Principles of Secret Trusts Reviewed in Freud Estate Dispute

The High Court has held in Rawstron and Anor v Freud [2014] EWHC 2577 (Ch) that a gift in the last will of the artist Lucian Freud took effect as

The late Lucian Freud had 14 children identified children but was rumoured to have  had many more

The late Lucian Freud had 14 children identified children but was rumoured to have had many more

an absolute gift to two named individuals in their personal capacities absolutely and was not given to them on trust under the will. However, the court heard evidence that the legatees held the assets on a secret trust that took effect outside the will.  The two individuals in question were the Claimants in the action.

One of the Claimant’s was Freud’s solicitor, the other was his daughter.  The Claimants were also the testator’s executors. The court rejected an argument from the Defendant, one of Freud’s children (at one time this was disputed by the Claimants, but was accepted for purposes of this piece of litigation that the Defendant was one of Freud’s 14 children) , that the naming of the solicitor as legatee pointed to the existence of a trust on the face of the will.  If that conclusion were correct, it would make it difficult, if not impossible, for a professional person to be trustee of a secret trust.

The decision of Richard Spearman QC breaks no new ground on the relevant principles and is specific to the facts of the case, but contains extensive discussion of case law on secret trusts (to which no reference is made in a will) and half-secret trusts (whose existence is disclosed in the will, but the terms of which are not) which would be useful for any practitioner advising in this area.

The issues

Freud’s last Will provided at clause 6:

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”.

The issue in the case was whether, on its true construction, clause 6 made the Claimants absolutely entitled to Freud’s residuary estate. A declaration to this effect was the only relief claimed in the Part 8 Claim Form.

However, the Claimants’ case was deceptively simple, they made it known that their full case was that the clause 6 gift of residue was subject to a fully secret trust imposed by Freud during his lifetime. The terms of that trust were not disclosed by the Claimants and had purposely avoided revealing the terms of that trust to the Defendant, on the basis this would go against Freud’s wishes. However, they had gone so far as to inform the Defendant that he was not a beneficiary of the trust.

The Defendant’s case was that, on a proper construction of the Will, Freud’s residuary estate was not given to the Claimants for their absolute benefit, but instead was given to them to hold on the terms of half-secret trusts which are not set out in the Will.

Both sides were in fact arguing that the gift in clause 6 was subject to a trust but for the Claimant’s purposes it was sufficient that the Court granted the declaration sought in order for a fully secret trust to take effect outside the Will.  The significance of the distinction between a fully secret and half secret trust was that if the trust was half-secret and the necessary formalities were not met the Defendant wished to explore its validity with a view to asserting there was an intestacy of the residue. In the event of intestacy, the Defendant would be entitled to a share of the residue.  If the Claimants’ case was right the Defendant’s only claim for provision from the estate arose under the Inheritance (Provision for Family and Dependants) Act 1975.

Legal framework

This was a essentially a construction dispute and there was no dispute between the parties concerning the relevant legal principles:

Save where section 21 of the Administration of Justice Act 1982 applies, a will should be interpreted in the same way as a contract, namely as summarised by Lord Neuberger of Abbotsbury in Marley v Rawlings [2014] UKSC 2 at [18]-[19]:

“[18] During the past 40 years, the House of Lords and Supreme Court have laid down the correct approach to the interpretation, or construction, of commercial contracts in a number of cases starting with Prenn v Simmonds [1971] 1 WLR 1381 and culminating in Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900.

[19] When interpreting a contract, 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. In this connection, see Prenn, at pp 1384–1386 and Reardon Smith Line Ltd v Yngvar Hansen-Tangen (trading as H E Hansen-Tangen) [1976] 1 WLR 989, per Lord Wilberforce, Bank of Credit and Commerce International SA v Ali [2002] 1 AC 251, para 8, per Lord Bingham of Cornhill, and the survey of more recent authorities in Rainy Sky, per Lord Clarke of Stone-cum-Ebony JSC, at paras 21–30.”

