Discuss the Modern Uses of Trusts

The History of the Trust
The idea of the trust arose almost accidentally from the procedural intricacies of English law, where a dual system of justice had arisen as early as the fourteenth century. The system provided two judicial structures based on fundamentally different jurisprudences of the rule of law and the rule of equity. The common law courts administered law and the Chancery courts provided equitable relief when the application of strict law in the common law courts either gave no remedy or gave an unjust one. The Chancery courts were often faced with petitions relating to “uses”. A “use” arose where a person (the “feoffor”) conveyed property of any sort to another (the “feofee”) upon the understanding that that other was to hold the property on behalf of the feoffor or on behalf of a third party (cestui que use). Clearly the feofee, bound in honour but beyond the law, was in a position of confidence which he might abuse. Consequently, the rights of the cestui que use required protection. The common law courts failed to recognise uses and so it was upon repeated petition to the court of “conscience” that relief was awarded by the Chancellor who forced the feofee to administer the property for the benefit of the cestui que use, according to the terms of the grant.

The system of uses made it possible to avoid some of the feudal burdens incurred when property descended to an heir. Under feudal law, the lord was entitled to a payment when an heir succeeded to feudal land. This payment could be avoided if the estate was vested in a plurality of feofees, where the normal rules of joint tenancy would apply so that when a feofee died, the other feofees would take by survivorship and the land would never pass to an heir. Similarly, in the case of land left in wills, which was illegal at common law, the legal estate could be vested in feofees and the will covertly made in respect of a beneficial interest, which again allowed the avoidance of such feudal instances. The system of uses was therefore favourable towards those at the bottom of the feudal hierarchy - the tenants - and harmful to those further up the pyramid - the lords. The King, as lord of all and tenant of none, was the one person who could derive no advantage from hiding property behind a curtain and it is hardly surprising that the King of the day, Henry VIII, believed the principle reasons behind the employment of uses to be manipulation and secrecy and in the latter half of his reign took action against what were effectively medieval equivalents to modern tax avoidance schemes.

This action came in the form of the Statute of Uses 1535 and effectively abolished uses altogether. However, in less than a century, the abandoned principles of the system of uses had been revived to create the modern day trust. For the purposes of this essay, the medieval system of uses may be treated as an exact counterpart of the modern trust. Thus the cestui que use has become a cestui que trust or “beneficiary”, while the feofee has become the “trustee”.

Modern Functions of a Trust
Throughout the centuries the trust has proved a remarkably resilient and flexible concept. Its uses have reflected the needs of the times. In Medieval times it was used as a means of avoiding forfeiture, while in the Victorian period it was often used as a means of controlling one’s family, even after one’s own death. Today, as well as retaining its old uses, the trust has been put to many new ones. The modern role of the trust lies significantly in pension funds, charities and various endowments.

(i) charitable puposes
A function of the trust concept which has been common for many centuries is its utilisation for charitable purposes or for the public good. “Charitable” in English law has a technical and somewhat artificial meaning, which derives from the meaning contained in the Statute of Charitable Uses (the Statute of Elizabeth). To date, no comprehensive definition of a legal “charity” has been provided either by statute or by the courts. However, there is an accepted if not wholly adequate test. A claim to charitable status is determined by considering whether the purpose in question comes within Lord MacNaghten’s classification, first stated in 1891:

‘Charity in its legal sense comprises four principle divisions: trusts for the relief of poverty; trusts for the advancement of education; trusts for the advancement of religion; and trusts for other purposes beneficial to the community’.

The achievement of charitable purposes through the use of a trust is often easier and cheaper than the use of a charitable corporation, or for the purposes to be administered by a local authority. For these reasons, many established charities today are in fact trusts. One pertinent way in which such trusts are utilised is in the creation of disaster funds which accepts funds from members of the public (the trusters or settlors) for equitable distribution amongst the victims, survivors and dependents of victims, of the disaster.

