Failure of part of residue as trust does not exist

Trusts Discussion
1

I am looking at a will where the deceased died in 2019, having made his Will in 2008.

It appointed Spouse as sole executor and left the residue as to:

  • 60% to Spouse; and
  • 40% to “The ABC Grandchildren’s Trust where D, E and a representative of XYZ Solicitors will serve as Trustees”

Initially, we thought there may be a pilot Trust in existence and asked XYZ Solicitors for more info. They had none. We explained that the terms of the trust would be written somewhere… they replied back sending us the STEP standard terms!.

On further reflection, the wording “…will serve as Trustees” suggest that the Trust might not(yet) have been in existence at the time of the Will.

If that is the case, and there is no record of the Trust (The Will file has been requested just in case) - could this simply be treated as a partial intestacy of this 40%?

Kam

2

Hi Kam,

It sounds like this could be a half-secret trust: we know the property is meant to be held on trust but we do not know the terms. As well as checking with the solicitors regarding what the terms of the trust are, you could also check with D and E and with the grandchildren. If that does not lead to your identifying the terms of the trust, I do not think you can safely proceed to distribute on the basis of a partial intestacy as there is still a possibility a trust is in existence that they do not know about. I think the safest option would be to apply to the court under CPR 64 for directions regarding how to distribute that 40% of the residue. The court may also direct that further enquiries should be made.

Yours the ever faithful Legal Beagle

3

I agree with the Legal Beagle that this could be a half-secret trust but to be valid the details of the trust would have to have been communicated to at least to one of the putative trustees at the time of or before execution of the Will. This is per Re Keen [1937] Ch 236, a Court of Appeal decision. With a fully secret trust communication can take place at any time during the testator’s lifetime. This difference has been criticised by some commentators and has not been followed in Ireland and Australia.

But in both cases the communication must nevertheless conform with the three certainties. Certainty of objects would require communication of the essential limitations of the ABC Grandchildren’s Trust.

Unless one of the trustees received a suitable communication at or before execution of the Will the trust is not valid. There is some authority that only a person to whom the communication is actually made is thereby constituted a trustee. The outcome would be a partial intestacy if the Will does not, as all good wills should, contain a default beneficiary clause.

I would question, as a non-contentious lawyer, whether directions should be sought from the Court unless there is a doubt about the facts as the order for costs might not be made against the estate but against the applicant; or even if it is against the estate the beneficiaries might be upset if they consult someone like their retired Uncle Jack who doubts whether those costs were justifiable given that the law has been unchallenged for 80 years and requires the SC to overturn the precedent.

Jack Harper

4

Hi Jack,

That’s an interesting point regarding the fact that a half secret trust needs to have been communicated to the trustees at or before execution of the will. However, in any event, from Kam’s comment, it only seems he has checked with XYZ regarding they have any knowledge of the trust, and not yet with D and E who are also listed as future trustees. Therefore, he should check with D and E.

Yours the ever faithful Legal Beagle

5

Of course D and E must be contacted to see whether the trust was communicated to them. But unlike creditors and s27 TA 1925 it is not a practicable possibility to advertise or search for whether anyone else is a trustee of the ABC trust in order to confer protection for the executors. I would be inclined to also make enquiries of others e.g. family members or even law firms other than XYZ that the deceased might have instructed for any reason during lifetime. Turn over all reasonable stones.

At the end of the day the executors need to be able to demonstrate that they are squarely within s61 TA 1925. It will then be open in theory for any trustee or beneficiary of the ABC trust to pursue those whom they allege to have received, as volunteers, property that they were not entitled to.

I merely attempt to put myself in the position of a beneficiary. The Court is not some kind of Social Services Department for traumatised solicitors who lack the ability to research the law that their professed specialisation would indicate that they purport to have. I would expect such a beneficiary but particularly my good self (and I have been in this position) to only accede to the seeking of Counsel’s Opinion or directions from the Court on a point that does not scream out at them from the Book of Snell or the Book of Lewin. The basic ingredients of secret trusts, full fat or low calorie, is imparted about a week in to any undergraduate course on Equity. Granted I am not the typical Will beneficiary, but many such are just as savvy if only to instruct Professor Google KC. Don’t spend my money to cover your own bottom when pragmatically the risk is small and is not, or certainly need not be, even yours but rather mine! Where do I sign the s62 TA 1925 indemnity?

