Trust Formalities Notes
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Trust Formalities Revision
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FORMALITIES Formalities differ between a testamentary trust (made by will) and an inter vivos trusts. Further differences are dependent on the type of property subject to the trust. Generally no need for formalities, however, there are exceptions for: (i) transfer of land; (ii) transfer of existing equitable interests; and (iii) where the trust is made in a will. The need for formalities: One of the purposes is to create certainty of transactions and prevent fraud — it needs to be clear from the outset who has the benefit of an equitable interest. Fuller identifies the following functions of formalities (he's writing in relation to contract):
Evidentiary function: formality constitutes proof that a legal event has happened. o Some force to this: if the formality is constitutive, then every case has the formality and so that's all the courts / third parties have to look for. However, formalities perhaps undermine this function because it limits the evidence the courts will look at (i.e. will only look at writing, closing their eyes to oral evidence). Improves certainty, but may undermine ability of courts to look at all the evidence.
Cautionary function: they act as a check against inconsiderate action. Insures legal intention. o Does the requirement for writing actually help in this regard? Writing is far more common place than the use of a wax seal (old requirement).
Channeling function: standardizing transactions "form offers a legal framework into which the party may fit his actions." Allowing people to have confidence that their actions have legal effect. o If we abolished formalities an optional standard could be used to largely achieve this function, without defeating intentions of those who failed to do so. Virgo: a strict insistence on formalities will frustrate the intention of the settlor in some instances. Tension between giving effect to the intention of the settlor and ensuring compliance with formalities. Advantages for:
Trustee: they need to be certain who beneficiaries are, so they can exercise their trust duties.
Beneficiary: Must be certain of interest to prevent fraud by the trustee.
Courts: When a court intervenes, it must ensure it acts correctly in relation to competing interests.
Revenue/Customs: Need clarity to know who has the benefit of property for the purposes of tax. TESTEMENTARY TRUSTS Many trusts are created by will — a requirement of all wills is that they must comply with the requirements of s.9 Wills Act 1837 to be valid. Under this section, trusts must be:
Signed by the testator: or someone acting at the testator's direction in his presence.
Two witnesses: must sign and attest the will, at the same time, in the testator's presence. Formalities reduce the chance of mistake / fraud / undue influence / ill-considered, hasty dispositions. If any of these requirements is not satisfied, the will is invalid and the trust void. For inter vivos trusts, a resulting trust is satisfactory if another trust fails — no good where the settlor has died. As such, mechanisms have been developed to ensure formality rules do not frustrate settlor's intent, including: Doctrine of incorporation by reference: Informal documents can be incorporated into a will provided: (i) they are expressly identified by the will; (ii) existed at the time it was executed.
In the Goods of Smart : will directed trustees to give testatrix's friends articles. These articles would be specified in a book. As the book was not prepared until years after the will, it could not be incorporated. However, Gorell Barnes J confirmed that an existing document could be incorporated if it was mentioned "in such terms that it could be ascertained" in a valid will. SECRET / HALF-SECRET TRUSTS Testators may intentionally evade the formality requirements of testamentary trusts — e.g. to leave assets to illegitimate children. Testator can try to do this in two ways:
Half secret trusts: mention is made in the will of the existence of the trust, but the terms of the trust are not disclosed in the will (i.e. beneficiaries' names are contained in another document).
Secret trusts: where the trust does not appear on the face of the will. Will purports to leave property to a named person absolutely, but testator intends legatee to hold it on trust for another. o If the legatee (aware of the testator's intention) seeks to rely on his legal rights under the will, he will be using the Wills Act to perpetrate fraud. Strong case for equitable intervention. Since secret trusts are an exception to the formality requirements of the Wills Act (all terms of trust must appear in writing), it needs justification. Three main theories:
1. Incorporation thesis: A written document can be incorporated into the will when the will specifically refers to it — under the doctrine of incorporation by reference. o Although this is a way of mitigating harsh formalities, it's difficult for this to be the basis of secret trusts, since if you're explicitly identifying a document in the will, it's no longer secret.
2. Fraud theory: this is the historical justification for secret trusts, but isn't convincing. o Narrow view: unless the trust is upheld, the legatee will take the property beneficially, thereby unjustly enriching himself. However, this isn't convincing as a reason to uphold the trust, because an RT to the testator's estate could prevent this. o Broad view: could define a fraud as anything which defeats the settlor's intention (therefore trust should be upheld). However, if we take this view, any trust could be enforced regardless of formalities.
3. Dehors the will theory: the secret trust operates 'dehors' (outside) the will. The trust does not arise from the will, but from the communication to and acceptance of the trustee (Re Young). This means the secret trust is inter vivos and the Wills Act does not apply. o Rickett: If we see secret trusts as express trusts, secret trusts of land should still be caught by the relevant formalities for dispositions of land in s.53 LPA. Dehors will theory supported in the case law:
Re Snowden  See below for facts. Megarry VC: "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 to its tenor, but then fastening a trust on to the property in the hands of the recipient." He rejects the fraud theory, which has implications for the standard of proof required — i.e. high standard to prove fraud, but only a civil standard of proof to show existence of a secret trust.
