WHAT IS A TRUST?
IT’S A CONTRACT BETWEEN THE CREATOR AND THE TRUSTEE.
IT MUST MEET THE LEGAL REQUIREMENTS OF CONTRACTS.
In the final analysis, a Trust is merely form of legally enforceable contract between the creator, grantor or settler of the Trust and the Trustee for the benefit of the Beneficiary that has been committed in writing on a piece of paper. It must meet the legal requirements of the State in which it is to be enforced, and these are almost universally the following:
Legal requirements of contracts
Offer and Acceptance (Between Settter/Grantortlrustor and Trustee)
In writing (Declaration of Trust or Trust agreement)
Meeting of the Minds (Trustor and Trustee)
Between competent Parties (usually the Grantor, Settler, Trustor and
the Trustee)
For a lawful purpose (Federal, State and Local)(Civil an Criminal)
Not against Public Policy
For a Consideration (Trustee Fees)
To accomplish something that is possible
Which isn’t’ illegal or against Public Policy
Over a specified period of time within limits prescribed by law
Trust concepts in one form or another have been used successfully for over 3900 years. In 1805 B.C. the first recorded Trust in history was created by an Egyptian named UAH during the reign of Amenemher III.
Later, around 51 B.C., Julius Caesar, having learned about Trust while he was dallying with Cleopatra in Egypt, was getting set to go off on his Gallic Wars. He picked out one of the Senators to whom he entrusted his possessions to him to hold safely until his return.
They each inscribed their names on an agreement that more or less said that the Senator would hold the property for the benefit of Caesar’s family until such time as he requested their return. In the meantime, the Senator agreed to look after Caesar’s possessions, passing on income to his wife and protecting the property against the avarice of those left behind in the capital.
Caesar’s prominence brought about by his victory over the Gauls focused attention on his ”Holding Trust”. After he became Emperor of Rome, the Senate incorporated Trusts into Roman Law. From then to the 14th Century, the dark ages obliterated any references to the usage of Trusts, but they spread as the Roman Empire brought its laws to the barbarian tribes, first to Gaul and the Knights Templars in ancient Paris, then to 13th century England.
On June 19, 1215 at Runnymede the English Barons forced King John to sign the Magna Carta. In this the King agreed to make the throne subservient to the will of the Nobility. In Feudal times, the commonfolk were defenseless against the Nobility. Their property rights were under constant attack by the King’s tax collectors.
Under the rights of primogeniture, the eldest son could inherit everything regardless of his interest or ability. The mere accusation of Treason could cause all lands and chattel to revert to the crown. Between the legal takings and illegal pillage constantly carried on between rival warlords, the serfs had little choice but to convey their property to a powerful Duke in return for his protection – especially against the King.
As Henry the Eighth’s marauding Heriffs became more and more vicious in seizing the serfs’ land and property, they turned more and more to holding property privately in Trust with the Dukes.
Being the King had its hazards. Without the support of the powerful Dukes, a kingly reign could be cut short by assassination or revolt; so once property were placed in Trust with the Duke, it was more or less protected so long as the Duke retained power. For his protection and Trusteeship, the Duke was paid one third of the avails and proceeds of the land through rents and shares of produce, and the serf kept the remainder. Note that this is less than the tax rate many Americans serfs are paying government today.
In 1536, Henry enacted “The Statute of Uses”. Under this law, the person who used land that was in the name of a Trustee who did little other than to hold title was deemed the actual owner. But this was challenged, and the Court of the Assizes dissented with Henry VIII saying that, so long as the Trustee had some minimal duties to perform, the Statute of Uses would not be applicable.
As time passed, English Common Law, which now incorporated Trusts was brought over to the new world. As new corporations were formed to exploit opportunities in America, the Massachusetts Bay Colony, Ltd. saw its profits beginning to shrink. It influenced legislation to preclude (competing) corporations from holding property.
In 1795 entrepreneurs counter-attacked by forming the first Massachusetts Business Trust which offered investors limited liability. This concept spread swiftly and widely so much that the use of Trusts became the principal way to raise capital without risk to fund new ventures. Furthermore, the public saw it as a means to obtain privacy in owning and operating businesses even when investment was not a consideration.
In 1787 the Trust concept was embodied in the United States Constitution through the recognition of the sanctity of contracts and the admonition that all States would henceforth recognize the rulings in other states regarding them.
Here are the references directly from the text of the original Constitution:
Article 1, Section 10 “’No State shall: . . . pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts”.
Article IV, Section 1: “Full Faith and Credit shall be given in each State to the public Acts, Records, and judicial Proceedings of every other
Stale.”
Article IV, Section II: “The Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States . . . in the United States, than according to the rules of the Common Law.”
This laid the ground work for all sorts of Trust concepts, and significantly among them was the Illinois Land Trust. In 1891 in Illinois a land company wanted to subdivide a large parcel that was encumbered by a large mortgage. The mortgagee refused to release the lots, so the would-be home- buyers who wanted to buy the land on which to construct houses were unable to get financing.
