Author: Helena Luckhurst
This article is taken from Helena Luckhurst’s blog The Wealth Lawyer UK
A court case over the £42 million residuary estate of the painter Lucian Freud has resulted in its true recipients remaining a closely guarded secret, despite the fact that his will was made public when it was proved at the Probate Registry.
So how was this feat achieved and, for anyone not wanting the world to know to whom they leave their wealth after death, is this a trick worth imitating?
On its face, Freud’s will left his residuary estate (the rest of his assets after specific gifts) to his solicitor and one of his children – the Claimants – seemingly as a personal gift to them. However, the Claimants were adamant that they held residue on the terms of a ‘secret trust’ instead. A secret trust is a trust separate from a will but which impinges on a beneficiary named in a will – the will itself does not reveal that a trust exists but because of an earlier agreement between the will-maker and the recipients during the will-maker’s lifetime, the recipients are regarded in equity as bound to distribute the assets to the intended recipients under the agreement, not to themselves personally.
The Claimants had made clear to the Defendant that they were holding on a secret trust, the terms of which they could not reveal to him as Freud’s wishes were that he should not be told. However, in any event, they advised him, he was not a beneficiary of the secret trust anyway. Not surprisingly the Defendant wasn’t terribly happy to hear that. Accordingly, the Claimants sought a declaration from the court that, on its true construction, the will left the residuary estate to them personally. This would allow them to give effect to the secret trust. The Defendant took the opportunity to argue that the true construction should be that residue was held by them on trust. Believing that this would ultimately result in the intestacy rules applying, the Defendant stood to benefit in that case.
If the only criterion was to maintain privacy, the outcome was a great success. The court found in favour of the Claimants, who as part of the court process were not obliged to reveal any details about the secret trust. However, the price of secrecy was, presumably, the not insignificant cost of bringing the case to court, each side doing battle with the services of a QC.
The court was also influenced by the fact that the will was professionally drawn and one of the recipients was a solicitor. As a result, the court was satisfied that the situation could not have come about by accident – Freud meant his will to pave the way for a secret trust. However, the Defendant was not prepared to take the solicitor’s word for it and perhaps he cannot be blamed for that. If a will appears to be saying one thing when it comes to the distribution of assets but you are told that something completely different is going to happen, a disappointed beneficiary is likely to start questioning the state of affairs. In certain circumstances, perhaps without professional involvement, such an outcome could appear rather suspicious. So, by all means use secret trusts if you want to keep everything top secret. A recipe for family harmony though, it is probably not.
PS: There have been reports in the Daily Telegraph and the Independent (UK newspapers) this week alleging that the Government is consulting on a ‘Pay up before you die’ plan to combat Inheritance Tax avoidance. This appears to be a reference to the Government’s plans to issue accelerated payment notices to people involved in tax planning arrangements which have been disclosed (and disputed by HMRC) under the Disclosure of Tax Avoidance Schemes (DOTAS) rules and the fact that DOTAS may be extended to cover more Inheritance Tax schemes than at present according to a new Government consultation. However, the press reports fail to make clear that this cannot apply to Inheritance Tax payable on death. To be issued with an accelerated payment notice, there has to be some tax technically already due and, in the case of Inheritance Tax, most people only encounter it in lifetime on setting up a trust. HMRC have since confirmed that the Government does not intend to ask taxpayers to pay in their lifetimes Inheritance Tax which only falls due on their deaths. As you were, folks.
Helena Luckhurst, Partner, Fladgate LLP (firstname.lastname@example.org)