You’re probably quite familiar with trusts in your financial practice – but have you ever stopped to think about the origins of this financial instrument?

Why do trusts exist, and why are they used?

In this post – the first of a series of posts on trusts – we’ll examine the origins of trusts, and review some of the terms that you might have heard but weren’t sure what they actually referred to.

Please note that nothing in this post, or any of our writings, is to be considered legal or tax advice.

Origins in Medieval England
The Trust law that we have in the US today traces its origins all the way back to the early Middle Ages. The development of the institution of a Trust may have been sparked by the Crusades. During the 12th and 13th centuries, English knights and nobles would embark on long, hazardous journeys to the Holy Land, leaving their estates and properties behind.

To manage their assets in their absence, they transferred the legal title of their properties to trusted individuals, known as “trustees,” who would manage the properties for the benefit of the knights’ families. This arrangement relied on trust (in the everyday meaning of the term: “assured reliance on the character, ability, strength, or truth of someone or something” as Merriam Webster defines it) and was the precursor to the modern legal institution of trusts.

The Court of Chancery and Equity
The early common law did not recognize trusts. The development of trust law was significantly influenced by the establishment of the Court of Chancery in the 14th century. The Court of Chancery, presided over by the Lord Chancellor, recognized and enforced trusts, even though trusts were not acknowledged by common law courts.

Statute of Uses
The evolution of trust law took a significant turn with the enactment of the Statute of Uses in the year 1535.

Before the statute, one person could allow another person to use his land, but the land-owner still had to pay taxes on it. Under the Statute, if a person transferred land to another person to use, the user would be considered the owner for tax purposes. People began using trusts to circumvent this outcome.

The Statute of Uses is considered by many to have laid the groundwork for the separation of legal and equitable titles, a fundamental aspect of modern trust law.

Modern Trust Law
By the 19th century, trust law had matured significantly. The Trustee Act 1850 and the Trustee Act 1925 codified principles and rules governing the administration of trusts. These acts clarified the duties and powers of trustees, established guidelines for the investment of trust property, and provided mechanisms for the appointment and removal of trustees. The flexibility and adaptability of trust law allowed it to be used in various contexts, such as family settlements, charitable trusts, and pension funds.

But we move across the Atlantic to see the fullest flowering of trust law.

The Development of Trust Law in the United States

Colonial Period and Early Development
The colonization of America by English settlers brought with it the English legal system, including the legal principles of equity[1] and trust law. However, the application and evolution of trust law in the United States were shaped by the unique social, economic, and political conditions of the developing nation.

In the colonial period, trusts were primarily used for family settlements and the management of estates. The influence of English trust law was evident, but the American legal system began to develop its own distinct characteristics. The adoption of written constitutions and the establishment of state legislatures allowed for the adaptation and modification of English legal principles to suit American needs.

The Rise of Charitable Trusts
For reasons that are not fully understood, but are part cultural, part historical, part legislative, Americans are the most charitable people in the world.

Thus, it is perhaps not surprising that a significant development in American trust law was the rise of charitable trusts. In the 19th century, the growth of philanthropic activities and the establishment of charitable institutions led to an increased use of trusts for charitable purposes.  A Massachusetts court, in Jackson v. Phillips, in 1867, gave a definition often attributed to be that of a charitable trust:

A charity in the legal sense may be more fully defined as a gift, to be applied consistently with existing laws, for the benefit of an indefinite number of persons, either by bringing their minds or hearts under the influence of education or religion, by relieving their bodies from disease, suffering or constraint, by assisting them to establish themselves in life, or by creating and maintaining public buildings or works, or otherwise lessening the burdens of government.

The Restatement (Second) of Trusts and the Uniform Trust Code
In the 20th century, efforts were made to standardize and modernize trust law across the United States. The Restatement (Second) of Trusts, published by the American Law Institute in 1959, provided a comprehensive summary of the principles of trust law and served as a guide for judges and practitioners.

Another significant development was the creation of the Uniform Trust Code (UTC) in 2000. The UTC aimed to provide a uniform set of rules and guidelines for the creation, administration, and termination of trusts. It addressed issues such as the duties and powers of trustees, the rights of beneficiaries, and the modification and termination of trusts. The adoption of the UTC by many states helped to harmonize trust law across the country and provided greater clarity and predictability for trust administration.

Trusts in Modern America
Today, trusts are widely used in the United States for a variety of purposes, including estate planning, asset protection, care of people unable to take care of themselves (e.g. special needs), and charitable giving. The flexibility and versatility of trusts make them valuable tools for managing, growing and preserving wealth. The development of specialized trusts, such as revocable living trusts, grantor and non-grantor irrevocable trusts, and spendthrift trusts, allows individuals to tailor their plans (including providing for people, minimizing taxes, asset protection, care of people, provide for charity etc.) to meet their specific needs and objectives.

While trust law in England and the United States shares common roots, there are notable differences in their development and application. English trust law has remained closely tied to its origins, with a strong emphasis on the fiduciary duties of trustees. In contrast, American trust law has evolved to address the diverse needs of a dynamic and heterogeneous society, incorporating principles from both common law and statutory frameworks.

State of Choice
Though it is a matter of opinion and there is no universal agreement, Delaware is often considered the most favorable state for establishing a trust in the U.S. due to its robust legal framework, favorable tax treatment, and strong asset protection laws. Delaware allows for perpetual trusts, meaning trusts can last indefinitely without being subject to the Rule Against Perpetuities.[2] It also offers significant privacy for trust beneficiaries and grantors, with minimal disclosure requirements. Additionally, Delaware’s tax laws do not impose state income tax on trusts created by non-residents, making it a tax-efficient choice.

What is Required to Establish a Trust?
The minimum requirements for a trust generally include the following elements:

1. Trustor/Settlor/Grantor: The person who creates the trust.
2. Trustee: The person or entity that manages the trust assets according to the trust agreement. (In some instances, this can be the grantor.)
3. Beneficiary: The person or entity that benefits from the trust. In some cases, this can be the grantor, in which case the trust is “self-settled.”
4. Trust Property: The assets or property placed into the trust.
5. Intent: The clear intention to create a trust, typically expressed in the trust document. Typically, the trust document will include an expression of intent.
6. Valid Trust Purpose: The trust must have a lawful purpose and not violate public policy.
7. Clear Expression: This almost always means a written trust document, properly evidenced by the laws of the governing state.

Trust or Corporate Form?
For many purposes, including most estate planning purposes and many charitable purposes, a trust is the best or only choice.

But for tax-exempt private foundations, you have a real choice between corporate and trust form.

To learn more, please click here for our Advisor Guide, or call to request it at 703 437 9720, or email us at [email protected].

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[1] https://www.law.cornell.edu/wex/equity states: “In law, the term “equity” refers to a particular set of remedies and associated procedures involved with civil law. These equitable doctrines and procedures are distinguished from “legal” ones. While legal remedies typically involve monetary damages, equitable relief typically refers to injunctions, specific performance, or vacatur. A court will usually award equitable remedies when a legal remedy is insufficient or inadequate. For example, courts will generally award equitable relief for a claim which involves a particular or unique piece of real estate, or if the plaintiff requests specific performance.”

[2] The rule against perpetuities is a principle that holds that a trust cannot last more than 21 years after the death of a life-in-being (life in existence) at the creation of the trust.