Half-secret Trusts, Mutual Wills, Secret Trusts

The doctrines of secret trusts and mutual wills both see equity riding to the rescue to forestall justice, but in both cases untidy situations are left behind. Explain.

ll'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."

In essence a secret trust takes free of the requirements of section 9 of the Wills Act 1837. The purpose of the section is of course to prevent fraud. A testator may want to avoid the formality requirements, for example, because he wishes the identity of the beneficiary to remain secret. The rationale behind allowing the doctrine is to prevent the trustee that the property has been bequeathed to committing a fraud by keeping the property or dealing with it in matter that is not in congruence with the wishes of the testator. How true is it then to say that 'untidy situations' are left behind? The detail of the area demands a close analysis of some of the leading cases.

The principle of the secret trust was applied to a non-testamentary disposition in the case of Gold and Gilbert v Hill, (The Times on 24th August, 1998.) Here there was $350,000 payable under a life assurance plan taken out by a Mr Gilbert. It had been designed for employees of the company, 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 enrolment card and on that the name of the primary beneficiary appeared as Max Gold. Opposite his name, in a column headed 'entitlement' appeared '100%'. In a column headed 'relationship' was the word 'Executor.'

Mr Gilbert made a will, through his solicitor, Mr Hill, under which his wife took his whole estate. In addtion Mr Hill was also the executor of that will. Mr Gilbert became involved with Carol. Mr Gilbert told Mr Gold that he was going abroad to work, and that the firm was arranging insurance. He had left this to Mr. Gold and said "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 passed away in and subsequently Mr Gold and Carol sought a declaration that the nomination was effective and that Mr Gold held the policy proceeds in trust for her. Upon the passing away of the holder the nomination was held to be effective, as despite there been no subsisting equitable interest capable of being disposed of, it was held that and the trust crystallised and the sum became payable on death. Until then there was held to be no subsisting equitable interest capable of being disposed of within the meaning of section 53(1) (c) of the Law of Property Act, 1925.

It was held that the most likely interpretation of Mr Gilbert's intentions, as expressed in the enrolment card and elaborated by his conversation with Mr Gold, was that he should hold them as trustee for her benefit and her children. However it is submitted that the position is not wholly satisfactory. Indeed Mr Gold was appointed the executor of the policy, but in essence the entirety of the decision would seem to rest wholly on the fact that there was a conversation between them, and them alone, as to the intended beneficiary. How do we not know that the money was not left to someone else and Mr Gold cut a deal with Carol to split it with her? In essence it could be argued that the doctrine of the secret trust is open to rather less than equitable movements that will not always point down the path of justice. If the rationale is to bring an equitable decision in the first place can the doctrine not be said to be somewhat circular?

Partly against this contention, but also partly in support of it, is the case of Kasperbauer and Griffith v Griffith and Ors, which shows that there must be clear and satisfactory evidence in all cases, in order that a secret trust be held. In this case there existed a house worth £350,000, subject to a mortgage of £170,000, and a death in service gratuity of £110,000. The testator S was a surgeon for the NHS. His first wife, by whom he had a son and daughter, had died. He had remarried and under his NHS pension scheme his widow would get a pension of £20,000 per annum and the gratuity.

S called his son and daughter to a meeting at the house throughout which S's new wife was present. S told them that he would leave the house to his widow and she would 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. S said that this would minimise tax and that his wife knew what she had to do and could be trusted. She however said nothing throughout, but showed no signs of surprise or dissent.

The testator then employed his solicitor to make his new will. He told her that he was giving the house to his widow as an outright gift for tax purposes and that she would divide it three ways or buy the children out. His solicitor was told nothing of the meeting. The testator said that his wife knew what she had to do, saying "I 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 completely. The son and daughter failed in their action on a secret trust as it was held that the testator intended that his widow should carry out the wishes he had expressed at the meeting. The remark he had made to his solicitor that it was "up to her" whether to carry them out was held to be the best evidence of his intention, which was to make the expression of his wishes at the meeting not legally binding. It was held that the wife new of the wish but could not have understood that the testator was seeking to impose an enforceable obligation upon her. The contention that the use of the words "she knows what she has to do" was evidence of an intention to impose an enforceable obligation; was rejected and the matter rested on the trust which existed between husband and wife, as in essence there was no intention to create legal obligations between them.

It could be argued that the fact that the testator repeated the words "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. True it is that that Dr Burrows was never told of the original meeting. 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 indicative of the fact that the testator regarded the obligation on the widow to be only a moral one. Yet equally it could be evidence that they had agreed in secret that she knew what to do and had agreed an oral contract. Again the doctrine would seem to leave a somewhat tenuous linkage between fact and fiction. Is this equity for equity's sake?

The appellants in the case sought to rely on a dictum of Mr Justice Hoffman in Sekhon v Alissa (1989) that the law does not readily accept that the parties intended to distinguish between legal and moral obligations. However it was held that case may compel the court to consider whether that very distinction was intended by the parties concerned, and this was such a case.

The mutual wills case of Re Cleaver is also evidence of this, where Nourse J said at p.1024: "Cases of mutual wills are only one example of a wider category of case … 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 property 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."

