The secret to using secret trusts

This article appears in the March 2021 issue of Advisor’s Edge magazine. Subscribe to the print edition, read the digital edition or read the articles online.

Testators leaving an asset to someone may not want others — even family members — to know about the gift. One way to keep gifts confidential is through the use of secret trusts.

With a secret trust, an individual makes a gift to a person — typically in a will — but privately agrees with that person that they are to hold the gift in trust for a third person. For example, Jim names Bob as the beneficiary of a gift in a will. Separately, Bob agrees to a request from Jim, made before Jim’s death, that Bob will hold that gift in trust for Kate after Jim dies.

“Once a will is probated, it’s a public document — anyone can look at it,” said Carol Bezaire, vice-president of tax, estate and strategic philanthropy with Mackenzie Investments in Toronto. With a secret trust, “nobody needs to know about the gift” except the testator, the trustee and the beneficiary.

A testator may also consider using a semi-secret trust. With a semi-secret trust, an individual creates a trust, usually in a will, but doesn’t indicate the beneficiary’s identity. For example, Jim leaves a gift for Bob to hold “in trust” but provides no other information in the will as to the terms. Separately, Jim and Bob reach an agreement before, or at the same time as, the will is executed that Bob is to hold the gift in trust for Kate.

Secret and semi-secret trusts have roots in English estate law. Testators might have used a secret trust to provide for a child born outside of marriage, to pay off a gambling debt or to otherwise avoid social stigma.

There are a variety of reasons today to keep a testamentary gift confidential, Bezaire said.

“It might be an unequal distribution among children — you’ve got three kids but you want to leave a favourite child a little extra,” she said. “Or you might want to make a charitable donation but you know the family is going to fight it if they know about it.”

A testator using a secret trust should exercise great care. A court might find a secret trust invalid. In that case, the gift could remain with the trustee and not the intended beneficiary. (If a court finds a semi-secret trust invalid, the gift reverts to the estate.)

Another risk is that the trustee reneges on their promise to transfer the assets.

A testator who chooses to create a secret trust “should build in safeguards,” said Ian Lebane, vice-president, tax and estate planner with TD Wealth Management. He suggested informing the ultimate beneficiary of the secret trust “so they can enforce it,” or naming more than one trustee “in case one trustee denies the existence of [the trust.]”

Secret and semi-secret trusts have largely been replaced by “less risky” planning techniques, Lebane said. These could include creating multiple wills, with one will containing assets not subject to probate, and therefore not made public; the establishment of trusts — such as an alter-ego trust — during a testator’s lifetime, the contents of which can remain private; or using beneficiary designations of registered plans and insurance policies to direct assets outside of a will.

Despite their waning usage, secret trusts were the subject of a 2020 court decision in British Columbia.

In Bergler v. Odenthal (2020 BCCA 175), a dying woman without a will asked her common-law partner to transfer her estate to a niece if he entered into a new relationship following the woman’s death. The partner reluctantly agreed to the request. However, following the woman’s death, he received her estate under intestacy and kept it — even though he began a relationship with another woman, whom he eventually married. He contended at court that the deceased had later “clarified” her initial request and her estate should be given to the niece after his death. The niece, who knew of the agreement between the couple, commenced legal action.

The court determined that a valid secret trust had been created as two essential requirements had been met: the testator had communicated the intention to create a trust, and the beneficiary — the common-law partner — had accepted the request to hold the assets in trust. The court found in favour of the niece.

The B.C. Court of Appeal not only upheld the lower court’s decision but suggested that even if the common-law partner had stayed silent, such a request would have created a trust obligation.

“Even if you don’t say anything, then you have agreed,” Bezaire said. So trustees who receive such a request from a testator should explicitly say no if they don’t intend to honour it.