Secret trusts – when promises clash with wills.

The Court of Appeal (CoA) considered the complexities of establishing a secret trust in a will dispute, focusing on the level of evidence required to allow such a claim to proceed to trial.

Background:

Alan Lorenz passed away on 13 February 2021, leaving his entire residuary estate to his civil partner, Sheila Caruana, in his last will dated 12 November 2020. Robert Lorenz, Alan's brother, has brought a claim asserting that Sheila holds half of this residuary estate on a "secret trust" for him and his other siblings, Anthony and Vanessa.

Robert contends that Alan instructed Sheila, at the time or shortly after making his last will, and she agreed, to distribute half the estate to them equally. Alternatively, if the instructions were different, he sought a declaration regarding the actual beneficiaries and subject matter of the secret trust. Sheila applied to have Robert's claim struck out or for a reverse summary judgement, arguing that no reasonable grounds existed for the claim.

In a Judgement in December 2023, Master Kaye dismissed Sheila's application, but the Judge on appeal allowed it and dismissed Robert's claim. This appeal to the CoA follows that dismissal.

Decision:

The CoA allowed the appeal and restored the original decision of Master Kaye, as there was a real prospect of further relevant evidence being available at trial supporting the existence of a secret trust. Lord Justice Zacaroli started by explaining what a secret trust is, namely “A secret trust may arise in circumstances where a testator leaves a will which on its face leaves property to a legatee under the will but where the testator and the legatee have agreed that the legatee will hold that property for the benefit of others.” The legatee is then bound in equity to carry out the promise, as held in Ottoway v Norman [1972].

To establish such trust, the person claiming to be a beneficiary must demonstrate “(1) An intention by the testator to create a trust, satisfying the traditional requirement of three certainties: (a) certain language in imperative form; (b) certain subject matter; and (c) certain objects or beneficiaries; (2) The communication of the trust to the legatee under the will; and (3) Acceptance of the trust by the legatee.”

Despite Sheila's denial, the Court examined contemporaneous documents, particularly the solicitors' attendance notes, for evidence of Alan's intentions. These notes contain references suggesting Alan did give "instructions" and that there was a "plan" for Sheila to benefit his family. However, the Court also identified specific phrases within the solicitors' notes that create ambiguity.

From the evidence, it was also clear that the reason Alan made a gift of his estate to Sheila was to avoid inheritance tax. The Judge noted that a “testator has an intention to avoid inheritance tax by making use of the spousal exemption does not inevitably mean that they cannot have intended to impose an obligation on the legatee under the will to make gifts to others, sufficient to establish a secret trust.”

Despite the compelling arguments against the existence of a secret trust due to the tax avoidance motive, the Judge concludes that the ambiguous language in the contemporaneous documents, combined with the potential for further evidence from key witnesses, meets the threshold of a "real prospect".

Implications:

This case underscores that a testator's intention to avoid inheritance tax by leaving assets outright to a spouse or civil partner does not automatically preclude the possibility of a secret trust. Claimants can argue that the testator intended both tax efficiency and a binding obligation on the legatee.

This case demonstrates that even seemingly contradictory or unclear references in contemporaneous documents, like solicitors' attendance notes, can be crucial in establishing a "real prospect" of a secret trust.