QC, sitting as a Deputy Judge of the Chancery Court, heard this preliminary application, and began his judgment with the following apposite words:

‘In his long and successful life, the late Lucian Freud achieved international recognition as an outstanding painter and draughtsman, and, with it, considerable wealth. He also lived a very full private life.’

Lucian Freud died on 20th July 2011. His net UK estate for probate was just under £96m, and his residuary estate after payment of legacies and inheritance tax, but before administration expenses, was estimated by the Claimants to be worth approximately £42m. The first Claimant had been Lucian Freud’s solicitor for many years. The second Claimant was one of his children. The Claimants were the executrices of his Will, and brought this claim in that capacity. The Defendant, it was accepted for the purpose of the application, was another of Lucian Freud’s children, the papers in the case indicating that his children numbered ‘at least 14’.

Lucian Freud executed a professionally drawn Will in 2004 (the ‘2004 Will’) which included the following provision:

‘6.  GIFT OF RESIDUE

6.1 I GIVE all the residue of my estate (out of which shall be paid my funeral and testamentary expenses and my debts) and any property over which I have a general power of appointment to my Trustees ON TRUST to sell or retain it (and such estate and the property which currently represents it is referred to in this Will as “the Trust Fund”)

6.2 MY Trustees shall hold the Trust Fund on the trusts and with and subject to the same powers and provisions communicated before the execution of this Will to the persons named in clause 1 [the Claimants] and set out in a deed already executed by me and them (which is not to form part of this Will)’

The 2004 Will also included clauses relating to a specific gift, personal chattels, copyright, tax on lifetime transfers, trustee powers and a charging clause. The 2004 Will was revoked in 2006 by the execution of Lucian Freud’s last Will, dated 10 May 2006 (the ’Will’). Under the terms of the Will the gift of residue was worded differently:

‘6.  GIFT OF RESIDUE

6.1 I GIVE all the residue of my estate (out of which shall be paid my funeral and testamentary expenses and my debts) and any property over which I have a general power of appointment to the said Diana Mary Rawstron and the said Rose Pearce jointly’

While the wording of the gift of residue clause under the Will was different, the other clauses (apart from a change to the specific legacy that was not relevant to the case) were essentially the same as those that had been contained in the 2004 Will.

Richard Spearman QC was asked to consider whether the gift of residue under clause 6 of the Will amounted to an absolute gift of the residuary estate to the Claimants. The Claimants contended this was the case, but also made it clear that this gift of residue was subject to a trust imposed by Lucian Freud, the terms of which they did not want to disclose on the basis that this would be contrary to Lucian Freud’s wishes. In other words, this gift was the subject of a secret trust.

The Defendant, however, argued that on its proper construction, the Will did not give the residuary estate to the Claimants for their absolute benefit, but instead for them to hold on trusts which are not set out in the Will. On that basis, any trust imposed on the residuary estate would only be a half-secret trust. In the light of the different requirements for the valid creation of secret and half-secret trusts, the Defendant would then wish to explore whether a valid half-secret trust had in fact been created, or whether there was, instead, an intestacy of the residuary estate. In that event, the Defendant would be entitled to a share of the residue, whereas if the half-secret trust was valid his only possible claim on the estate would be to seek provision under the Inheritance (Provision for Family and Dependants) Act 1975. As the Defendant was an adult child, such a claim would be very unlikely to succeed.

The Claimants asserted that, in fact, even if the trust was half-secret, it would still be valid as the requirements that its terms were communicated to the trustees before the Will was executed (or contemporaneously with its execution) were met. In deference to the wishes of testator, the Claimants chose not to disclose evidence relating to this to the Defendant, who was not prepared to concede the point in the absence of supporting material. This point would only involve further consideration, however, if the Claimants failed to establish a secret trust in this hearing.

