All About Estates

Secret and Semi-Secret Trusts: An Unusual Approach to Testamentary Dispositions – Part I

Guest written by Giancarlo Mignardi, Student-at-Law at Fasken Martineau DuMoulin LLP

When we think about testamentary gifts, we typically think of outright gifts, and testamentary trusts, both of which are typically set out in the terms of a Will. However, there is another, lesser-known option: the secret (and semi-secret) trust. This week and next, I’ll explore the use of secret and semi-secret trusts––what they are, how they have been historically used, and their validity in today’s estate planning landscape.

Secret and Semi-Secret Trusts: A Brief Overview

A secret trust arises where a testator leaves property to a certain person who, on the face of the Will, appears to take such property absolutely, but who is, in truth, a trustee for another beneficiary.[1] A testator generally does this out of a desire to keep the beneficiary of a trust (and perhaps the existence of the trust itself) untraceable––or, put simply, “secret”––on the face of a Will, and thus hidden from public scrutiny. A semi-secret (or “half-secret”) trust may also be created for this same purpose although, as its name suggests and as will be outlined below, it offers less secrecy than its “fully” secret sibling.

Essentially, these are both types of trust arrangements made between a testator and a trustee (who on the face of the Will only seems to be a legatee in the case of a secret trust) without disclosure of the terms of the arrangement, but where a mutually-accepted understanding exists between the parties as to the trustee’s office. This understanding may be set out in another document which remains private, even if the Will is probated, or may be made orally (which, while risky, is acceptable).

With a secret trust, the property is given to this legatee-trustee without any express words that impose a trust in the Will itself. As such, a typical case of a secret trust would be where a testator leaves property in his Will to X absolutely, but where, in truth, before his passing, the testator had informed X (and X had agreed) that the property was not for his own benefit, but for the benefit of certain other individuals or charitable purposes.

Semi-secret trusts are similar and born of the same purposes, but differ in that the terms of the Will have expressly stated that a given legatee is to hold property as a trustee. An example would be a case where a given Will states that certain property is to go “to Y in trust so that it may be distributed in accordance with my wishes”. The “secret” component here is not the existence of the trust, but is instead the terms and beneficiary of the trust.

Requirements for Secret and Semi-Secret Trusts

Before a court, secret and semi-secret trusts may be recognized when the following criteria are proven:

  1. a proven intent by the testator to subject the legatee-trustee to an office in favour of a beneficiary;
  2. communication of that intent to the trustee; and
  3. an express or implied acceptance of that office by the trustee.[2]

If such criteria are satisfied, equity will generally enforce the trust and ensure that the property is given to the intended beneficiary.[3] (Note though that these trusts are still required to satisfy the “three certainties” – intention, subject(s), and object(s)). The onus of proving a secret or semi-secret trust rests on the party attempting to support its validity, and the standard of proof for proving such trusts is the civil standard (i.e. a balance of probabilities).[4]

The rules governing semi-secret trusts are distinct in one important and admittedly odd way: while the trust arising under a secret trust may be communicated to trustees at any time before the property vests in them (i.e. any time before the death of the testator), in the case of semi-secret trusts, the communication must be before or at the same time as the Will is made.[5]

What Happens When these Trusts Fail?

Where a secret trust fails, the trustee will be entitled to the trust property absolutely, with no obligation to the beneficiaries.[6] This is because, in the case of such a failure, the Will itself grants the property to the trustee-legatee absolutely, and so the contents of the Will are simply followed. However, if a semi-secret trust fails, there arises a resulting trust in favour of the testator’s estate.[7] The distinction is because, in the case of a semi-secret trust, the Will expressly states that the trustee has no beneficial interest in the trust property, as the existence of the trust is made explicit on the face of the Will. As a result, there is no principled reason why the trustee should then become the beneficiary of that property. It therefore reverts back to the estate.

