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 (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.
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 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 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. 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.
Originally these trusts were designed as “passive” holding to real estate and transfers. Later on they became “active” managers of property including chattel as well as land. In this context we see the trust evolve into a contracting entity. All of this led to the trust as a joint stock company (unincorporated association).
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 United States only the state of Delaware has a Chancery Court.
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.
By the late 1680’s England adopted the joint stock company (unincorporated association) as a solution to government issued corporate charters. They enjoyed tradable shares, strong entity shielding, liquidation rights, trustee and beneficiary protections.
As these alternative forms of business organization grew in popularity, there was an effort to suppress their usage. The Bubble Act of 1720 forbade unincorporated companies from selling shares. 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.
A joint stock company or business trust is simply a contract among private parties. No government permission required. Liberty of Contract. It’s your right.
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 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 Trusts:
- 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 vertical monopoly 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. Use them wisely. Use them to your advantage.