The legal issues involved

Interpretation of Wills

The first matter considered by the Judge, over which the parties were not in dispute, related to the basis on which the Will should be interpreted. Richard Spearman QC followed the recent case of Marley v Rawlings, confirming that, save where s.21 Administration of Justice Act 1982 applies, a Will should be interpreted in the same way as a contract. Lord Neuberger stated in that case that:

‘When interpreting a contract, the court is concerned to find the intention of the party or parties, and it does this by identifying the meaning of the relevant words, (a) in the light of (i) the natural and ordinary meaning of those words, (ii) the overall purpose of the document, (iii) any other provisions of the document, (iv) the facts known or assumed by the parties at the time that the document was executed, and (v) common sense, but (b) ignoring subjective evidence of any party’s intentions.’

Neither side contended that s.21 of the Administration of Justice Act applied, and so the Judge concluded that Lord Neuberger’s formulation should be followed. On this basis it was agreed that no extrinsic evidence as to the instructions on behalf of Lucian Freud, or as to what the solicitors intended by their drafting, should be admitted as an aid to interpretation of the Will.

Secret and half-secret trusts

The other legal issue considered by Richard Spearman QC was the definition of secret and half-secret trusts. He cited Theobald on Wills, 17th edn, to distinguish the two:

‘a trust is fully secret if the Will does not disclose that the trust exists. It is half-secret if the Will discloses that there is a trust but does not disclose the object and/or the terms of the trust. In the case of a secret trust, it is of no consequence whether the terms of the trust are communicated to the trustee before or after the execution of the Will, so long as it is communicated in the testator’s lifetime. A half-secret trust, by contrast, will fail if its terms are not communicated to the trustee either before or at the time of the execution of a Will.’

Submissions were made by both Counsel on the nature of the residuary gift in clause 6 of the Will, as the Judge’s decision on that point would be key to whether the Defendant could pursue this claim on the estate.

The legal arguments

Submissions for the Claimants

  • The Claimants took the gift of residue beneficially because the gift was expressed as a simple gift of residue with no mention of a trust.
  • In particular, the Will defined the Claimants as ‘the Trustees’, making gifts of e.g. the personal chattels to ‘the Trustees’. The Claimants are, in striking contrast, identified in clause 6 of the Will by name.
  • The Will specifically revoked the wording of the residuary gift in the 2004 Will, which had declared a trust on the face of the document. Instead, wording was used that made no mention of a trust. This reinforced the conclusion which was evident from the Will itself.
  • Any argument contrary to the above points involved implying a declaration of trust where none existed. This was not necessary as the Will worked perfectly well as it was. Moreover, implying a trust would give the Defendant the opportunity to challenge the validity of the trusts applicable to the residuary estate and create an intestacy. It was submitted that the Court should not seek to imply a trust where none was needed and to do so might cause the validity of the residuary gift to be challenged.
  • The inclusion of the trust powers in the Will made sense even if there was no trust of the residue, on which point the following arguments were relevant:
    • It would be strange to use the terms of the trustees’ administrative provisions to seek to change the meaning of a beneficial provision in the Will.
    • The powers contained in the Will could still have a purpose, even if not used for the residuary gift e.g. valuations, insurance, investments in relation to the chattels, the specific gift, and for use generally during the administration of the estate.
    • If the Claimants had pre-deceased the testator there would have been a partial intestacy, to which the powers would have been applicable.
  • The fact that the first Claimant was the testator’s solicitor does not mean that she must have been intended to take as a trustee. The fact that the first claimant took beneficially was readily explicable by the fact that the testator intended to impose a fully secret trust. It would be impossible to use a professional as a fully secret trustee if the mere fact of naming the professional as legatee made them an express trustee under a Will.

