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As society grows wealthier, and more people become interested in personalizing the space in which they spend their daily lives, more people will be interested in a property arrangement in which they have unilateral control over the design of their personal living space. If people also want the advantages of a division of managerial authority between common facilities and individual units, then common interest communities permit people to have the advantages of this division of authority, while also conferring a much stronger degree of individual control over interior spaces than is generally possible with leasing. This may be the best explanation for the growing popularity of common interest communities relative to leasing, given the weaknesses in the other explanations.
• Trusts
Even more clearly than leasing and common interest communities, trusts are designed to separate management authority from other incidents of resources. Unlike leasing and common interest communities, trusts are typically not used to divide physical assets into common and separate components, with different management regimes devoted to each. Instead, trusts tend to be used for the management of assets held for investment purposes. Management of the assets is separated from the use and enjoyment of the income and capital gains generated by those assets, allowing different persons to manage and to consume the fruits of the assets. This arrangement is extremely useful. It is the principal mechanism today for managing the transmission of wealth within families. It is also widely used in the management of charitable foundations and nonprofit associations, in the organization of pension funds, and in the creation of certain kinds of investment vehicles.
The trust is one of the great inventions of English law (and the equity courts in particular), widely adopted or emulated by other legal systems. It involves three legal personas and some assets,
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sometimes called the trust res or corpus. The first persona is the settlor, who creates the trust out of assets that the settlor owns, typically in fee simple. The settlor makes a declaration, either by a deed of trust during the settlor’s life (an inter vivos trust) or by will (a testamentary trust), that the assets are subject to a trust. The declaration of trust conceptually splits the assets into two components, legal and equitable. Legal title to the trust assets is given to the second persona, the trustee, who typically retains possession of the assets and is charged with their protection and management. Equitable title to the trust assets belongs to the third persona, the beneficiary, who is entitled to enjoy the benefits of the trust corpus. Thus, once the trust takes effect, the trustee becomes the manager of the assets, while the beneficiary gets the beneficial use and enjoyment of the assets.
The different personas involved in the creation of a trust can be either natural or artificial persons (e.g., corporations). Corporate trustees are especially common. Most banks have trust departments, which specialize in the management of trusts. It is also possible for one person to function as more than one persona. The settlor can also be the trustee (if the settlor is still alive), and the trustee can also be a beneficiary. The only limit traditionally recognized is that one cannot create a trust in which one is both the sole trustee and the sole beneficiary.20 But even this restraint is breaking down in some jurisdictions.
Trust law is the one area where the system of estates and future interests discussed in Chapter 5 continues to play an important role. Legal title to the trust assets is typically held by the trustee in fee simple. Hence the trustee can manage the property largely the way any owner of a fee simple could. The trustee can sell the property, use the proceeds to acquire different property, rent
20.See Restatement of the Law Third, Trusts § 3, cmt. d (2003) (“The settler or the trustee, or both, may be beneficiaries; but a sole trustee may not be the sole beneficiary.”)
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the property, use the property as collateral for a loan, and so forth. With respect to the equitable title of the beneficiaries, however, title is often divided. For example, there may be a surviving spouse, one or more children with spouses, and one or more grandchildren. Lawyers naturally looked to the system of estates in land to describe the different equitable interests of the different beneficiaries. Hence, beneficiaries will have equitable estates for life, equitable vested or contingent remainders, and occasionally equitable executory interests. Lawyers who practice trust law, at least in the context of family wealth transmission, need to be fluent in manipulating the categories of estates in land and future interests.
As in the case of leasing and common interest communities, contracts play a large role in the formation and implementation of trusts. The identity and duties of the trustee, the identity and interests of the beneficiaries, and the nature and extent of the trust property are all matters that can be spelled out in written agreements between the settlor and the trustee. These issues largely concern only the three personas involved in the trust—the settlor, the trustee, and the beneficiary—and do not affect the world at large. Most rules of trust law are therefore default rules that can be modified by contract.21
The principal exception to the purely contractual nature of the trust concerns the identity of the trust property, which can affect third parties, such as individual creditors of the trustee and the beneficiaries. In particular, it is important that the creditors of the trustee not be able to reach trust assets to satisfy the individual debts of the trustee. Trustees will also want assurances that creditors of the trust will not be able to reach the individual assets of the trustee to satisfy their claims. Consequently, for the trust to function properly, the trust assets must be sequestered from the other
21.See John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 Yale L. J. 625 (1995).
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assets of the trustee.22 Title to the assets of the trust must be registered as trust property, and the trustee T must indicate whether T is acting in T’s capacity as trustee when T undertakes actions such as buying and selling securities for the trust. Also, owners of beneficial interests receive a degree of protection against transfers to third parties with notice of the trust.
Many trusts in the United States also have spendthrift clauses, meaning that creditors of the beneficiaries cannot reach the trust assets before they are distributed to the beneficiary. These clauses provide an additional reason why trust assets have to be sequestered and separately marked off from other assets of the trustee and the beneficiaries.
Much of trust law consists of an elaboration of what are called the fiduciary duties of trustees. These can be broadly subdivided into duties of loyalty, duties of impartiality, and duties of prudence. Duties of loyalty preclude trustees from self-dealing or engaging in transactions that create a conflict of interest with their obligations to the settlor and the beneficiaries. Duties of impartiality require that trustees act fairly toward all beneficiaries, not favoring one class of beneficiaries at the expense of others. Duties of prudence require that the trustee invest and manage the trust assets in a fashion that entails an appropriate degree of risk, given the circumstances of the beneficiaries and the nature of the trust property.
One interesting issue that arises in trust administration concerns the problem of changed circumstances not anticipated by the settlor. This is particularly an issue in the creation of charitable trusts, which can last for a very long time. Suppose, for example, the settlor leaves money in trust to create a foundation for the support of polio victims. Some years after the settlor dies, Dr. Jonas Salk develops the polio vaccine, with the result that over time there are
22.See Henry Hansmann & Urgo Mattei, The Functions of Trust Law: A Comparative Legal and Economic Analysis, 73 N.Y.U. L. Rev. 434 (1998).