Jack Harper

6

Would it be feasible to make a search in this sort of case in the TRS to establish whether D and E are trustees of a named trust?

Julian Cohen

Simons Rodkin

8

The executors are not being asked to do anything wrong. They are being asked to have the courage of their convictions, ostensibly derived from their understanding of settled law (unchallenged C of A precedent of 80 years standing) in an area in which as professionals they profess to be competent and are paid to advise with the benefit of PI cover if they are in error, provided they have done everything reasonable to make the searches that any reasonable executor should make.

The Court is not there to tell them what the law is: they are supposed to know or they should not be in practice. It is not a wet nurse for solicitors or a law tutor. It is there to authorise or not litigation at the estate’s expense but given the cost of first securing the safeguards in para 7.2 and 7.8 of PD64B the size of the estate must surely be considerable for the trustees to seek to litigate at all. I am not a litigator but I find it hard to believe the Court will be happy at being asked to adjudicate on a point of law which, if the facts are not disputed, is covered by clear precedent per Snell, Lewin and Underhill.

CPR Part 64 and PD64B are of great interest to beneficiaries. Notably as to when they should be joined and prior consultation:
"7.7

The evidence must explain what, if any, consultation there has been with beneficiaries, and with what result. In preparation for an application for directions in respect of litigation, the following guidance is to be followed:

(1) If the trust is a private trust where the beneficiaries principally concerned are not numerous and are all or mainly adult, identified and traceable, the trustees will be expected to have canvassed with all the adult beneficiaries the proposed or possible courses of action before applying for directions."

PRs can ask the court to authorise distribution on the basis of an indemnity from the beneficiaries, where they can demonstrate that they are good for that indemnity. Distribution on the basis of an indemnity can be agreed without the court’s sanction, if the PRs are prepared to accept it. If the beneficiary (ideally all who are relevant) is prepared to grant an indemnity under seal that he will hold the executor harmless, and is worth powder and shot, why would this not be enforceable and so acceptable? It would not be any more contrary to public policy than a bona fide compromise between parties on what was a tenable though not (as here) incontrovertible point of law as applied to agreed facts. Indemnity insurance may be available if cover will be an acceptable alternative to costs of litigation.

As to Julian’s suggestion the TRS register is a non-starter:
"

TRSM60020 - Trust Data Requests

Trust Data Request – Legitimate Interest

Requesters must demonstrate to HMRC that they have a ‘legitimate interest’ in the information
they require to access. This is where;

  • the requester shows they are involved in an investigation into money laundering or terrorist financing, and,
  • the requester shows they are requesting the information in order to further an investigation into a specified suspected instance of money laundering or terrorist financing.

Requesters are expected to provide a rational basis which objectively explains why they think a Relevant Registered Trust (see TRSM60010) might be involved in money laundering or terrorist financing.

Additionally, HMRC must conclude that:

  • the information provided by the requester to support their request shows the requester has reasonable grounds to suspect the trust is being used for money laundering or terrorist financing, and,
  • releasing the information would not prejudice any existing or potential investigation (criminal investigation or proceedings or any other investigation mentioned in section 342(1) Proceeds of Crime Act 2002).
    Jack Harper
9

Dear Jack,

Where have you dervived the idea from that the solicitors are the executors? The executor in this example is the spouse.

Legal Beagle

10

Have had some time to think about this.

My opinion is there is a difference between a half-secret trust, whereby the legatee agrees to hold the property on the terms of a trust and a situation where the legatee is the trustee of an existing trust. The rules about secret trusts and half-secret trusts apply to trusts which are not yet in existence. I do not think they apply to gifts to trusts that already exist.

Making enquiries of D, E and XYZ Solicitors regarding whether they know anything about the ABC Grandchildren’s Trust is a sensible thing to do. I would say it is important to speak to the specific solicitor at XYZ who prepared the will as he will be the most likely person to know anything about this. Making enquiries of other close family to see if they know anything about the ABC Grandchildren’s Trust is also a sensible thing to do.

Assuming they know nothing, then it seems likely that the gift fails. As this is probably a half-secret trust, the property will pass either to the default beneficiaries or, failing that, to the intestacy beneficiaries. However, it is also possible that the trust already exists without them as trustees. In that case, I suspect the gift is still valid.

