Analysis of Equity and Fraud - Research Paper Example

 Analysis of Equity and Fraud The introduction of the Statute of Frauds in 1677 introduced the requirement of formalities into a will in order to prevent frauds against the estate of a deceased person. This has evolved over time into the Wills Act of 1837 as amended, under Section 9 of the Act, that protects against fraud. This was also included into the Land and Property Act of 19251 by way of Section 51(3) (c) which is directed towards the prevention of oral dispositions of equitable interests in property and decrees that in order for a disposition to be effective, it must be in writing, it must be signed by the personal making the disposition and this must be done in the presence of witnesses. All these measures have been introduced with the intention of preventing fraud and ensuring that there are no hidden transfers of equitable interests and that the contents of a deceased person’s will are clearly evidenced in writing. The purpose of the Wills Act of 1837 is therefore to encourage people to make out their last wishes formally, publicly and in writing to prevent any scope for misunderstanding. However, the public nature of wills is often a significant drawback in some instances. A will is a public document and can be accessed by anyone and there are instances when a testator may wish to make provision for a mistress or an illegitimate child for example, which are not to be revealed in the public eye. In such instances, a testator may resort to secret trusts or half secret trusts, whereby he formally and outwardly designates a legatee as the beneficiary of his estate, yet enters into a private arrangement with him for dispersal of the assets of his estate to other parties. The legatee thus accepts the gift after having provided an assurance to the testator for dispersal of the gift in accordance with the testator’s wishes. Hence this gives rise to the existence of a secret trust, however if the beneficiaries cannot prove the existence of such a trust, the legatee may take the property free of the trust, which raises the issue of fraud. The Secret trust: Meggary VC provided the best justification for the existence of such secret trusts, inspite of the fact that the Wills Act of 1837 seeks to ensure that all dispositions are made public, as follows: “The whole basis of secret trusts is that they operate outside of the will, changing nothing that is written in it, and allowing it to operate according to it’s tenor, but then fastening a trust on to the property in the hands of the recipient.”2 However, as established in the Snowden case, it is not for the legatee to prove that he is holding the property on trust, rather the beneficiaries of the trust must prove this, on the basis of the probabilities that exist. The justification provided for the existence of the Secret trust is that it operates entirely outside the realm of the Wills, yet it is valid on the grounds of equity, which will dictate that a statute should not be used as an instrument of fraud; equity imputes a trust on the conscience of the legatee to administer the disposition in accordance with the wishes of the testator.3 In the case of a half trust, there is an indication in the will that a trust exists and the names of the beneficiaries are also included, however this is not so with secret trusts. Moreover, under Section 15 of the Wills Act, a beneficiary cannot be a witness to a will, but under Secret and half secret trusts, it is allowed on the grounds that such trusts fall outside the scope of the will, as a result of which Section 15 does not apply. This was laid out in the case of Re Young4 as follows: “the person does not take by virtue of the gift in the will but by virtue of the secret trusts imposed upon the trustee who dies in fact take under the will.” The will Theory set out by Viscount Sumner: Viscount Sumner tries to reconcile the notion of secret and half secret trusts with the formality requirements of the Wills Act by contending that such trusts are not testamentary trusts, rather they are in the nature of intervivos declarations of trust that remain undeclared until the testator dies. Moffat highlights the fact that trusts are in effect a measure of a confidence reposed by the testator in the legatee which is conditioned by equity and conscience by leading to “certain moral obligations that are conditioned by ethical principles”, therefore a trust constitutes “the duty or aggregate accumulation of obligations that rest upon a person described as a trustee.”5 Therefore, a secret or half secret trust will mandate the exercise of conscience and equity in giving effect to the testator’s wishes. The nature of the obligations arising in equity out of a secret or half secret trust in the prevention of fraud were laid out by Lord Davey in French v French;6 “….the testator has died, leaving the property by his will in a particular manner on the faith and in reliance upon an ex­press or implied promise by the legatee to fulfil his wishes” Lord Davey went on further to state that when a testator communicates with a legatee during his lifetime and indicates that he is leaving him property which is intended to be disposed of in a particular manner, and the legatee by way of his silence, conveys his assent and if the testator then dies without withdrawing such an oral disposition, then “a trust is fastened