Section 21 was not in issue in this case. It was common ground that no extrinsic evidence as to the instructions given on behalf of Freud, or as to what his solicitors intended by their drafting, should be admitted as an aid to interpretation of the Will.

Difference between a fully secret and a half-secret trusts

There are two kinds of secret trusts in common use: a fully secret trust and a half-secret trust. Both kinds of secret trust provide for the testator a means of creating a trust without publicly identifying the beneficiary and/or the terms of the trust.

A trust is fully secret if the will does not disclose that the trust exists, to the world the gift in the will looks like an outright bequest.  It is immaterial whether the trust is accepted before or after execution of the will but it must be communicated must occur in the testator’s lifetime, otherwise it cannot be enforced and the legatee will take beneficially.

A trust is half secret if the will discloses that there is a trust but does not disclose the object and/or terms of the trust.  The details of the trust must be communicated to the trustee before the execution of the will (or at least be contemporaneous with it) otherwise it will fail.

Claimants’ submissions

  1. It was obvious that, under clause 6 of the Will, the Claimants take as beneficial legatees, and not as trustees of a trust, because the gift is expressed as a simple gift of residue with no mention of a trust.
  2. There was a striking contrast with the language used in a previous version of clause 6 in a  Will dated 2004, which defined the Claimants in the clause 6 of that will as “the Trustees”, and proceeds in clauses 3 and 4 to make gifts to “the Trustees”.
  3. If, contrary to the above, the Claimants took as trustees, there was no trust set out in the Will, so the trust potentially would fail, which was a very unlikely thing for Fraud to have intended.  The only point in creating an undefined trust on the face of the Will would be to create a half-secret trust, the terms of which have been communicated to the trustees at or before the time the Will was made. If that had been the intention, then it was necessary to ask why wording of the sort used in clauses 3 or 4 of the same Will was not used. Those clauses gave assets to “the Trustees” and refer expressly to the instructions or non-binding requests to which the Trustees are to have regard. On the Defendant’s case, either (i) the testator intended to create a trust which had been previously communicated to the “trustees”, in which case it was right to ask why he did not say so in clause 6, as in the other clauses, or (ii) he intended to create a trust with no beneficiaries, which made no sense as that would be a nonsense.
  4. If one were to step outside the terms of the Will and looks at extrinsic evidence the matter becomes even clearer. In the previous 2004 Will, the testator made very similar provision for his estate to that made under the Will that was eventually admitted to probate. Apart from a different clause 2 (which was not material), the main change was that clause 6 took a different form. It used precisely the sort of wording one would have expected to find in the Will, had it been intended to declare a trust on the face of the Will. There was a gift of residue to “the Trustees”, there was an express declaration of trust and there is specific reference to the existence of the terms of the trust. This was the wording which the later Will revoked, and replaced with a version of clause 6 which makes no mention of a trust at all. The contrast was striking, and reinforces the conclusion which is already evident from the drafting of the Will itself.
  5. In the absence of an express declaration of trust, to find a trust existed involved implying a declaration of trust where none exists. There is no necessity to do this, because the Will worked perfectly well without it. Further, the consequence of making the sought for implication would be to give the Defendant a platform to challenge the validity of the trusts applicable to clause 6 of the Will and to create an intestacy. The Court should not be astute to imply a trust where none needs to exist when to do so might potentially cause the validity of the gift in clause 6 to be challenged.
  6. The Defendant’s arguments to the contrary were unpersuasive. “What the Defendant is trying to do is to conjure out of other provisions in the Will a trust which is not expressed [in clause 6]”.

