Secret and half-secret trusts

Executors of Lucian Freud v Paul McAdam Freud [2014] EWHC 2577 (Ch)

This case combines what many may regard as the arcane distinction between secret and half-secret trusts with what seems to be the ‘hot’ topic of the moment, the principles to be applied when construing wills.

Secret and half-secret trusts

In a fully secret trust property is given to a legatee, apparently beneficially, without words imposing a trust. However, the legatee agrees with the testator that he will hold it on certain trusts. The trust fails if it is not communicated to the legatee during the testator’s lifetime and takes effect as a beneficial gift to the legatee.

In a half-secret trust the terms of the will make it clear that the legatee is to hold property on trust, but the terms of the trusts upon which he is to hold the property are not disclosed. Such a trust fails if the details are not communicated to the trustee before the will is executed (the distinction is odd, but is well established in case law). If a half-secret trust fails for lack of communication, the trustees hold the property for those entitled to residue or on intestacy. The trustees cannot hold beneficially because the will makes it clear that they are taking as trustees.

Principles of interpretation

According to Lord Neuberger in Marley v Rawlings [2014] UKSC 2, [2014] 2 WLR 213 at [18]-[19], unless extrinsic evidence is admissible under section 21 of the Administration of Justice Act 1982, the interpretation of a will should be approached in the same way as the interpretation of a commercial contract – that is, ‘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’.

All parties agreed that section 21 was not relevant so the court had to establish the intention of the testator. 

The facts

Lucian Freud died with a very substantial estate. His last will made in 2006 replaced an earlier will made in 2004. Both wills were professionally drawn by the same solicitor. The 2004 will appointed his solicitor and one of his many children as executors, and gave the residue to them by name on half-secret trusts. The 2006 will appointed the same individuals as executors and gave the residue to them but this time without any reference to a half-secret trust.

The defendant (who would have been entitled to a share of the residue under the intestacy rules) claimed that on a proper construction of the whole will, the executors took the residue on trusts which were not set out in the will – that is, on half-secret trusts. Had the court found in his favour, he would then have questioned whether the half-secret trust was valid, or whether there was a partial intestacy.

(In fact, the personal representatives’ evidence was that, even if the defendant’s construction of the will was correct, the half-secret trust attaching to the gift would be valid, as its terms were communicated before the will was executed, which made the defendant’s position fairly hopeless.)

Paragraph 6 of the will provided as follows:

‘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.’

Taken by itself this would appear to be an absolute gift. However, the defendant advanced various arguments based on the will as a whole. The arguments included the following:

1.    The gift was not expressed to be a gift made to the executors ‘beneficially’ or ‘absolutely’.

2.    Clause 7 set out extensive trust administration provisions which were not required unless the gift of residue was intended to be on trust. Clause 8 contained a charging clause, which was inconsistent with an intention that the executors were to receive the residue for their joint absolute benefit.

3.    The relevant factual context in which the will was made and common sense both suggested that the testator intended the residue to be held on trust:

(i) the testator’s residuary estate was likely to be substantial.

(ii) one executor was the testator’s solicitor, who drew up the will, and her rules of professional conduct prevented her from taking an absolute benefit under it; the other was only one of the testator’s many living issue at the time the will was made.

Decision

While the points made were correct, in the opinion of Richard Spearman QC sitting as a deputy judge they did not outweigh the essential point that the gift in clause 6 is expressed as a simple gift of residue, and that clause 6 contains no mention of a trust.

Looking beyond clause 6, and seeking to collect the testator’s intention from the words used in the entirety of the will, he considered that the fact that the testator referred to the executors as ‘trustees’ in clauses 3 and 4 but referred to them by their names in clause 6 was more consistent with the construction that, under clause 6, he intended them to take personally and absolutely rather than as trustees.

Because one of the individuals taking under clause 6 was the testator’s solicitor, who had prepared the will, public interest considerations required the court to be vigilant before accepting that clause 6 means that the executors took as beneficial legatees. However, the law recognises that in secret trusts it is commonplace for solicitors to be appointed as trustees, and one reasonable explanation for a clause which confers a beneficial gift on a solicitor is that the testator intended to impose a fully secret trust.

Most importantly, the 2006 will revoked the 2004 will, which created a half-secret trust. The testator was professionally advised by solicitors, by whom both wills were drawn. The only reasonable conclusion to be drawn from this change of wording was that he did not intend to create a half -secret trust in the later will. If he had, it was difficult, if not impossible, to see why he did not use the same or similar words as those used in the 2004 will.

It was clear that the testator had an appreciation of secret trusts and must be taken to have intended to make a full gift in the will, not a half-secret trust.