Chicago Title Insurance Company came to the rescue. After first confirming that title to the parcel was marketable and free of all liens or claims except for the mortgage, they set up what was then a break through in land development.
The land company first establihed a trust under the terms of which Chicago Title Insurance Company was the Trustee, and the new home buyer was the Beneficiary. Using their considerable financial clout, Chicago Title made this guarantee to both the buyer/beneficiary and the new home finance company that was providing the construction loan: Title to the property represented by the Beneficial Interest held by the new home buyer would be delivered tree and clear of all prior liens once enough lots had been sold off to pay off the old loan.
In the meantime, Chicago Title more or less co-signed the home Loan and the Beneficiary pledged his Beneficial Interest as additional collateral so everyone would be secured adequately. Ultimately, after 55 years had passed, the lots were all sold and the old loan paid off. All the Beneficial Interests then were converted to fee simple land equities and everyone was happy.
Over this long period, while homes were built on land represented by Beneficial Interests in this first Land Trust, there were deaths, divorces, bankruptcies, law suits, partitions, and partnerships as various parties wrangled over the legalities involving hundreds of lots and homes. These all added to the Common Law which is more or less merely a historical compilation of various cases and ensuing law from various court decisions which unfailingly supported the Illinois Land Trust in a multitude of legal actions of every possible description.
Because of this, virtually all legal precedent in the United States as regards Land Trusts is based upon these Illinois cases. As Illinois continues to lead the nation in the formation and uses of Land Trusts, the body of case law continues to grow. This has led to an interesting side effect:
Massachusetts Business Trusts and Illinois Land Trusts epitomize the models upon which all other Trusts are founded. Many states, rather than drafting their own statutes, simply model their laws on these two states. Thus, few states have any statutes at all as regards Land Trusts and Business Trusts.
Land Trusts are formed and administered under the Common Law with respect to Illinois-type Land Trusts with the exception of Florida, Virginia, North Dakota, Indiana, and Hawail. In these States specific Land Trust statutes have been enacted.
In addition to some States that may have just rung in with their own new legislation, Colorado, Utah, South Dakota, Nevada, Alaska, Delaware, Maryland, Arizona, Ohio, Missouri, and California have enacted Trust laws that resemble Land Trusts, but that aren’t the same and that refer to the Common Law for their authority rather than Illinois case law. These Trusts are extremely useful for many of the same purposes as Land Trusts, but they require specialized knowledge beyond the limitations of this seminar.
Because the Constitution requires the courts in all States to respect each others laws, Trusts created under either by Statute or under the Common Law are valid legal entities in all States in one form or another with the exception of Louisiana.
Louisiana’s law isn’t based upon English Common Law, but on Civil Law; which is an offshoot from Roman Law. Because France didn’t have the Magna Carta or Henry VIII to provide a legal background, Trusts are administered differently under Louisiana’s laws. Anyone who is considering using Trust techniques in Louisiana should consult legal authorities in that state to determine the legals basis for Trusts. Louisiana’s law is beyond the scope of this seminar.
There’s another legal anomaly in the use of Trusts that is peculiar to some 34 states in which non-judicial foreclosures of liens are legalized. In those states, title to property that is being mortgaged is conveyed to a Trustee by means of a Deed of Trust which he holds until the debt secured by it is paid off:
The Trustee under a Deed of Trust holds title to the property as collateral for payment of the loan. Once the loan has been retired, the property is then reconveyed by the Trustee who is holding title wider the Deed of Trust to the former borrower who has repaid the loan.
A Deed of Trust can co-exist with the other Trusts described previously thus far. It needn’t confuse you if you just think of the holder of the Deed of Trust as being the holder of a Lien rather than as holder of the title. Under this system, it’s possible for non-judicial foreclosures to be instigated and to take place without the need for a judicial review and judgement in lieu of court-ordered judicial foreclosures. As a general rule, when this occurs, no personal deficiency judgment liability is incurred by the foreclosed borrower.
So far, you’ve been introduced to several different types of Trusts which have been devised for many different purposes. Rather than trying to commit them all to memory, it will be easier to understand them if you consider them separately – to the extent that they don’t overlap in their applications – to fix in your mind just what they are and how they work.
FOUR PRIMARY APPLICATIONS OF TRUSTS
In the great scheme of things, trusts are useful in doing the following four things:
1. They provide privacy both for transactions and for holding title to assets; often with a saving in recording fees, readjustment of property taxes, and the need to obtain lender permission when transferred.
2. They can create favorable results either at State level through avoidance of probate and reduction of State inheritance taxes, and at Federal level through the use of gifts of future interests and insurance.
3. Because of their unique properties, they facilitate creative and innovative strategies in business and real estate transactions to increase profits.
4. The use of a Trust enables one to control the management and distribution of an estate in the event of death, disability, or incapacity in the present and/or for later generations.
Learn how to use a variety of Trusts with Jack Miller’s NEW TRUSTS CONCEPTS Home Study Course. This course includes Trust paperwork samples.
