The Most Innovative Legal Instruments Ever Devised

History of Trusts

History of Trusts

Roman Origins of Trust Law

History of Trusts – trusts are viewed by many as one of the most innovative legal instruments ever devised. Trusts historically expanded property rights and circumvented onerous prohibitions and confiscations by the state. At its most basic, a trust is simply an agreement between two people. It describes ownership, the benefits and the management of property or wealth.

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, “fideicommissum” (a 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 (inter-vivos). Additionally, for the Romans, a trustee was generally the “heir” upon death of the trust creator.

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 the first legally enforced fideicommissa was the testament of Proconsul Lucius Lentulus, in which he appointed the Emperor Augustus as his heir trustee.

Fideicommissum (trust) 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.

History of Trusts – English Trusts

In the history of trusts the English trusts arise in the mid 1200’s as Franciscan friars, compelled to commit to a vow of poverty during their lifetimes, were unable to own property, even their own housing. To solve this dilemma and provide housing to the clergy, local communities became trustees (legal owners in title) of dormitories where the friars lived. The use of transferring property title to a trustee became an effective method for towns and landowners to provide housing for the Friars. The stability and security of the housing could not be threatened by confiscation or death of an individual patron. The trusts endured and the use of the housing by the Friars was guaranteed by the contractual obligation of the town.

Many other landowners took notice because they were continuously at risk of losing their property because of capricious exactions by the King. The feudal system allowed the seizure of their land as retribution for treason, crimes, debts, or failure to perform military duty. If they bequeathed property in a will, they were still at risk from the Crown. Their best solution was to appoint friends as co-trustees and transfer title of property to a common law trust. This arrangement which generally made clear the beneficiaries who have the right to use and enjoy their interest — proved successful. These land trusts served as the progenitor of the famous English estates.

Still, there were no specific protections for property “rights” 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. This marked the invention of the concept of equity (fairness or justice) as we understand it in the modern financial system today whereby stockholders own equity “rights” in a company without necessarily holding title to its assets.

An example of an equity decision by the Court of Chancery could be to forbid a person from trespassing on your property. Likewise, a decision could settle a contract dispute between parties, or compel performance. These cases might or might not involve monetary damages.

In the 1500’s, with tax revenues receding because of these trusts, King Henry VIII created the Statute of Uses, a series of provisions enabling him to wield more power over estates run by “nominee” trustees. These provisions required that trustees do more than just hold title. It was an oblique attempt to disqualify the legality of trust estates in order to confiscate them and capture the wealth for the throne. The Court of Chancery fought back and weakened these provisions. In the end, trusts designed to hold land (real estate) and protect wealth against liability continues today in common law countries, including the USA.

Trust History in the United States

Because the founders of the United States adopted most of English common law, trusts remain a part of our law nationwide with one exception — the state of Louisiana adopted French Civil Law.

In the early 1800’s, at the dawn of the industrial revolution, the U.S. Supreme Court confirmed that businesses could formally organize as trusts. There were advantages for these businesses to utilize trusts. For example, real estate developers could circumvent corporate rules enacted by individual state legislatures. Industrial barons and major landowners structured as a business trust could own multiple businesses in private. Coincidently, monopolies emerged that gained a choke-hold on an entire industry thwarting all competition. Rockefeller’s Standard Oil is an infamous early example of this strategy.

The U.S. government pushed back with the Sherman “anti-trust” Act of 1890. The ostensible objective of which was the promotion of free competition. Rather than an indictment of the trust structure, these laws were designed to end abusive vertical monopoly practices of early industrial magnates. Despite populist mythology that business trusts are somehow inherently “untrustworthy”, and despite politicians eager to stoke this sentiment in order to extract more tax revenue from and control over businesses, Business Trusts remain a practical, effective and highly flexible way to legally organize a business enterprise in the United States.

In the US today, many businesses and enterprises are organized as trusts. In fact, trusts exist everywhere in our daily life.

Company Pension funds are trusts.

Mutual Funds are often trusts.

Estate plans are trusts.

Employee tax withholdings are held in trust.

You may own virtually any type of property in a trust for personal or commercial purposes. Certain kinds of Trusts can protect assets from creditors. They can provide asset privacy. They can reduce estate taxes. They can insure a public legacy by providing funds for a museum, hospital building or other philanthropic cause.

Trusts are an enduring, well established and a powerful component of our rightful legal heritage.

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