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Secret Trusts: Once More Unto the Breach

The recent case, Bergler v. Odenthal,[1] is yet another example of the device called the “secret trust”. Although it is not an everyday occurrence, it arises often enough that it merits another look. It is a device that is fraught with problems, because the rights it confers on the intended beneficiary are tenuous at best.

A secret trust comes about when the owner of property leaves it to another person (the “trustee”) subject to an understanding or agreement that the other person will hold it for the benefit of and transfer it to a third person (the “beneficiary”). The device is typically used by a testator, who has good reasons to keep the name of the beneficiary private and thus does not want to name her in the will. If she did name her, the gift would become public knowledge when the will is probated. However, the device can also be used by a person who does not have a will, but enters into an understanding with his intestate heir that he will hold the property for the benefit of the third person and transfer it to her.[2] Moreover, the device can be used in inter vivos transactions. Thus, for example, if A and B hold property as joint tenants and A promises B that when B dies he will pay a specified sum of money to C, a secret trust arises with C as the beneficiary.[3]

The rights of the beneficiary are tenuous, because everything is done in secret and the intended trustee may decide not to disclose the trust. Hence, unless the beneficiary has evidence of the agreement or understanding, she will never receive the property. Whether the beneficiary ultimately receives the property will also depend on whether the will (if that is what is used) is valid and whether the intended trustee survives the testator. The fragile nature of the beneficiary’s rights are illustrated in the Bergler case, as will become apparent below.

A secret trust can be fully secret in that the agreement between its creator and the “trustee” is entirely oral. Or it can be semi-secret if the gift to the “trustee” is expressed in some limited form such as, “on terms I have conveyed to him”. Semi-secret trusts have their own distinct rules. I shall not discuss them further here, since the trust in the Bergler case was fully secret.

The secret trust is not an express trust. It cannot be express. Thus, for example, in the case of a will the testator leaves property to the intended trustee, but the terms of the trust are not contained in the will. This means that the gift to the trustee is valid, but the terms of the trust are not valid, since a will is valid only if it is in writing and executed and attested in accordance with statutory formalities.

Thus, secret trusts fail to satisfy the provisions of modern wills statutes. However, equity will step in and enforce the agreement if it is proved, by imposing a constructive trust on the recipient of the property. And the constructive trust will be in the same terms as the failed express trust.

For a secret trust to be enforceable, three conditions must be satisfied: (1) the property owner must disclose its terms fully to the “trustee”; (2) the “trustee” must accept, or at least acquiesce in the trust and agree to carry out its terms; and (3) the communication and acceptance must occur before the testator’s death in the case of a fully secret trust and (although this an illogical distinction) before the will is made in the case of a semi-secret trust.

For further details about the secret trust and its basis. I refer you to Oosterhoff on Trusts.[4] In it we argue that the secrete trust cannot be explained on the basis or unjust enrichment, or of wrongdoing. We maintain that the best explanation for the secret trust is equity’s desire to perfect intentions and to protect detrimental reliance.

The secret trust in Bergler v. Odenthal arose in the context of an intestacy. Angelika E. Stuhff had intended to make a will, but she had been diagnosed with cancer and died intestate in hospital at age 62 in April 2013. She left no descendants. Her common law partner, Bernd Odenthal, the appellant/defendant, was her sole heir.[5] However, two of Ms. Stuhff’s nieces, Anja and Monika, testified to conversations they had with Mr. Odenthal at the hospital before Ms. Stuhff’s death, in which he said that Ms. Stuhff had told him that she wanted her estate to go to Susanne, the respondent/plainttif, another niece of hers. Monika also testified that Ms. Stuhff told all of them that she wanted her estate to go back to her family after she died and that Ms. Stuff had told Mr. Odenthal that he was to transfer her estate to the Bergler family when he began a relationship with a new partner. Monika’s husband, Eberhard, confirmed these statements made by Ms. Stuhff in the presence of Monika and Mr. Odenthal. Further, Mr. Odenthal confirmed that Ms. Stuhff told the group that if he got involved in a new relationship (when he had “a new chick” according to one conversation), her estate was go back to her family. However Mr. Odenthal testified that Ms. Stuhff clarified her instructions and told him that wanted her family to receive her estate only on his death and not before and that, in the meantime, he had only “moral” obligation to retain estate assets, so that he could use them, but had to leave them in his will to the Susanne. Eberhard did not recall Mr. Odenthal disagreeing with Ms. Stuhff’s instructions.