upon his [the legatee’s] conscience” so that “he cannot afterwards either appropriate the property to his own use or dispose of it otherwise than in accordance with the wishes which were communicated to him and which he had accepted.”7 Therefore, the inter vivios declarations of trust become enforceable on grounds of equity and conscience of the legatee, which will obviate fraud. Limitations of this theory: One of the first limitations that may be seen to arise with this view is the fact that when a testator is declaring a disposition of what will become his legacy, he may be declaring a trust over future property and equity does not allow a trust of an expectancy. If a trust is create during the lifetime of the testator, a secret trust or a half trust should still hold valid even if the secret trustee passes away before the testator and the beneficiaries should be able to press the Courts for the appointment of a new trustee. However in reality the Courts have not supported this position, because a trust comes into existence only when a testator dies, which creates legal difficulties in posing the argument that the secret trust is in fact an inter vivos declaration of trust.8 Moreover, there is also the issue of Uncertainty of Intention that arises in the case of secret and half secret trusts. A trust cannot be created over uncertain property or future property that may or may not exist when the estate is actually administered and equity does not allow for the trust of an expectancy. The certainty of Intention on an existing trust can be realized only in the event the Court is able to attach an order to the property on an immediate basis, as soon as the trust is declared. The Certainty of Intention was for example, an issue in the case of Hunter v Moss.9 Moreover, another problem that arises with the Dehors will theory as stated by Viscount Sumner is in the actual designation of the secret and half secret trusts. Since these trusts are purportedly created outside the will to fulfill an entirely different purpose that is not contained in the will, the issue that rises is; are they express trusts or constructive trusts? The problem in enforcing an express trust or assuming a secret or half secret trust to be equivalent to an express trust is the fact that by its very nature, an express trust needs to be expressed in writing and should be subject to Section 53 (1) (b) of the land and property Act, which is not the case with inter vivios declarations of trust. For example in the case of Vandervell v IRC10, a rich man was unable to successfully transfer his assets via an express trust in the absence of written instructions and disposition to clearly named beneficiaries. He was finally able to constitute an express trust in favor of his grandchildren after formal disposition was made.11 In some instances however, oral dispositions of secret trusts have been enforced by the Courts as for example in the case of Ottoway v Norman, wherein Brightman J discussed the basis of the doctrine of secret trusts in imposing an obligation upon the conscience of the primary donee12. In the case of Re Gardner, Romer J made it clear that the primary donee takes under the trust and does not take under the will.13 But this may also be seen to be one of the problems associated with secret and half secret trusts. If such trusts are outside the parameters of the Wills Act then there should not be any objection for a beneficiary under the trust to also be a witness to it. However, from the perspective of probate law, this would be highly objectionable. There are also other problems in deciding whether a legatee of a trust or half trust can be a beneficiary. In the case of Re Rees14, a decision was taken that he/she could not, because if a professional legatee benefits under a secret or half secret trust, he would have to prove the existence of the trust which in turn gives rise to opportunities for fraud. In the case of wills which are public documents, the opportunity for fraud is curtailed. Conclusion: On the basis of the above, it may be noted that there are several difficulties that arise in the disposition of secret and half trusts. If they are in the nature of inter vivios obligations, then they are difficult to prove, especially in the case of secret trusts. The scope for fraud is also considerably more in the case of such trusts, especially when a professional legatee benefits under the will. On the whole, there is little sustainable reason for such trusts to exist, especially in view of the fact that if the beneficiaries are unable to successfully prove the existence of a trust, they are likely to be defrauded by a legatee who may appropriate the proceeds of the estate to himself, contrary to equity and conscience. Bibliography * Annotated Provisions of the Land and property Act of 1925 In Wolstenhome and Cherry’s Annotated Land Registration Act 2002. London: Sweet and Maxwell, 2003 * French v French (1902) 1 IR 172 at 230. * Hunter v Moss (1993) 1 WLR 934 * McCormack v Grogan [1869] LR 4 HL 82 * Moffat, Graham Trusts Law: texts and Materials Fourth edition, pp 1-3 * Ottoway v Norman 1972 Ch 698 * Re Gardner No 2 [1923] 2 Ch 230 * Re Maddock (1902) 2 Ch 220 * Re Rees (1950) * Re Vandervell (No: 2) (1974) Ch 269 * Remarks of Meggary VC in Re Snowden [1979] 22 All ER 172 at 177 * Vandervell v IRC (1966) 2 AC 291 (HL) * Re Young[1951] Ch 344 Read More