Trusts are viewed by many as one of the most innovative legal instruments ever devised. They historically expanded property rights and circumvented onerous prohibitions and confiscations by the state.
However we must first step back to the Romans. England later evolved ‘trusts’ in the courts. Then we follow up with the United States. It’s fascinating to learn about the practical problems from ancient generations and how trusts still benefit all of us today.
Rome – Fideicommissa
In the Roman Republic citizens were prohibited by law from transferring property or wealth at death to certain classes of people – such as unmarried persons, childless couples, slaves, or foreigners. To get around these rules, “fideicommissa” (trust) was invented to circumvent strict inheritance laws. These agreements were often oral and held in secrecy because their mere existence could lead to confiscation of property. As such, they were initially unenforceable by law.
Over time, this new device evolved and the mechanism slowly became a part of law. Yet initially, if a beneficiary acknowledged their secret participation in a trust to the state, he could keep one half of the benefit.
Roman “fideicommissum” established the succession of wealth and property after death, unlike the English “trust” which permitted succession before death while alive (inter-vivos). Additionally, for the Romans, a trustee was generally the “heir” upon death of the trust creator.
The Romans had a “horror of intestacy” which led them to death planning for a sense of security, or instrument of control. It gave them real security while alive, the family could continue after death, and the feeling of being remembered. This also prevented forgeries and captation (inheritance hunting).
Financial paper assets were non-existent in these early times. Wealthy families only had real property. Very few individuals could read or write. Sixty percent of Roman males were fatherless by age 20 and most people were dead by age 35. Elaborate tombs became timeless legacies.
Over the course of 500 years, fideicommissum replaced the civil laws of succession in Rome and became part of Roman social history. Historical records indicate that in 48BC the first legally enforced fideicommissa was the testament of Proconsul Lucius Lentulus, in which he appointed the Emperor Augustus as his heir legatee (trustee).
FideicommissaA Roman testator could choose, in disposing of his estate, between the formal methods of the… symbolized for Romans an expression of deep emotion, of affection for the future happiness or security of family and friends. Personal immortality was survived in the memory of others.
England – Realty and Unincorporated Joint Stock Companies
Long before we created valuable business enterprises, the principal wealth of people worldwide for centuries was land. This was the origin of the legal institution known as a trust.
Feudal Law
One early problem was feudal rules and restrictions on land transfers by King William. His agenda was power and protection of Castles by the military. By controlling all the land he was able to bestow gifts of ‘fiefs’ (land) to his nobleman vassals in exchange for loyalty and service. Or they might pay “property taxes” to excuse themselves from military duty.
This conflicted with the desires of vassal families to freely gift their land without restrictions. “Mr. John Smith” who owned farmland was always at risk. If accused of treason, crimes, held debts, or failed to perform military duty, the King could seize his land in retribution.
And the rules of primogeniture meant the eldest son could inherit everything regardless of ability. At this time it people thought “only God” can choose an heir. If Mr. Smith bequeathed property in a will, he was still at risk from the Crown.
It was frustrating. After death transfers were problematic. The Englishman cannot leave his land by will. Trusts resulted from deficiencies in English Land Law.
Common Law Courts
The Norman Conquest of 1066 in Hastings was a catalyst for change. The Battle of Hastings resulted in common law courts to handle disputes and real property as indivisible. New forms of legal actions by the Crown were called “writs” or royal orders. These new property rights led to the construction of castles, cathedrals, abbeys, and churches.
Years later the Magna Carta of 1215 – was the Baron’s Revolt against feudalism. Signed by King John, it mandated everyone is subject to the law which included the Crown. This allowed more freedoms to the passage of land to heirs and to eventually end capricious feudal rules of the Crown. It was a turning point in human rights called ‘due process.” One famous result is the Writ of Habeas Corpus. Fundamentals of the US Constitution.
Even after the feudal system collapsed old rules endured –
- Rather than a Will, Land Passed by Descent
- Rigid Shares – Primogeniture and Dower
- Fiscal Fees – Wardship & Marriage (taxes on minors)
It would take more time to resolve these issues. But we see changes starting to occur…trusts.
By the mid 1200’s another group with land ownership problems were Franciscan Friars. Commitments to a vow of poverty meant they were unable to own property, even their own housing. To solve this dilemma and provide housing to the clergy, local community leaders became the legal owners of dormitories where the friars lived.
Transferring property title to community leaders (co-trustees) became an effective method for towns and landowners to provide housing for the friars. Stability and security of their housing was safe from threat of confiscation or death of an individual patron.
