Introduction to Trusts

Adapted from James Grimmelmann, “Trusts and Corporations” in Stephen Clowney, James Grimmelmann, Michael Grynberg, Jeremy Sheff, and Rebecca Tushnet, eds., Open Source Property: A Free Casebook, https://opensourceproperty.org (2015).

Origins of the Trust #

The origin of the trust lies in medieval tax estate planning and tax evasion. (Arguably, nothing has changed in the last six hundred years.) Imagine Osbert, a minor lord in the 15th century, who holds Greenacre as a tenant of Leonard, a slightly less minor lord. Osbert is getting on in years and has started to worry about the future of his family. His elder son, Aylwin, is not showing promising signs of maturity, and Osbert has come to think that Aylwin may be better suited to religious orders than the duties of managing a great estate. But Osbert’s younger son Bartholomew appears to be a fine young gentleman: athletic, patient, and wise in the ways of men. Osbert would like to provide for Aylwin, but would prefer to have Greenacre go to Bartholomew. Osbert’s problem is that the available conveyancing devices don’t work for him. If he does nothing, then Greenacre goes to Alywin at Osbert’s death under the rule of primogeniture in effect in England at the time, according to which the eldest son receives any land his father owned at his death (was “seised of,” in contemporary terminology). A will leaving Greenacre to Bartholomew doesn’t work because land could not be devised by will until the Statute of Wills in 1540. And Osbert doesn’t want to convey Greenacre (or a future interest in Greenacre) to Bartholomew now, because Bartholomew might die before him, or Aylwin might get his act together, or something else could come along to force a change in plan.

The solution hit on by contemporary lawyers was the “use.” Osbert conveys Greenacre to his friend Theobald “to the use of Osbert and his heirs.” Then he writes a letter to Theobald, instructing Theobald to convey Greenacre to Bartholomew at Osbert’s death. This works. When Osbert dies, Theobald owns Greenacre, so primogeniture never kicks in. Then Theobald conveys to Bartholomew while they are both alive, so again the conveyance is perfectly good. What’s more, Osbert can change his instructions to Theobald at any time by writing a new letter. And as an added bonus, because the land never passes by intestacy, the “feudal incidents”– effectively taxes payable to Leonard when a new tenant inherits – never become due. Uses became highly popular for solving numerous similar problems created by the inflexibility of the medieval system of interests in land.

But there was a fly in the ointment. As far as the law courts could see – or rather, as far as they were willing to look – the “to the use of” language was a superfluous, meaningless, and ineffective addition to an otherwise valid conveyance. On their view of the situation, Theobald owns Greenacre in fee simple once Osbert conveys to him. Osbert’s subsequent letter is a worthless piece of paper; much as if you wrote to Bill Gates telling him to convey to you some lakefront property in Washington. So if Theobald turned out to be untrustworthy and held on to Greenacre for himself or conveyed it to Aylwin contrary to Osbert’s instructions, Osbert’s plan would come to ruin. In such cases, Osbert and Bartholomew could obtain relief from the Chancellor, who would hold that Theobald was under a duty in equity and good conscience to follow Osbert’s instructions.

The use thus created what we would today call an “equitable interest” in land. Theobald remained the legal owner of Greenacre while he held it to the use of Osbert and his heirs, but Osbert was the equitable owner, since he could enforce his claims and instructions in a court of equity. Over time a variety of similar situations, in which Chancery would enforce interests in land legally owned by another, gave rise to a reasonably coherent body of equitable jurisdiction, equitable doctrine, and equitable interests in property.

The use is long gone, along with the medieval doctrines that necessitated it, but the modern trust shares its essential characteristics. A trust requires three people and one thing. The people are the settlor, who creates the trust; the trustee, who holds legal title to the trust property and is responsible for following the settlor’s instructions, and the beneficiary, who is entitled to receive distributions from the trust in accordance with the settlor’s instructions but does not directly control it. The thing is the trust property (or sometimes res, Latin for “thing,” or corpus, Latin for “body”), whose ownership is split between the trustee (with legal title) and the beneficiary (with equitable title).

[…]

The Modern Trust #

[T]rusts can arise in a variety of settings. The executor of a will and the administrator of an estate in intestacy act as trustees for the parties who are to receive the decedent’s property. The estate of a bankrupt firm or individual is also managed by a trustee, who acts to maximize its value for the creditors.

There are many kinds of trusts. Private trusts have identifiable individual beneficiaries. There are also charitable trusts, which can serve broader social purposes and large classes of unidentified beneficiaries, and business trusts, in which trustees manage financial assets for specific purposes. Many retirement funds, for example, are organized as trusts with the employees who are entitled to pensions as beneficiaries. Another common distinction is between revocable trusts, which the settlor can terminate, and irrevocable trusts, which she cannot. Trusts can also be inter vivos, i.e. established by the settlor during her lifetime, or testamentary, i.e. created in the settlor’s will.

The basic duties of a trustee are obedience to the instructions given by the settlor, loyalty to the interests of the beneficiaries (rather than the trustee’s own interests), and prudence in managing the trust assets appropriately. Various subsidiary duties, such as the duty to account for the trust assets and how they have been used, ensure that the basic duties are carried out faithfully. (Which of these duties did the different trustees in Duthie violate?)

[…]

A trust beneficiary has equitable title to trust assets. Equitable title is not legal title, as illustrated by spendthrift trusts. Suppose that the fabulously wealthy parents of Rick von Slonecker, currently 28 and never employed, decide that they want their son to enjoy a luxurious lifestyle, so they create in their wills a trust to pay Rick $1 million a year for life, with the remainder to go either to his children, or if there are none, to various charitable causes. (Side note: observe the great flexibility provided by the trust form; equitable interests are almost always better alternatives to legal ones in any complicated property settlement, given the notorious inflexibility and troublesome traps of the system of estates in land.) They fear, not without reason, that Rick will run up gambling debts and want to pay off large legal settlements quietly. So they put a clause in the trust instrument making abundantly clear that the monthly payments are to go directly to Rick and no one else, and that Rick shall have no power to encumber the trust corpus. Now, in many jurisdictions, when the casino comes calling and waving its bill, it must pursue Rick directly, even though he is penniless except for a few days immediately after each check arrives from the trust. It would be more convenient for the casino either to collect its debts from the trust corpus, or to obtain an order directing the trustee to pay it instead, but the casino has no more rights to the trust than Rick does, and Rick holds only an equitable interest in the trust.

Is it fair and just for Rick’s parents to help Rick escape his debts in this way? One might think that there would be an obvious motivation for states to protect legitimate creditors against the various asset-shielding uses and abuses of trusts, but the trend has been in the other direction. Competition for trust business has induced numerous jurisdictions to adopt highly settlor-friendly trust law, such as validating spendthrift trusts like Rick’s or weakening the Rule Against Perpetuities to attract long-lived dynastic trusts with beneficiaries spread out over many generations in a family. There are even asset-protection trusts, in which the settlor is also the principal beneficiary; the goal is that she can draw on the trust but her creditors cannot. These legal concessions to settlors can benefit economies because trustees are entitled to compensation for managing trust assets, and many financial and legal service providers offer professional trust management services. But these benefits come at the expense of frustrated creditors and current generations bound by the dead-hand control of long-gone settlors. Is this a worthwhile trade-off to make?