At first instance, Baker J. preferred Eberhard’s evidence to the evidence of the “clarification” by Mr. Odenthal. However, she did accept other evidence by Mr. Odenthal to the effect that Ms. Stuhff had given him clear and precise instructions about transferring her estate to the Bergler family, and that he told her that he would abide by her wishes.

After Ms. Stuhff’s death, Mr. Odenthal received her entire estate. He did not keep the estate assets separate from his own, transferred the funds in her bank accounts to his own accounts and treated them as his own. He testified that he did make a new will in accordance with Ms. Stuhff’s wishes, but later revoked it when the Berglers brought these proceedings against him.

Mr. Odenthal entered into a new romantic relationship with a woman in the fall of 2013 and lived together. They were married in 2016.

Susanne and Anja began this proceeding in 2015 for a declaration, inter alia, of a secret trust. At trial the plaintiffs conceded that Anja had no claim, so the case was continued thereafter solely for Susanne’s benefit.

Justice Baker found that a secret trust had been created and that, according to its terms, Mr. Odenthal was to transfer all the assets to Susanne once he entered into the new relationship. Justice Baker accepted what was largely hearsay evidence to prove the trust, because it was reliable and was necessary to prove the trust. This is unexceptional. Hearsay evidence is typically accepted in secret trust cases and this indicates that equity does seek to perfect the parties’ intentions when they are clear and the evidence of the intentions are reliable. Moreover, the evidence clearly established that Ms. Stuhff clearly communicated her intentions to Mr. Odenthal and that he accepted them. Thus two of conditions of a secret trust were established. The third, that the communication and acceptance must occur before the death of the testator, was obviously satisfied as well.

Justice Baker then had to determine what Ms. Stuhff’s assets were at her death and how their value was to be calculated. Two assets were of particular interest. One was a British Columbia property in which both parties held an interest and which Mr. Odenthal had sold. Justice Baker held that Ms. Stuhff’s share should be calculated as the sum of what she had contributed to its acquisition and maintenance, plus the increase in value of her share to the date of sale.

The other was a property in Washington State. It was held solely in Mr. Odenthal’s name at the time of trial, but Ms. Stuhff had contributed a significant amount to its acquisition and title had been registered in joint tenancy as to a 20% interest in Ms. Stuhff’s favour and 80% in Mr. Odenthal’s favour, which reflected their relative contributions to the acquisition. Justice Newberry mentioned in her reasons that the law of Washington permits unequal shares between joint tenants.[6]

Having determined the value of Ms. Stuhff’s property, Justice Baker ordered that the amount, plus prejudgment interest, be paid first out of the proceeds of sale of the British Columbia property and the balance by Mr. Odenthal personally.

There was an interesting further development with respect to the Washington State property. Mr. Odenthal applied to the court to reconsider the judgment as regards that property. His argument was that it was not part of Ms. Stuhff’s estate, since it was held in joint tenancy and therefore passed to him by right of survivorship. Baker J. refused to make any change to her previous order.

Mr. Odenthal appealed and argued that there was no evidence that he accepted the obligation Ms. Stuhff had tried to place on him. He also argued that the intention to create a trust and the acceptance of the obligation to carry it out must be clearly proved. Justice Newberry, who wrote the judgment on behalf of the court, agreed with that proposition. She also stated that the three certainties required of trusts, that is, certainty of intention, property and objects, must be satisfied.[7] The latter requirement is not often discussed in the context of secret trusts, but it is good to have this confirmed, for a secret trust is indeed a trust and must therefore satisfy those requirements. By reference to a number of case and secondary authorities, Justice Newberry confirmed the established principle that acceptance of the obligation can be readily inferred once the communication has been made. The trustee must then say yea or nay and if he remains silent and does not protest, he will be treated as having accepted the obligation.[8] Again, it is good to have this principle confirmed. Justice Newberry held that the judge of first instance had not erred on this point and that her finding that Mr. Odenthal had accepted the obligation was well-supported by the evidence.

The court then addressed the joint tenancy issue. On this point Justice Newberry affirmed the legal principle that the creation of a secret trust normally severs a joint tenancy. For this point she relied[9] on Clauda v. Lodge.[10] She also relied[11] on British Columbia (Public Trustee) v. Mee,[12] in which Bull J.A. stated,

There is no doubt, … that a valid declaration of trust … could effectively sever a joint tenancy to the same effect as a transfer made to a trustee would do.