Submissions for the Defendant

  • The wording of the residuary gift in the Will was as capable of being a gift on trust as of being a beneficial gift:
    • The gift was not expressed to be made ‘beneficially’ or ‘absolutely’.
    • The wording of the clause referred to the ‘said’ Diana Rawstron and the ‘said’ Rose Pearce i.e. the persons previously appointed as executors and trustees.
    • The residuary gift was made ‘jointly’, which in other cases (e.g. Saltmarsh v Barrett 3 De G F & J 279 from the mid nineteenth century) has been taken as an indication that the gift was not intended to be beneficial.
    • The gift under clause 6 would include some chattels, the copyrights given to the Claimants under another clause, and was also subject to an express trust to pay funeral expenses and debts, as well as tax. It was therefore clear that the Claimants were to receive the subject matter of the gift of the clause, at least in part, as trustees.
  • The other provisions of the Will supported the conclusion that the gift in clause 6 was to be a gift on trust e.g. the range of trustee powers given and the inclusion of a charging clause which was inconsistent with the Claimants receiving the residue as joint beneficiaries.
  • The factual context in which the Will was made, and common sense, supported the contention that the residuary gift was intended to be on trusts.
    • The testator’s estate was substantial.
    • The first Claimant was the testator’s solicitor, and Professional Conduct rules prevented her from taking an absolute gift under the Will she prepared for her client.
    • The trust administrative powers contained in the 2004 Will were identical to those in the Will. The 2004 Will had created a half-secret trust. The trust powers were deliberately retained, and they were more likely than not left in the Will to apply to the gift of the residue. Furthermore, the individual powers in that clause led to an ‘irresistible conclusion’ that they were intended to apply to the residue.

The judgment

The Judge accepted that the gift of residue in clause 6 had not used the term ‘beneficially’, nor ‘absolutely’; that the gift was made to the Claimants, who were the same persons as appointed executors and trustees; that this was spelled out by the use of the word ‘said’ in clause 6; and that the gift was made to the Claimants jointly. He did not accept, however, that any or all of these points outweighed the fact that clause 6 was expressed as a simple gift of residue, and that the clause made no mention of a trust.

The fact that the testator referred to the Claimants as trustees in some clauses of the Will, but by name in clause 6, was more consistent with the construction that the testator intended the Claimants to take the residue (under clause 6) personally.

It was correct to say that the subject matter of the gift in clause 6 was not only the residue, but would also include some chattels and copyrights. The Claimants took, however, in a fiduciary capacity under the chattels and copyrights clauses, rather than in a personal capacity. This matched the different ways in which the Claimants were referred to in the different clauses of the Will, therefore supporting the argument for an absolute gift of residue more than not.

It was argued that the fact that the Claimants were the testator’s solicitor and one of many children suggested the gift of residue was intended to be a gift in trust. The Judge disagreed: if this argument were allowed to succeed, it would make it difficult if not impossible for a professional person to be a secret trustee.

The Judge agreed with the Claimants that the trust powers given under the Will could have a purpose even if the gift of residue was absolute. The administrative powers should be viewed as ancillary provisions, and did not justify interpreting the residuary gift as one in trust. He concluded that the charging clause contained in the Will should be viewed in the same way.

Richard Spearman QC then considered what he regarded as a ‘striking feature’ of the case: the Will revoked the earlier 2004 Will, which contained a differently worded residuary gift plainly intended to create a half-secret trust.

The Judge acknowledged that this was part of the factual context of the case, but a factual context to which he was allowed by both parties to have regard, being the circumstances of the revocation of the 2004 Will, the substantial nature of the estate, the professional advice Lucian Freud received and both Wills having been drawn up professionally by his advisors. The only reasonable conclusion the Judge could draw was that in changing the wording of clause 6 Lucian Freud did not intend to create a half-secret trust in the Will. It would be ‘unrealistic’ to suggest that he did not have an appreciation of secret trusts, but it was noted this factual context was peculiar to the present case and distinguished it from other secret trust cases.

The judgment concluded by confirming that in the light of (a) the natural and ordinary meaning of the words used in clause 6 of the Will, (b) the overall purpose of the Will, (c) the other provisions of the Will, (d) the material factual matrix when the Will was made and (e) common sense, the Claimants’ interpretation of clause 6 of the Will was to be preferred. The clause contained a beneficial gift to the Claimants.

Practice points/ points of interest

  • Many may have thought that secret trusts were a thing of the past, but this case shows they are alive and well. One wonders if this is because most that are created work successfully, but are, of course, secret, so little is heard about them.
  • Great care needs to be taken in drafting either a secret or half-secret trust. Communication can be key. In this case the Claimants were in no doubt as to what they were expected to do with the residue of Lucian Freud’s estate, even though, as the secret trust worked, others may never find out what that was.
  • Consider discussing with the testator the possibility of letting the beneficiaries of a (half) secret trust know what is planned, so that they can be involved in bringing its performance to a satisfactory conclusion following the testator’s death.
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