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In common law legal systems, a trust is a relationship between three parties whereby property (real or personal, tangible or intangible) is transferred by one party to be held by another party for the benefit of a third party. A trust is created by a settlor (archaically known as the feoffor to uses), who transfers some or all of his property to a trustee (archaically known as the feoffee to uses), who holds that trust property (or trust corpus) for the benefit of the beneficiaries (archaically known as the cestui que use, or cestui que trust).
The trustee has legal title to the trust property, but the beneficiaries have equitable title to the trust property. The trustee owes a fiduciary duty to the beneficiaries, who are the "beneficial" owners of the trust property. (Note: A trustee may be either a natural person or an entity, and there may be a single trustee or multiple co-trustees. There may be a single beneficiary or multiple beneficiaries. The settlor may himself be a beneficiary.)
The trust is governed by the terms under which it was created. The terms of the trust are most usually written down in a trust instrument. The terms of the trust must specify what property is to be transferred into the trust, and who the beneficiaries will be of that trust. The trust is also governed by local law. The trustee is obliged to administer the trust in accordance with both the terms of the trust and the governing law.
In the United States, the settlor is also called the trustor, grantor, donor, or creator. In some other jurisdictions, the settlor may also be known as the founder.
Roman law had a well-developed concept of the trust (fideicommissum) in terms of "testamentory trusts" created by wills but never developed the concept of the "inter vivos trust" that applied while the creator was still alive. This was created by later common law jurisdictions.
Personal trust law developed in England at the time of the Crusades, during the 12th and 13th centuries.
At the time, land ownership in England was based on the feudal system. When a landowner left England to fight in the Crusades, he needed someone to run his estate in his absence, often to pay and receive feudal dues. To achieve this, he would convey ownership of his lands to an acquaintance on the understanding that the ownership would be conveyed back on his return. However, Crusaders would often return to find the legal owners' refusal to hand over the property.
Unfortunately for the Crusader, English law did not recognize his claim. As far as the courts were concerned, the land belonged to the trustee, who was under no obligation to return it. The Crusader had no legal claim. The disgruntled Crusader would then petition the king, who would refer the matter to his Lord Chancellor. The Lord Chancellor could do what was "just" and "equitable," and had the power to decide a case according to his conscience. At this time, the principle of equity was born.
The Lord Chancellor would consider it unjust that the legal owner could deny the claims of the Crusader (the "true" owner). Therefore, he would find in favor of the returning Crusader. Over time, it became known that the Lord Chancellor's court (the Court of Chancery) would continually recognize the claim of a returning Crusader. The legal owner would hold the land for the benefit of the original owner and would be compelled to convey it back to him when requested. The Crusader was the "beneficiary" and the friend the "trustee". The term "use of land" was coined and, in time, developed into what we now know as a trust.
Also, the Primogeniture system could be considered as a form of trust. In the Primogeniture system, the first-born male inherited all the property and "usually assumes the responsibility of trusteeship of the property and of adjudicating attendant disputes."
The waqf is an equivalent institution in Islamic law, restricted to charitable trusts.
"Antitrust law" emerged in the 19th century, when industries created monopolistic trusts by entrusting their shares to a board of trustees in exchange for shares of equal value with dividend rights. These boards could then enforce a monopoly. However, trusts were used in this case, because a corporation could not own other companies' stock and thereby become a holding company without a "special act of the legislature." Holding companies were used after the restriction on owning other companies' shares was lifted.
The trust is widely considered to be the most innovative contribution to the English legal system. Today, trusts play a significant role in all common law systems, and their success has led some civil law jurisdictions to incorporate trusts into their civil codes. France, for example, recently added a similar though-not-quite-comparable notion to its own law with la fiducie, which was modified in 2009. La fiducie, unlike the trust, is a contract. Trusts are recognized internationally under the Hague Convention on the Law Applicable to Trusts and on their Recognition which also regulates conflict of trusts.
Although trusts are often associated with intrafamily wealth transfers, they have become very important in American capital markets, particularly through pension funds (essentially always trusts) and mutual funds (often trusts).
Property of any sort may be held on trust, but growth assets are more commonly placed into trust (for tax and estate planning benefits). The uses of trusts are many and varied. Trusts may be created during a person's life (usually by a trust instrument) or after death, in a will.
In a relevant sense, a trust can be viewed as a generic form of a corporation where the settlors (investors) are also the beneficiaries. This is particularly evident in the Delaware business trust, which could theoretically, with the language in the "governing instrument," be organized as a cooperative corporation, limited liability corporation, or perhaps even a nonprofit corporation. One of the most significant aspects of trusts is the ability to partition and shield assets from the trustee, multiple beneficiaries, and their respective creditors (particularly the trustee's creditors), making it "bankruptcy remote" and leading to its use in pensions, mutual funds, and asset securitization.
Trusts may be created by the expressed intentions of the settlor (express trusts) or they may be created by operation of law (resulting trusts).
Typically, a trust can be created in the following ways:
a written trust instrument created by the settlor and signed by both the settlor and the trustees (often referred to as an inter vivos or "living trust");
an oral declaration;
the will of a decedent, usually called a testamentary trust; or
a court order (for example, in family proceedings).
In some jurisdictions, certain types of assets may not be the subject of a trust without a written document.
Generally, a trust requires three certainties, as determined in Knight v Knight:
Intention. There must be a clear intention to create a trust (Re Adams and the Kensington Vestry)
Subject Matter. The property subject to the trust must be clearly identified (Palmer v Simmonds). One may not, for example, settle "the majority of my estate," as the precise extent cannot be ascertained.
Trust property may be any form of specific property, be it real or personal, tangible or intangible. It is often, for example, real estate, shares, or cash.
Objects. The beneficiaries of the trust must be clearly identified or at least be ascertainable (Re. Hain's Settlement). In the case of discretionary trusts, where the trustees have power to decide who the beneficiaries will be, the settlor must have described a clear class of beneficiaries (McPhail v. Doulton). Beneficiaries may include people not born at the date of the trust (for example, "my future grandchildren"). Alternatively, the object of a trust could be a charitable purpose rather than specific beneficiaries.