Re Gardner (No. 2) : testatrix attempted to create a secret trust, but the beneficiary of the trust died before her. Usual practice for trusts created by will was for property to revert back to the testator's estate. Romer J: a secret trust arises immediately — therefore, the beneficiaries title arose not under the will, but by the trust already in existence prior to the testatrix's death. Trust is created before the will. The representative of the beneficiary could therefore claim her share. o Virgo: case is wrongly decided. Romer J held that the dead beneficiary acquired her interest at the date of declaration of the secret trust. Because she had an interest before she died, the usual rules under which a gift lapses do not apply. However, this is contrary to principle: beneficiaries of a trust cannot acquire an interest in the trust property until the trust has been completely constituted, and a secret trust is not constituted until the testator dies and the trust property is vested in the legatee/trustee by operation of the testator's will. No interest is acquired on communication / acceptance by the trustee. Thus, the secret beneficiary did not have an interest at the time of her own death — the secret trust should have lapsed and the property held on RT for those entitled to residuary estate.
Re Young : Testator's will left property to his wife subject to a condition that she should make certain bequests he had previously communicated to her, including a gift of £2,000 to his chauffer, Mr. Cobb. C had witnessed the will, which meant he could not receive a legacy under it. Dankwets J: C was entitled to receive the money because his interest arose from an oral secret trust, not under the will. Wills Act formalities were irrelevant to the trust. Issues with 'dehors' theory:
Constitution: because trust is declared while testator is still alive, but is constituted following his death, equity allows the trust to bind property added to the estate in this period. This contravenes the rule in Re Ellenborough against declaring an immediate trust of future property.
Half-secret trusts: Operation of fully secret trusts Elements were identified in the following:
Ottoway v Norman  Testator left his bungalow to his housekeeper in his will. H did so on the separately communicated understanding that, on her death, she would leave it to his wife
and son (claimants). Housekeeper died and left bungalow to N. Brightman J: Three elements necessary for a fully secret trust: (i) intention to create a trust; (ii) communication; (iii) acceptance by the trustee (which can be express or silent). These elements were present here. McCormick v Grogan : Intention not proved. Testator left property to D and, as he lay dying, instructed D in letter what to do with the property. Terms were not obligatory: "I do not wish you to act strictly on the foregoing instructions, but leave it entirely to your own good judgment". D complied with some wishes, not all. Lord Hatherley: there was no trust, only a moral obligation.
Standard of proof necessary:
Older cases: high standard: o Ottoway the standard of proof was said to "clear evidence is needed before the court will assume that the testator did not mean what he said". The standard of proof was said to be that of rectification of a contract (i.e. higher than ordinary civil standard). o McCormick v Grogan: court held the standard of proof required was that for fraud.
Modern approach: civil standard: o Re Snowden  Testatrix made a will giving her estate to her brother, telling him (with his consent) she wanted him to use his discretion to split the money between nieces and nephews. Brother dies, leaving everything to his son. Question: standard of proof required to prove the trust. Megarry VC: the ordinary standard of evidence required to establish a trust" is necessary — i.e. the ordinary civil standard of proof. On this test, there was no trust here. "She simply left him, as a matter of family confidence and probity, to do what she would have done if she had ever finally made up her mind." However, if the beneficiary alleges fraud on the part of the trustee (i.e. they are using the Wills Act to fraudulently take property absolutely), then the standard of proof for fraud will apply. Virgo paradox with variable standard of proof: the worse the trustee's conduct is alleged to be, the higher the standard of proof that needs to be satisfied before the secret trust is recognised. Don't need to show fraud to establish a secret trust, so beneficiaries would be well advised not to allege fraud. Failure to establish all requirements of a secret trust: if it can be shown that the testator intended the trust (and it was communicated / accepted) but not who the beneficiary of the trust was, the property will be held on an RT for those entitled to the testator's residuary estate, because of the failure of the express trust. Where it is not possible to prove even that the testator intended the legatee to take the property as a trustee, he or she will take the property beneficially. Half-secret trusts If A leaves a right to C in his will, and the will indicates that C is to hold the right on trust, but the terms are separately communicated to C before the making of the will, the court will enforce the trust. Two different explanations of secret trusts have been suggested:
Incorporation thesis: Matthews: argues this is the case (see above).
o Critchley: there are similarities between half secret trusts and incorporation by reference (both require: (i) validly executed will; (ii) informal disposition; (iii) informal arrangement to be in place prior to the date of the will). However, there are also substantial differences: (i) in half STs the wishes of the testator can be made known orally; (ii) elements of communication
/ acceptance inter vivos are essential to half STs, but missing from incorporation.
