History of Trusts
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. At its most basic, a trust is simply a contract, or agreement between two people. It describes ownership, the benefits and the management of property or wealth.
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).
Fideicommissa 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
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. Meanwhile, the rules of primogeniture meant the eldest son could inherit everything regardless of ability. At this time it was thought “only God” can choose an heir. The best new solution was to appoint Dukes as trustees and transfer legal title of property to a trust. This arrangement which generally made clear the beneficiaries who have the right to use and enjoy their interest as equitable title — proved successful. These land trusts served as the progenitor of the famous English dynasty estates.
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 passive trustees. It effect, the Statute said that beneficiaries also held legal title which was then subject to seizure.
It was an oblique attempt to disqualify the legality of trust estates in order to confiscate them and capture feudal dues for the Crown. The Court of Chancery fought back and King Henry VIII lost in court. As long as the trustee had ‘active’ minimal duties, e.g., collecting rents, conveyances, or security, the Statute of Uses did not apply.
Yet the Statute of Uses is significant because it’s the first time in modern English history that a landowner could freely choose in a will who would get his property. The Statute of Wills affirmed this right.
The Statute of Enrollments required deeds be written and registered.
Trusts designed to hold land (real estate) and protect personal wealth against liability continues today in all English common law countries.
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. This marked the invention of the concept of equity (fairness or justice) as we understand it in the modern financial system today whereby shareholders own equity “rights” in a company without necessarily holding title to its assets.
One example is a lien. A person borrows money to buy land. A lender makes the loan. The borrower then owns the land. The lender then has a ‘lien or right’ to the land in exchange for the loan but they are not the owner.
An example of an equity decision by the Court of Chancery is forbidding 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 this context we see the trust evolve through the courts into a valid contracting entity. This led to using a trust in a business setting. It took form as an ‘unincorporated joint stock company.’
By the late 1680’s England adopted the unincorporated joint stock company (business trust company) as a solution to government issued corporate charters. They enjoyed tradable shares, strong entity shielding, liquidation rights, trustee and beneficiary protections.
As this alternative form of business organization grew in popularity there was an effort by the government to suppress their usage. The Bubble Act of 1720 forbade unincorporated companies from selling shares. However, it was repealed in 1825 as this form of business structure proved extremely popular. In a hundred years only once did the government try to enforce the Act. By the early 18th Century there were over 1,000 of these organizations operational. Possibly sensing a loss of control or revenue to the government, the first corporate registrar was passed into law 1844.
Meanwhile, new Corporations were formed to exploit opportunities in America. The heavyweight Massachusetts Bay Colony Ltd. was seeing profits reduced from competitors. This led to legislative restrictions on corporations holding property. Isn’t it great to have friends in government?
In 1795 competitors counter-attacked by forming the first Massachusetts Business Trust.
We see innovation, adoption, testing and case law evolution of this new trust device applied to real property and business ventures. It spread like wildfire. Investors felt safe and enjoyed privacy of ownership.
A charter is permission from the government (Crown or Secretary of State) to operate a joint stock company – corporation.
A trust is a right bestowed upon people (Citizens) to operate an unincorporated stock company – business trust.
In 1787 the Trust concept was embodied in the United States Constitution.
It recognized the right and sanctity of contracts, and that all states recognize the rulings of other states. Here are a few references…
Article 1, Section 10 – no state shall…pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts.
Article 4, Section 1 – full faith and credit shall be given in each state to the public acts, records and judicial proceedings of every other state.
Article 4, Section 2 – the citizens of each state shall be entitled to all privileges and immunities of citizens in the several states.
Since a trust is a contract, you have the free right to create any type of trust.
Because the founders of the United States adopted most of English common law, trusts remain a part of our law nationwide in 49 states. Louisiana is the exception which 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 with anonymity. They became known as commercial trusts.
Monopolies emerged that controlled an entire industry by eliminating all competition. Rockefeller’s Standard Oil is an infamous early example of this strategy.
Famous Business Trust Companies:
- Standard Oil Company
- United States Steel
- American Tobacco Company
- International Mercantile Marine
- DeBeers Diamonds
- International Match Company
The U.S. government pushed back with the Sherman Anti-Trust” Act of 1890. The objective was to promote free competition. The followup Clayton Antitrust Act of 1914 prohibited predatory price fixing and anti-competitive mergers.
Rather than an indictment of the trust structure, these laws were designed to end abusive monopoly business practices of early industrial magnates.
Populist mythology was that business trusts are somehow inherently “untrustworthy.” Politicians stoked this public sentiment to extract more tax revenue and control. However, 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. Here are a few examples…
- Pension Funds
- Mutual Funds
- Oil & Gas Royalties
- Music Royalties
Your trust may own virtually any type of property for personal or commercial purpose. Trusts have unlimited practical applications. They protect assets from creditors, provide asset privacy, and reduce taxes.
Trusts can insure a public legacy by providing museum funds, hospital building or other philanthropic cause.
Trusts are an enduring, well established powerful component of our rightful legal heritage. Never once outlawed or deemed illegal. Use them wisely. Use them to your advantage.