Defendant’s submissions

The Defendant’s submissions broke down into three arguments:

Argument 1: The wording used in clause 6 of the Will was as capable of meaning a gift to the Claimants on trusts as of meaning a gift to them beneficially for the following reasons:

  1. The clause 6 gift was not expressed to be a gift made to the Claimants “beneficially” or “absolutely”. Nor does clause 6 contain wording that expressly permits the Claimants to dispose of the residue as they think fit.
  2. The clause 6 gift was made to “the said Diana Mary Rawstron and the said Rose Pierce jointly” (i.e. to the persons previously appointed as executors and trustees by clause 1.1 of the Will). Further, no other description, such as “friend” “solicitor” or “daughter” is used by the testator.
  3. The clause 6 gift was a gift to the persons named as executors and trustees in the Will “jointly”, and this has been held to be an indication that a gift was not intended to be beneficial: see Saltmarsh v Barrett 3 De G F & J 283, Turner LJ at [286]

Argument 2: The other provisions in the Will support a conclusion that the gift in clause 6 was intended to be a gift to the Claimants on trusts as opposed to for their absolute benefit:

  1. The subject matter of the gift in clause 6 was not what remained of the testator’s estate after satisfaction of the legacies and payment of his funeral and testamentary expenses and debts. The subject matter of the gift included the chattels in sub-clause 3.3, the copyrights given to the Claimants in trust under clause 4 and all the remaining property in the estate. Further, the gift is subject to an express trust to pay the testator’s funeral expenses and debts (as well as the tax referred to in clause 5). Thus, it was clear from the wording of clause 6 itself that the Claimants were to receive the subject matter of the gift in that clause, at least in part, qua trustees. This was a further factor which supports a construction that they took the entire gift as trustees: again, see Saltmarsh v Barrett 3 De G F & J 283, Turner LJ at [286].
  2. Sub-clause 3.1 of the Will contained a gift of the testator’s chattels to the Claimants. Sub-clause 3.2 contained precatory words which expressly did not impose a trust upon the Claimants. Sub-clause 3.3 stated: “Subject to such wishes my Trustees shall hold my Chattels or the balance of them as an addition to the residue of my estate”. If clause 6 was intended to give the testator’s residuary estate to the Claimants beneficially, this sub-clause would serve no purpose.
  3. Clause 7 of the Will set out extensive trust administration provisions. The inclusion of these provisions could not be explained by reference to the gifts in clauses 3 or 4 of the Will (in contrast to the position in Williams v Arkle (1875) LR 7 HL 606, Lord Cairns LC at [617], Lord Hatherley at [628-9]). Although, in correspondence, the Claimants initially asserted that the powers were only ever intended to apply to the gift in clause 4, the terms of clause 4.2 and the nature of the powers in clause 7 strongly suggested otherwise. Nor could those powers sensibly be construed as being intended to be limited in duration to the period of administration. The inclusion of the clause 7 powers was a strong indication that the gift in clause 6 was a gift to the Claimants on trusts.
  4. Clause 8 of the Will contained a charging clause, which was inconsistent with an intention that the Claimants were intended to receive the residue for their joint absolute benefit: see Saltmarsh v Barrett 3 De G F & J 283, at [286]; In re Rees [1950] Ch 204 at [209-210]

Argument 3: the relevant factual context in which the Will was made and common sense both suggest that Freud had intended the gift in clause 6 to be a gift to the Claimants on trusts rather than beneficially:

  1. The testator’s residuary estate was likely to be substantial.
  2. The First Claimant was the testator’s solicitor, who drew up the Will, and her rules of professional conduct prevent her from taking an absolute benefit under it. The Second Claimant was only one of the testator’s many living issue at the time the Will was made. Contrast with Williams v Arkle (1875) LR 7 HL 606 at [617-618] and [627, 631].
  3. Clause 7 of the previous 2004 Will contained trust administrative provisions in identical form to those in clause 7 of the Will. The Claimants accept that the 2004 Will created half-secret trusts of the testator’s residuary estate. It is clear that the administrative provisions in clause 7 of the 2004 Will were intended to apply to those trusts and, indeed, were the only trust administrative provisions intended to apply to those trusts. As appears from the third recital to the Order of Deputy Master Arkush dated 21 January 2014, the Claimants have accepted that the trusts of residue under the 2004 Will were sufficiently complex to require administrative provisions of the sort contained in clause 7 of the Will. Those provisions were deliberately retained in the Will, and it is much more likely than not that they were left in to apply to the gift of residue in clause 6 of the Will.
  4. The Defendant made a number of submissions on the powers in Clause 7 of the Will. There were two relevant questions: first, is it more likely than not that the powers in clause 7 were intended to apply to a trust in the Will; second, if so, which trust? At its heart, the submission was that the irresistible conclusion is that these powers are intended to apply to the gift of residue contained in clause 6 of the Will.
    1. Clause 7.1 contained a power to invest trust money (which was not a power that applied during the course of administration, as any such trust arises only at the end of administration).
    2. Clause 7.2 (which could not sensibly be construed as applying only to the administration period).
    3. Clause 7.4 (which, she said, would make no sense if the Claimants’ construction of the Will was correct, as it would, in effect, involve saying that the Claimants did not have to obtain consent from themselves).
    4. Clauses 7.7 and 7.8 (which were powers that were frequently seen in standard trust provisions, but which are rarely, if ever, necessary in administration provisions).