(ii) protective trusts
A debtor’s property is in principle available for the satisfaction of his creditors and , if he becomes bankrupt, it will pass to his trustee in bankruptcy; but it is possible, by making use of a protective trust, to obtain a measure of protection against such a calamity. The very notion of protective trusts, which effectively empowers a settler to defeat his creditors by putting his property beyond their grasp, would no doubt have Henry VIII turning in his grave. However, there is much to be said for allowing some means of protecting a person’s dependants from the adversities caused by his own lack of financial prudence and from this perspective it is pleasing to note that a settler cannot create a trust which will protect him against himself own bankruptcy. In Re Boroughs-Fowler , a settler attempted to protect his property by creating an ante-nuptial settlement that provided that the income from the trust should be paid to him and in event of his bankruptcy, paid to his wife. This was not allowed by the court and it was held that the property vested in the bankruptcy trustee, who could validly dispose of it. This rule is now enshrined in the Trustees Act 2000, formerly the Trustees Act 1925.

(iii) manipulating control of companies
A trust may be created in order to avoid any single person acquiring a controlling share of a company. If for some commercial or other reason the original owner does not want another person or body to acquire a controlling shareholding in a company, a sufficient number of shares could be taken out of circulation and put in trust. This method may be used in order to protect a company from a hostile takeover. It should be recognised however that this procedure might well have the effect of limiting the company’s freedom of manoeuvre, as the trust holding would be subject both to trust considerations and to commercial ones, and company decisions would be tightly bound into the welfare of the trust.

(iv) marriage trusts
With the increasing incidence of divorce in modern society it is foreseeable that a marriage will not last a lifetime. One way of avoiding the financial arguments that invariably embitter the parties to a divorce would be to make provision for the holding of property in trust, with the aim of dividing it out equitably on the break-up of the marriage. However, there may be a problem in relation to such a provision’s validity. In Re Johnston’s Will Trusts a trust was set up which made provision by a father whereby his daughter was to receive certain sums in the event of her divorcing her husband. Clearly, the father’s intention was to provide for his daughter only if her husband stopped supporting her; but the court held that the provision was void as being contrary to public policy in that it amounted to an encouragement to the daughter to divorce her husband. In spite of such precedents, it is submitted that such a provision may be a sensible way to deal with an event that is undesirable but foreseeable, so long as it does not encourage the onset of the undesirable event itself.

Conclusion
The above are a few of the uses to which the trust can be put. The examples chosen show that the nature of a trust can be protective, of person or property; it can achieve desirable aims, either of a private or charitable variety; or it can be distributive, in the sense of transferring wealth in a tax advantageous manner. From a strategic point of view, it is submitted that Maitland’s claim that the trust is “the greatest …achievement performed by Englishmen in the field of jurisprudence” holds sufficient weight. From a moral stand point, it is simply stated that Henry VIII’s misgivings of the Medieval system would still hold a degree of justice when applied to the modern trust. However, what is important to note is that the trust can clearly not be dismissed as having outlived its usefulness and today forms a distinctive part of English law which at the very least says a great deal about the ingenuity of our lawyers.

Bibliography

Cases
Bartlett v Barclay’s Bank (no.1) [1980] 1 All ER 139

Commissioners of Special Income Tax v Pemsel [1891] AC 531

Re Boroughs-Fowler[1916] 2 Ch. 251

Re Johnstone’s Will Trusts [1967] 1 All ER 553.

Wilson v Greenwood (1818) 1 Swan. 471

Legislation
Charities Act 1960

Trustees Act 2000

Books
Hanbury, Harold G. and Maudsley, Ronald H., Modern Equity, (12th ed.), Steven & Sons (1985)

James, Philip S.,Introduction to English Law, ( 11th ed.), Butterworths (1985)

Johnston , The Roman Law of Trusts, Clarendon Press, Oxford (1988).

Oxford English Law, English Private Law, Vol.I, Oxford University Press (2000).

Web-sites
LexisNexis Gateway at www.athens.ac.uk

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