Given the risk that the gift could still be valid, seeking directions would be a sensible precaution as I consider that that is safer than the executor waiting for someone to bring a claim and then seeking to obtain discretionary relief under s.61 TA. Jack’s suggestion of obtaining an indemnity from the beneficiaries is also a good one.

Hope that is helpful.

Yours the ever faithful Legal Beagle

11

There is a preliminary issue of pure construction. What did the testator intend by the words used? The wording seems to me to be ambiguous in that he may have been intending to give to an existing trust, in which case the gift fails if the trust does not exist. Or has not come into existence by the date of death: s24 WA 1837. He may have himself been intending to set up that trust but never got round to it. As I read them, the words used, “will serve as trustees”, refer to a contemplated future event or action as of the date of making the will rather than to a trust which was then in existence.

Or he may simply have been badly advised, or not at all, and thus apprehended that the words he used were in themselves sufficient to create a trust. They were not because the third certainty, of objects, was lacking. The key rationale of the half secret trust doctrine seems to me to operate here in that none of the purported trustees named by him can claim to take the gift beneficially as that was clearly not what he intended. Unlike a gift to a non-existent charity the gift cannot be treated cy-pres as one to his grandchildren outright.

We are not told by Kamlesh whether the executors are lay or professionals. I accept that the latter are going to wish to be more circumspect about distributing even after all sensible searches have been made. But there are alternatives to seeking directions from the Court, which I have suggested. I do not accept that it is just for them to take that route without considering those other options and I do not think it is just for them to do so without any regard to the costs and the size and composition of the estate. One alternative would be to seek an opinion from Counsel of at least 10 years call under s48 AJA 1985 as contemplated by CPR Part 64 (2)(d).

I am not a costs expert but I would hope that the Court would punish executors if they sought directions in a matter that should have been squarely within the professional competence that they held themselves out as having. I can hear the echo of some of my clients saying “So what are we paying you for Jack?”.

This confirms to me my invariable advice to many clients, especially those, for example in business, whom I judged to have the nous to evaluate advice given to them and judge attendant risk. Do not appoint professionals as executors or trustees as they will be off to the Court at the drop of a hat and at your great expense to find out how to make any decision, so that they can avoid criticism and personal financial exposure. And I don’t blame them to a degree. I did advise professionals where the beneficiaries were certain to fight like ferrets in a sack. Lay appointees can choose their advisers and can then decide to act on the advice accordingly. Those of the right calibre will be making such decisions regularly in their own sphere of operation. In this case, after all appropriate searches, if I were a lay executor I would be distributing 40% of the estate to the default beneficiary or on a partial intestacy and not wasting money on Counsel or litigation.

Jack Harper

12

Apologise for not noting the spouse was the sole executor. This is due to the way I receive and send posts. After a thread develops I only have some of the previous posts to view. I don’t like the way the Website makes you type in a box and has no spell check. If I were the spouse I would not be going near the Court on this.

Jack Harper

13

Thank you, Jack. I think there are more than enough ideas here for Kam to make a sensible choice. Hope you’re having a great day.

Yours the ever faithful Legal Beagle

14

Dear all, thank you so very much for your detailed input.

For clarification:

D – is the spouse (and sole Executrix)
E – is a family member and IFA
XYZ solicitors were the firm that drafted the Will and also acted for D in the administration and subsequently sent the 40% to E to invest on behalf of the grandchildren.

Whilst I note the comments regarding a secret or half secret trust, I really do not believe this is the case as neither D, E nor XYZ have a clue about the existence of the trust.

When questions had been asked of XYZ – they claimed that what was written in the Will was all there was to the Trust (:man_shrugging:)

When we pressed to explain that this was not possible and the ‘terms’ of the trust should have been outlined somewhere– they ‘kindly’ furnished us with the STEP Standard Provisions!

We have requested the Will file – which apparently does not exist (death was 2019)! Not really sure on what basis they have administered the estate and what advice they provided to D, for whom they acted.

Not sure a L-v-N letter will assist, but will be interesting to see what they do furnish us with if we did send the formal request.

We will also ask for the Probate file (on behalf of D) and see what they did (or didn’t do).

A Court involvement will be cost prohibitive and will swallow up any money there is for the grandchildren (on whatever terms)

Once again, thank you.

Kind Regards,