Again the 'Griffith' case turns on rather unsatisfactory boundaries. Were there any secret conversations between the wife and deceased? What really was said at that meeting? If what was said was true, does it really matter that there was not an intention to create a legal obligation? Indeed evidential difficulties often appear to give rise to the greater possibility of fraud then prevention. And one may ask, since when has equity concerned itself with the precision of legal intention?

We shall now look at mutual wills. Stone v Hoskins [1905] provides a good definition of the doctrine - "Where two persons make a single will or make wills in similar form and agree that the survivors should not revoke his will or his part of the will, the one of them who dies first without having revoked his will or his part of the will does so with the promise of the survivor that the arrangement shall hold good"

The doctrine of mutual wills was re-examined recently in the case of Healey v Brown [2002]. Mr and Mrs Brown owned a flat as joint tenants and made mutual wills under which each left their half share to the other with an agreement that the survivor would leave the flat to Mrs Brown's niece. The residue would then pass to Mr Brown's son by his last marriage. (Note that unlike express trust, the constructive mechanism is used here to attach itself to future property see the case of Re Hagger 1930) Mrs Brown passed away first but because she had not severed the joint tenancy of the flat her half passed to Mr Brown not under the terms of the will but through the doctrine off survivorship. Subsequently Mr Brown transferred the flat from his sole name to a joint tenancy with his son.

Mrs Brown's niece claimed that Mr Brown had acted in breach of the terms of the agreement and that the flat belonged to her alone. The niece brought her claim before the judge whom decided that Mr Brown was a constructive trustee of the flat, holding one half for himself and one half for the niece. The constructive trust did not extend to the half share which Mr Brown had always owned only to the half share which had passed to him by survivorship on his wife's death. This fits with the decision in a previous case on mutual wills Re Goodchild [1997] but not with the case of the University of Manitoba v Sanderson Estate [1998] where the constructive trust was said to extend to property passing by survivorship from the first to die as well as the survivor's property generally.

Until Healey there was no doubt that mutual wills work as a floating constructive trust which does not crystallise until the death of the survivor. This would not prevent the survivor from converting the property to liquidised assets and living off the proceeds of sale. The balance would then pass to a mutually agreed third party. But if this is still the case it is hard to understand why, in Healey v Brown, the constructive trust only extended to half the property and not the whole. It is perhaps an understatement to say that a certain amount of confusion has been cast over the doctrine by the case.

In Birch v Curtis [2002], a couple bought a house and lived in it with A's four children from a previous marriage. A, after discussing the matter with B, made a will leaving the residue of her estate to B. B made a will leaving the residue of his estate to the four children and two other parties. A died first and B eventually married another woman. B then made a new will leaving the residue of his estate to his new wife. He then sold the house and bought anew house with the proceeds in his and his new wife's joint names. After B's death A's children contended that B had gone against the agreement he had had with A and that he was a constructive trustee of the house for them and the other beneficiaries. Here the judge did not find that the doctrine of mutual wills applied because there was no express agreement that the couple would not revoke their wills and that agreement not to revoke could not be implied either.

Thus if partners make mutual wills they should document the agreement between them in some way as well as the agreement that the survivor will not revoke. Otherwise they might find that the agreement is eventually worthless. The matter is made more complicated because in many cases a husband and wife will make wills in mirror terms. This does not necessarily mean that they want the doctrine of mutual wills to apply. There is a great risk that disgruntled children from former marriages may claim many years down the line that they are entitled to a testator's property because a mutual will existed.

The case of Lord Walpole v Lord Orford states that the court will not permit the 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. However, it is interesting, if somewhat unsettling, that in Re Goodchild (1997) it was argued that the moral obligation/ legal obligation dichotomy was inappropriate in the context of mutual wills Leggatt LJ stating:

"..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".

The case of Goodchild confirms the need for those who have made wills to reconsider them in the light of changes in the law. Couples often make wills based upon similar terms. They agree to leave their property to each other, but on the second death, the property is to go to their children. This case suggests that such wills might well be reconsidered. If unchanged, such wills may just create obligations as between the partners which are neither wanted nor expected.

As seen above, after the first death, the surviving partner may have many years to live, and have to cope with unanticipated and substantial changes. He or she may re-marry, which will revoke the existing will, or the situation can change in any number of ways. In any event, the survivor will usually need to be free to alter his or her own will, and to deal with his or her property according to circumstances. In addtion Re the Estate of Monica Dale (Deceased), Proctor v Dale (Times 16 Feb 1993), which stated that where there are in fact mutual wills, there is no necessity for the second testator to take any particular benefit under the arrangement for him to have become bound by the mutuality on the first death.

The law recognises sometimes that wills are made which create certain expectations in the minds of potential beneficiaries. This can include an expectation that the person making a will, is not going to change it. Sometimes wills are made by two people, each on the basis that the others will is not going to be changed. Once such mutual wills have been executed, and those promises made, the wills can become irrevocable. It had always been thought that such expectations could only arise if an explicit promise is made not to revoke a will. A further complication now arises because of the Contract (Rights of Third Parties) Act 1999. Here a third party can take the benefit of a right given to them by a contract. A will is certainly not a contract, but an agreement to enter into mutual wills might well be viewed as such.

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