By: Verena Meiser, J.D., firstname.lastname@example.org, 443-393-7696
Throughout history, people have protected assets from creditors and confiscation by giving title to their property to a trustee, who was a trusted individual or group of individuals. The trustee agreed to follow their oral or written instructions on how to hold and administer the trust property. An important part of these instructions addressed the time and manner of how the property was to be distributed to beneficiaries and the identities of the beneficiaries.
The first trust in recorded history was created by Socrates over 2,400 years ago. His intent was to establish a public library for the people of Athens. He had a vast collection of books that he wanted to preserve and make accessible to the public. To implement his vision, he needed a group of trusted people to provide the significant management and maintenance his library would need for years to come. He did not want to expose his books to confiscation or risk upon his death or the death of any individual trustee. Socrates decided to turn his books over to the city’s politicians and established a public institution, the Socrates Public Library Trust.
The Romans resorted to trusts for estate planning purposes, since the laws of the times prohibited certain classes of people from inheriting. Unmarried persons, childless couples, slaves and foreigners, for example, could not receive inheritances. Citizens found a way around these inheritance restrictions by using secret agreements with trustees. In most cases, these trustees were the beneficiaries upon the trust creator’s death, and the agreements were not enforceable by law. These trusts were known as “fideocommissum,” from the Latin words “fides” (trust) and “committere” (to commit), meaning that something was committed to another’s trust. Recognizing what the citizens were doing, the Roman government offered to allow trustees to keep one half of their trust property in return for the benefit of legal enforcement. The first such fideocommissum is said to be the testament of Proconsul Lucius Lentulus, in which he appointed the Emperor Augustus as his heir trustee. Over a period of 500 years, these fideocommissa replaced the Roman civil laws of succession.
The English trust arose in the middle of the Thirteenth Century when the Franciscan friars who had committed to a vow of poverty could not own personal or real property. Local communities became legal owners (trustees) of the dormitories inhabited by the friars. Landowners during those feudal times recognized the protection these agreements could provide from frequent, sometimes capricious seizures of land by the Crown. They conveyed title to their land to trusted friends and identified the beneficiaries who had the right to use and enjoy the land. When the practice of using trusts first started, the common law did not provide ways to address disputes between trustees, beneficiaries and third parties. The church devised a special “court of equity” to address and settle trust related conflicts. The Lord Chancellor in the Court of Chancery was empowered to adjudicate such cases. When the widespread use of trusts by landowners led to a decline in tax revenues, King Henry, VIII attempted to regain control by introducing the Statute of Uses. It required that trustees be active in the management of trusts, and that beneficiaries pay taxes. The Courts of Chancery stepped in and limited the statute’s impact making it clear that trustees have the power to hold land and by allowing the use of trusts to protect wealth against liabilities.
In the United States, we adopted most of English common law, including the laws on trusts and estates. In the first half of the 19th Century, industrialists figured out that they could set up businesses as trusts, escaping government regulations to control commercial activity. They would title business property in the name of a trust and appoint a board of trustees to manage the trust or, in some cases, even run the business. The United States Supreme Court confirmed in a series of opinions that businesses could organize as trusts and be held subject to jurisdiction of the courts. Wealthy industrial families grew vast holdings in trusts. A well-known example is the Rockefeller’s Standard Oil Trust. Such industrial activity stifled free competition, leading to the Sherman “anti-trust” act of 1890. The act ended the growth of monopolies within trusts, but allowed the continued use of trusts for corporate purposes. Since the end of the 19th Century, trusts used for commercial purposes has evolved significantly. Nowadays, many corporate pension funds and mutual funds are held in trusts, even if their names may not include the word “trust.”
In today’s context of estate planning, trusts continue to offer individuals privacy, a way to ensure proper administration of trust assets during their incapacity or absence, and a way to customize guidelines and instructions for distributions to beneficiaries.