Secret Trusts: Rare and Interesting in the Law of Wills & Estates

A recent case out of British Columbia examined secret trusts, which according to the Court are rarely encountered, but have a long history.

What happened in the case?

The deceased was diagnosed with cancer in February 2013, and planned to make a will when she got better. Unfortunately, she died in hospital in April 2013 without a will.

After her death, the deceased’s common law partner Mr. O. received the entire estate because she had no will. He did not keep her assets separate from his own, and he spent her money as his own.

Several months after deceased’s death, defendant entered into a new relationship with a woman he eventually married. The deceased’s two nieces Anja and Susanne applied to the court arguing that a secret trust had been created and that Mr. O. had accepted the obligation to ensure that her estate would go to Susanne.

The trial judge found that, whether or not deceased had used the word “trust”, she had created a trust by giving instructions to Mr. O. , and that he had accepted this obligation. Therefore, it was not open to him to walk away from that obligation.

What did the British Columbia Court of Appeal decide?

There were three arguments made on appeal. First, Mr. O. argued that the trial judge erred by failing to sufficiently consider whether he had accepted the trust. The Court said that the trustee of a secret trust must accept it, but in this circumstance, silence is enough.

The second ground of appeal was about timing. Mr. O. argued that if there was a secret trust, he was not required to give over the deceased’s assets until after his death, not when he started a new relationship.

The trial judge had found that Mr. O. was required to transfer trust assets at the earlier of his death or his entrance into new relationship, and therefore the time for the distribution of the trust assets came when he entered into his new relationship. Mr. O. argued that the deceased had clarified that her assets were not to go to Susanne until after he died, but the Court found this was inconsistent with the deceased’s wish that her niece receive her assets to get on a better financial footing and continue her education. If that was the purpose of the trust, then it did not make sense to postpone the niece’s receipt of assets until Mr. O.’s death, which might not happen for many years.

The third issue on appeal related to the joint tenancy of properties Mr. O. and the deceased owned together. The Court found that, as a matter of law, the creation of the secret trust severed the joint tenancy of property, because Mr. O. was both the joint tenant and the trustee. Once the secret came into existence, nothing was left to pass by to Mr. O. for his own use absolutely.

Takeaways

This is an interesting case because of some of the ways it changes some expectations. Usually when a person dies without a will, legislation will govern how the assets are distributed. This case confirms that might not be true if the deceased instructed the person who was otherwise entitled to receive their estate that their assets were actually to go to someone else. If the heir accepts the instructions from the deceased, then a secret trust might be created.

Also of interest is that a secret trust, where trustee and deceased are joint tenants, can sever a joint tenancy.

As a general rule, a secret trust is a risky way to dispose of assets, and it is also risky to take on the role of trustee for a secret trust. One thing to watch for is that in a circumstance like this, silence can act as consent. If a testator makes a request like this, the heir and putative trustee is bound to speak up if they plan to reject the instructions and instead intend to claim the assets as their own after the deceased’s death.

Although the facts in this case are unusual, and the plaintiffs had good evidence to support their position, it is also a modern view of a rare legal phenomenon.