Statutory Requirements

At first glance, there seems to be nothing objectionable about a testator wishing to keep secret some of his or her testamentary dispositions in this fashion. However, as is well known, testamentary dispositions are supposed to comply with the provisions of applicable provincial Wills statutes, which all require that such dispositions be set out in conformity with the Will formalities in such provisions.[8]

So, what gives here? Clearly, these secret trusts do not comply with these requirements at all. Case law, however, has established them as a permissible means by which a testator is able to bypass the formality requirements in such provincial statutes. Since the eighteenth century, many theories have been adopted by courts and commentators which attempt to justify why this is the case. A full discussion of this is beyond the scope of this post, but suffice it to state that what seems to be one widely-accepted modern view as to the basis for secret and semi-secret trusts is that they arise entirely outside (“dehors”) the Will and thus do not need to comply with statutory formality requirements.[9] Essentially, Wills legislation is technically not circumvented by means of such trusts because the legatee-trustee under the Will takes legal title to the property. In this regard, the statute is allowed to operate, but equity then responds outside of the Will, fixes upon the legatee’s conscience, and enforces the promise that he had given to the testator.[10]

Today’s post was intended to provide an overview of secret and semi-secret trusts, as well as the legal framework that allows for their existence. Next week, I will discuss the practical use of such trusts in modern estate-planning, as well as some of the difficulties that arise in proving these trusts.

 

 [1]       Albert H Oosterhoff, “Secret and Half-Secret Trusts” (2007) 26:2 ETPJ 173 at 173 [Oosterhoff]; Albert H Oosterhoff, Robert Chambers & Mitchell McInnes, Oosterhoff on Trusts, 9th ed (Toronto: Thomson Reuters, 2019) at 830 [Oosterhoff on Trusts].

[2]       See for example Ottaway v Norman, [1971] 2 All ER 1325.

[3]       Oosterhoff , supra note 1 at 174.

[4]       See for example Re Snowden (1978), [1979] Ch 528 [Snowden]. See also Ian Hull, “Secret Trusts – How to prove one and what happens if it fails”, Hull and Hull LLP (November 30, 2015), online: <https://hullandhull.com/2015/11/secret-trusts-how-to-prove-one-and-what-happens-if-it-fails/>.

[5]       Many commentators believe that this distinction is wrong and illogical, and is perhaps the result of wrongly decided cases, which had initially created the distinction, continuing to be used as authorities in this sphere. A discussion of this is beyond the scope of this post, but consider visiting Oosterhoff on Trusts, supra note 1 at 843–845 & Oosterhoff, supra note 1 at 181–185 for a useful explanations of this odd distinction.

[6]       See for example Ottaway, supra note 2.

[7]       Ibid. See also Oosterhoff on Trusts, supra note 1 at 838, 845.

[8]       Oosterhoff on Trusts, supra note 1 at 831.

[9]       See, for example, Snowden, supra note 4, wherein Megarry J stated: “the whole basis of secret trusts … is that they operate outside the will, changing nothing that is written in it, and allowing it to operate according to its tenor, but then fastening a trust on to the property in the hands of the recipient [i.e. the legatee-trustee]”.

[10]     Oosterhoff on Trusts, supra note 1 at 831.

About Maureen Berry
Maureen Berry is a partner in the Trusts, Wills, Estates and Charities group at Fasken. Maureen’s practice is focused on wills, estate planning, domestic and international trusts, private corporation taxation, and executive compensation. Maureen also advises charities and non-profit organizations. Working with Canadian and international families, firms, corporations and charitable organizations, she provides advice on all aspects of private client matters. She is a leading expert in the fields of tax law and estate planning. As an Adjunct Professor at Osgoode Hall Law School, she teaches Advanced Estate Planning. Maureen has previously taught corporate tax and international tax at the University of Toronto and Western University, along with the Bar Admission course for up-and-coming lawyers.

0 Comments

Leave a Reply

Your email address will not be published. Required fields are marked *