Justice Newberry concluded, rightly in my opinion, that there is no difference in this respect between an express trust (such as in Mee) and the acceptance of an obligation imposed under a secret trust.[13]Again, it is important to have this principle affirmed.

A similar issue sometimes arises in the context of mutual wills. There too the principle applies that the joint tenancies of property owned by the parties before they enter into a mutual wills agreement are converted into tenancies in common. University of Manitoba v. Sanderson Estate[14] illustrates the point. A husband and wife entered into agreement to make mutual wills and not to alter them. Much of their property was held in joint tenancy. After the wife died, the husband made a new will that differed from his original will. The court held that the mutual wills doctrine was attracted in the circumstances and the husband’s property was accordingly subject to constructive trust. This trust is imposed by equity for reasons similar to the imposition of a constructive trust in the case of a secret trust. The Court of Appeal held that the parties’ conduct in buying properties in their joint names after they entered into the agreement had not revoked their agreement. Justice Rowles noted, “The creation of a right of survivorship in their assets is not necessarily inconsistent with the operation of the mutual wills, and it has no bearing on the Agreement, which was simply not to revoke the wills”.[15] However, she was only referring to property acquired after the agreement. The joint tenancy of that property would only have been converted if that is what the agreement provided, but not otherwise. The joint tenancies of the parties’ assets before the agreement would have been converted by it, as the trial judge held. Of course, a party seeking to impose an obligation on another person that, if accepted, will lead to a secret trust can also exclude any property, including property held in joint tenancy, from the obligation.

[1]    2020 BCCA 175.

[2]    See McCormick v. Grogan, L.R. 4 H.L. 22 at 97, where Lord Westbury mentions that a secret trust can be created by a testator, but also when “an individual on his deathbed, or at any other time, is persuaded by his heir-at-law, or his next of kin, to abstain from making a will”.

[3]    See, e.g., Clauda v. Lodge, [1952] 4 D.L.R. 570 at 574-75 (B.C.S.C.). Cf. Re Stephenson, [1939] 2 D.L.R. 32 (Man. Q.B., affirmed [1939] 3 D.L.R. 716 (C.A.); Sellack v. Harris (1708), 2 Eq. Cas. Abr. 46.

[4]    9th ed. by Albert H. Oosterhoff, Robert Chambers, and Mitchell McInnes (Toronto: Thomson Reuters/Carswell, 2019, §12.4.1.

[5]    In British Columbia two persons are spouses of each other when they were married to each other, or lived with each other in a marriage-like relationship for at least two years immediately before the death of one of them: Wills, Estates and Succession Act, S.B.C. 2009, c. 13, s. 1(1), sub voce “spouse”. In the circumstances, Odenthal was entitled to inherit all of Stuhff’s estate: ibid., s. 20.

[6]    In passing, I note that this is unusual. At common law, the shares of joint tenants must be equal and that has always been the law in Canada. See Bruce Ziff, Principles of Property Law, 7th ed. (Toronto: Thomson Reuters, 2018), p. 376.

[7]    Bergler v. Odenthal, footnote 1, supra, para. 28. The court cited Hayman v. Nicholl, 1944] S.C.R. 253, which was relied on by Mr. Odenthal. It was a case in which the court found that no trust had been proved because the testator used precatory language. Thus, the certainty of intention was lacking and so was certainty of objects. Justice Newberry distinguished Hayman on the facts: Bergler, ibid., para. 31.

[8]    Bergler, ibid., para 29. See also McCormick v. Grogan, footnote 2, supra, loc. cit., where Lord Westbury said that when a testator makes a bequest, the “disponee” will be converted into a trustee if “the disponee assents to it, either expressly, or by any mode of action which the disponee knows must give the testator the impression and belief that he fully assents to the bequest”.

[9]    Ibid., para. 36.

[10]   Footnote 3, supra.

[11]   Bergler, para. 38.

[12]   (1972), 23 D.L.R. (3d) 491 (B.C.C.A.) at 494.

[13]   Bergler, para. 40.

[14]   1998 CarswellBC 121, 155 D.L.R. (4th) 40 (B.C.C.A.), reversing (1996), 17 E.T.R. (2d) 78 (B.C.S.C.).

[15]   Ibid. para. 31.

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