These ‘trust’ arrangements endured as the friars housing (benefits) was guaranteed by the contractual obligation of the town. This also circumvented the Statutes of Mortmain which prohibited land donations to the church without permission of the Crown.
Other vassal landowners such as “Mr. Smith” took notice because they were still at risk of losing their property from capricious exactions by the King.
They transferred title to powerful Dukes (co-trustees) as the legal owners of their property. Written agreements (declarations) made clear named heirs (beneficiaries) have the right to use and enjoy their land proved successful.
These trusts served as the progenitor of the famous English dynasty estates. This is how land remains in one family for centuries. Because the Dukes were legal title holders, none of the feudal rules applied.
“Mr. Smith” was now able to make provisions for wife, daughters, and his younger sons. A trust also prevented “escheat” when someone dies without surviving lineal descendants. A trust protected families against the gross injustices of feudal land law centuries out of date. Because trustees were nominal owners (title) none of the feudal rules were triggered.
Unlike living (inter-vivos) trusts – effective before death, these ‘testamentary’ trusts only became effective after death. The primary purpose of these early trusts was to facilitate the transfer of freehold land within the family.
Originally land transfers were oral, read aloud in Sunday church. The Statute of Enrolments passed in 1536 required freehold inheritance transfers in writing and registered.
Courts of Equity
Still, there were no specific protections for property “rights” of beneficiaries under common law. English law went further than the Roman law and devised a special Court of Equity to recognize and settle conflicts among beneficiaries and mortgage holders of the English estates.
Thus, the “laws of equity” were established and the adjudication of them was empowered to the Lord Chancellor in the Court of Chancery.
The Chancery, Courts of Equity – established fairness in contracts (early 14th century) such as trusts & land law. English law now recognized the split between legal and equitable ownership.
This marked the invention of the concept of equity – the “rights” of trust beneficiaries.
This was separate from Common Law Courts. What are rights relative to ownership? Think of a beneficiary’s rights versus a trustee’s ownership. Equity = property interests. Three examples follow.
Example #1 – shareholders. in our modern financial system mutual fund shareholders own equity “rights” in a company without necessarily holding title to its assets.
Example #2 – lienholders. A person borrows money to buy land. A lender makes the loan. The borrower legally owns the land. The lender then has a ‘lien or right’ to the land as security collateral for the loan but they are not the legal owner.
Example #3 – tenants, optionees, life estates, etc.
The Court could forbid or penalize a person from trespassing on your property. Likewise, a decision could settle a contract dispute between parties, or compel performance. Cases might or might not involve monetary damages.
Statute of Uses
In the 1500’s, with tax revenues receding because of these trusts, King Henry VIII and the Barons enacted the “Statute of Uses,” with a series of provisions enabling him to wield more power over estates run by trustees.
The Crown argued that beneficiaries also held legal title, subject to seizure. It was an oblique attempt to disqualify the legality of trust estates – confiscate them and recapture feudal dues (taxes) for the King.
The Court of Chancery resisted, and King Henry VIII lost in court. Providing a trustee had minimal duties, e.g., collecting rents, conveyances, or security, the Statute of Uses did not apply.
This ruling was significant because it’s the first time in modern English history that a landowner could freely choose without risk who would get his property after death. The Statute of Wills affirmed this right. The Crown’s attempt to discredit trusts actually made them even stronger.
The Trust instrument was proven solid, a contract – with citizens and the UK courts. It protected families against gross injustices of the Crown.
This also led to a business idea. A trust now takes the form of an ‘unincorporated joint stock company.’
Summary
The Trust is a unique development of the Anglo-American institution.
Trusts designed to hold land (realty), protect personal wealth against liability and conduct commerce continues today in all English common law countries. This system uses a “three-party” contract.
Other countries use Civil Law derived from the Romans. They include France, Italy, Spain, Luxembourg, Portugal, Mexico, and Germany. This system uses a “two-party” contract.
Trusts (3 parties) remains more dynamic & flexible because of trustee powers. Contracts (2 parties) are missing that independent element to direct future interests and powers of appointment.
To better align these two different legal systems for family settlements, The Hague Trust Convention of 1985 was signed. It was an international agreement for wealthy countries with Civil Law systems to recognize the Common Law Trust institution.
Summary
Trusts may own virtually any type of property for personal or commercial purposes.
They have unlimited practical applications – distribute estate assets, fund charitable causes, leave a legacy, reduce taxes, camouflage assets, and operate for profit enterprises.
Use them wisely. Use them to your advantage.