I’ve Got a Secret
March 21, 2021
A trust created to take effect after you die must usually be in writing, because it forms part of your will, and in Ontario, the Succession Law Reform Act requires your will to be in writing.
Sometimes, you might think about creating a secret trust, or its close relative the semi-secret trust. These are seldom a good estate planning idea, but sometimes you want to try to take your secrets to the grave. Early cases involving secret trusts, for example, involved providing for illegitimate children, back in the day when that was an even bigger scandal than it is today.
A secret trust arises when, in your will, you give what appears to be an absolute gift of property, or money, to someone (let’s call them Mabel), but you tell them verbally that you want them to use the money for the benefit of a third person (Jane), and Mabel agrees to give the money to Jane.
A semi-secret trust leaves the property or money “to Mabel in trust” but it does not say who the beneficiary of the trust is – you tell Mabel verbally to give the money to Jane. Because there is no beneficiary, it is not a valid trust under normal trust principles. Under wills law, the unwritten portion is not a valid gift.
We don’t know how often secret trusts are used, because if Mabel does as asked, no one needs to know (except maybe tax authorities, land titles offices, etc.). Even then, Mabel pretends she is just giving Jane a gift, and no one needs to know why.
The issue arises when Mabel fails to deliver to Jane.
Can Jane sue Mabel for breach of trust?
You might think not, looking at what I said above about trust principles and invalid gifts.
Except for the fact that equity, the branch of law concerned with fairness, hates fraud. Mabel keeping the money is fraud.
Of course, not every alleged secret trust can be enforced, or the Janes of the world might line up to commit their own frauds – preventing fraud is one of the reasons wills need to be in writing. However, the whole point of wills law is to carry out the true wishes of the deceased, so if equitable principles can be applied to accomplish that without encouraging fraudulent Janes, the innocent Jane should recover from Mabel.
To sort this out, equity has developed a few simple rules about secret trusts, which also apply to semi-secret trusts.
First, for equity to find that a secret trust exists, Jane must show:
- you had an intention to create a trust;
- you expressed that intention to Mabel; and
- Mabel agreed to act as trustee.
The last requirement differs from the usual situation where an estate trustee, or a trustee of a gift created in a will, does not need to agree to act for the trust to be valid.
The last two points together mean that you cannot simply leave Mabel a note with the will, or separately, to be opened after death, that creates a secret trust.
To balance the situation between equity and law, and depart from the normal rules of gifts after death being in writing, the evidence for each of these three points must be clear and compelling. Because you are not around to give evidence, this might be tough for Jane to do.
If Jane can meet this heavy burden, then the court may impose a trust by operation of law upon Mabel, what is called a constructive trust. Essentially, the court says that although the express trust you intended to create is not valid, the court will impose a trust on Mabel of its own, because a constructive trust is a tool equity uses to prevent fraud, among other purposes (such as protecting “common law spouses” in property disputes).
On a side note, though secret trusts usually involve wills because of their requirement to be in writing, there are a few cases of other secret trusts involving living people, such as where you invest in a business on behalf of your uncle who cannot because of his debts, intending him to be the true owner. If you have a falling out out the same principles apply, as well as a whole set of other tax and legal troubles.
Because of the difficulty enforcing secret trusts, we do not generally recommend that you include them as part of your estate plan, but if that is the decision that you make, we hope that this information will help you do it in a way that accomplishes your true wishes, and that Jane gets her money.
If you are considering a secret trust, it is smart to discuss this with your lawyer. We may be able to suggest options that will accomplish your goals without the risk and expense if Mabel decides to be less than honest after you are gone.