Conclusions

The Defendant was held to be right in saying

(i) that the gift in clause 6 of the Will was not expressed to be a gift made to the Claimants “beneficially” or “absolutely”;

(ii) that the gift was made to the Claimants by name alone (and not by description, such as “solicitor” or “daughter”);

(iii) that the Claimants were the same persons who are appointed as executors and trustees by clause 1.1 of the Will;

(iv) that this was spelled out by the repeated use of the word “said” in clause 6, and

(v) that the gift was made to the Claimants “jointly”.

However, neither separately nor cumulatively did these points answer the point made by the Claimants that the gift in clause 6 is expressed as a simple gift of residue, and that clause 6 contains no mention of a trust.

Discerning the testator’s intention from the words in the entirety of the Will, and construing all the words in context, the fact that the testator referred to the Claimants as “Trustees” in clauses 3 and 4 but referred to them by their names in clause 6 was more consistent with the construction that he intended them to take personally and absolutely rather than as trustees.

Because one of the individuals upon whom clause 6 of the Will is expressed to confer a gift was the testator’s solicitor, and even more so because the Will was drawn up by that solicitor or by that solicitor’s firm, the public interest considerations discussed by Lord Evershed MR in Re Rees [1950] 1 Ch 204 at [211] required the court to be vigilant before accepting clause 6 means that the Claimants took as beneficial legatees. However it was common for solicitors to be appointed as trustees, and one reasonable explanation for a clause which confered a beneficial gift on a solicitor was that the testator intended to impose a fully secret trust. In this case, it was the Claimants’ evidence that the gift of residue was indeed subject to a fully secret trust under which Freud’s solicitor, the first Claimant, did not stand to benefit.

The Defendant’s argument that the fact that one of the Claimants was the testator’s solicitor suggested that the gift in clause 6 was intended to be a gift to the Claimants on trusts rather than beneficially would make the use of professional persons to be fully secret trustees nearly impossible.

The Court accepted the submission from the Claimant’s to the effect that the powers, or many of the powers, in clause 7 of the Will were not inconsistent with the Claimant’s case, or were at least not so inconsistent as to cause it to be rejected in favour of the Defendant’s interpretation. The clause 7 administration provisions should be viewed as ancillary provisions and did not justify interpreting clause 6 as making a gift to the Claimants as trustees.

The Will revoked the earlier 2004 Will, which contained a differently worded clause 6 which was plainly intended to create, and appears effective to have created, a half secret trust.  The factual context to which both sides agreed, that the judge could have regard included the fact that Lucian Freud’s residuary estate was likely to be very substantial, and the fact that Lucian Freud was professionally advised by solicitors, by whom both Wills were drawn. In light of those facts, the only reasonable conclusion to be drawn from the change of wording is that Freud did not intend to create a half secret trust by clause 6 of the Will. If that had been his intention, it was difficult, if not impossible, to see why, with the advantage of professional legal advice from the same solicitors who had drawn the 2004 Will, he did not use either the same words as he had used in the 2004 Will or at least clearer words than he used in the Will.

In light of this background, and whatever may be the position with regard to other testators, when considering the significance of this change of wording it is unrealistic to suggest that Freud did not have an appreciation of secret trusts.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s