Prevent fraud: although fraud was the historical justification for secret trusts, it can't apply to half secret trusts — it is clear from the face of the will that C is not intended to take the right for his own benefit. Therefore, in the absence of the secret trust doctrine, C would simply hold the right on trust for A's estate. So there seems to be no risk of C profiting by denying the trust However, if fraud were instead interpreted as encompassing unconscionable conduct, it could be used to justify the recognition of these trusts. Trustees can be considered to act unconscionably where they seek not to be bound by their undertakings to the testator to hold property on trust for another. The trust could then be recognized to prevent unconscionable behavior from occurring. Such a principle was effectively recognized in the following case:
Blackwell v Blackwell : testator left legacies, but required legatees to apply the income "for the purposes indicated by me to them." Instructions were made orally, to benefit the testator's mistress and their illegitimate son. Claimants were residuary legatees. HL: this was a valid trust. o Viscount Sumner: requirements of half-secret trusts are: testator has communicated the purpose of the trust to the legatee, who then acquiesces/promises to comply, and the testator consequently relies on this by executing the will so as to leave property to the trustee. o Lord Buckmaster: Half secret trusts should be enforced to avoid fraud: "if the half secret trust was denied by trustee, he would not get the property absolutely because it would be held on resulting trust for the residuary beneficiaries, but the testator's intended beneficiaries would not get their agreed benefit and the testator's intentions would be defeated, so the half secret trust should be enforced to avoid this fraud." (Broad interpretation of "fraud", closer to unconscionability) Virgo: in other words, this acquiescence / promise operates as a form of estoppel — there is: (i) communication; (ii) acceptance; (iii) reliance. It will be unconscionable for the legatee not to fulfil the undertaking he has given to carry out the purposes for which the bequest was made. Oakley: the fraud argument is circular. To refer to the terms of the trust as the 'intentions of the testator' and to describe those entitled under the terms of the trust as 'beneficiaries' assumes that there is a valid trust in the first place. If there is no valid trust, there are no validly expressed intentions of the testator and no beneficiaries to be defrauded if the secret trust were not recognised. Viscount Sumner and Lord Warrington seemed to endorse the 'dehors the will' theory.
Sumner: noted the secret trust doctrine does not undermine the Wills Act formalities because it operates outside the Act. It lets the legatee/trustee take what the will gives him and then makes him apply it as he agreed in the secret trust agreement.
Warrington: "What is enforced in not a trust imposed by the will, but one arising from the acceptance by the legatee of a trust communicated to him by the testator, on the faith of which
acceptance the will was made or left unrevoked… it is the fact of acceptance of the personal obligation which is the essential feature". The terms of the trust must be communicated to the trustee before (or at the same time as) the execution of the will:
Re Keen  The testator made a will giving money to legatees/trustees "to be held upon trust and disposed of by them among such persons… as may be notified by me to them". Prior to the execution of this will, the legatees/trustees had been given a sealed envelope containing the name of the beneficiary of the intended half secret trust. The court held that the half secret trust failed.CA (Lord Wright MR): o For a half secret trust, communication of the terms of the trust must take place before or contemporaneously with the execution of the will because if the terms could be communicated after the execution of the will, the testator would be reserving a power to change the will informally in the future, contrary to the Wills Act. o Here the trust failed because the will states that the beneficiaries of the half secret trust "may be notified" by the testator to the legatees/trustees in the future, so the testator was trying to reserve a power to alter the will informally in the future, contrary to the Wills Act, not allowed. The sealed envelope, communicated to the legatees/trustees before the execution of the will, was invalid because it conflicts with the future tense wording of the will, "may be notified" in the future, rather than "as have previously been notified." Virgo: communication before execution of the will is not a requirement for fully secret trusts and is inconsistent with the 'dehors the will' theory — i.e. that all secret trusts operate outside the will. Virgo suggests that it should be sufficient if the terms of the half-secret trust are communicated before the testator's death (even after execution of the will), because then the testator can be considered to have relied on the trustee's acquiescence by not changing the terms of the will. Issues with Ottoway
Trust of land without writing: Ottaway might mean that fully secret trusts of land operate as CTs, since such trusts of land are valid despite the absence of writing. Virgo: the preferable view is that, regardless of whether the trust is fully or half secret, writing is not an issue for a trust of land if the trustee knows of the testator's intention because the trustee cannot use the LPA 1925 as an instrument of fraud. Under this approach the trust could still be express — per Rouchefoucauld.
'Suspensory' trusts: Normal secret trusts operate as express inter vivos trusts, which crystalise when constituted on the death of the settlor. However, there are difficulties where the testator leaves property to B 'to do with as she likes' during his life time, but to leave the residue to C on B's death. We can't see these as arising on the testator's death because the trust property is still uncertain and might never exist if the legatee dissipates all of it. In Ottoway, Brightman J said, in such circumstances "a valid trust is created in favour of the C which is in suspense during the lifetime of the B, but attaches to the estate of B at the moment of the B's death." Hayton: o A trust of the residue of the testator's estate could only be constituted on the death of the legatee/trustee, so the suspensory trust is better analysed as a CT that attaches to any residue of the testator's estate at the time of the legatee's death — it is only on the legatee's death that the subject matter will be certain.
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