Imagine you’re the Lady of Hertford in 12th century England, and your husband, the Earl of Hertford, heads off to fight for the Cross in a Crusade under the leadership of Richard the Lionheart. You don’t know if he’ll return safely, but as a woman you can’t hold legal title to your castle. Worse, you and your children are considered your husband’s chattel, no different than the castle where you reside.
There’s no such thing as a trust, so, before he departs to fight the Moors, your husband has no choice but to convey the castle to his cousin, the Earl of Pembroke who promises to reconvey the property upon your husband’s safe return.
English common law arose out of Roman law which regarded land as an indivisible entity – whoever owned legal title owned it absolutely, in “fee simple”. There was no such thing as holding title “in trust for” someone else. This presented a problem for you as the Duchess, as you didn’t want the Earl to own your castle outright with a mere promise to return it if your husband returned.
The concept of a trust originated not as a separate area of the law as it stands today, rather as a blend of English common law through the Court of Chancery, (“fairness”) that followed a set of loose rules to avoid the harshness (“inequity”) of English common law.
When a landowner like the Earl of Hertford left England to fight in a Crusade, he would convey ownership of his lands in his absence to another man to manage the estate, to pay and receive feudal duties, with the understanding that the ownership would be conveyed back upon the crusader’s return.
Upon their return, however, Crusaders often encountered a refusal to hand over the property. This would happen if the Earl of Pembroke refused to reconvey the castle and lands back to our Crusader after his many years of absence fighting.
The disgruntled Crusader would then petition the King, who would refer the matter to his Lord Chancellor. The Lord Chancellor could decide the case according to his conscience, determining what was “equitable” or “fair.” Typically, the Lord Chancellor would consider it unconscionable that the legal owner could go back on his word and deny the claims of the Crusader. 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 named land title holder the “trustee”. The term “use of land” was coined, and, in time, developed into what we know now as a “trust.”
In modern trust law, we can create both inter-vivos trusts during our lifetime as well as testamentary trusts that determine how property is invested, owned and distributed following our death.
A “trustee” is not to be confused with the owner or the beneficiary, in that the trustee is responsible for carrying out the terms of the trust. He has a fiduciary duty to the beneficiaries of the trust to own, invest and deal with the assets and property prudently. Should the trustee violate those duties, he can be held liable to the beneficiaries.
Today trusts can hold more than land. They can own nearly any kind of asset, tangible and intangible. Stocks, bonds, mutual funds, closely held business interests, jewelry, artwork and intellectual property are all examples of assets that can be held in trust.
Unlike our Crusader example, today’s trusts allow someone to create a trust where they are both the trustee and the beneficiary. In other words, the trusts aren’t created for someone else, until the grantor of the trust dies. The reason to create these “revocable” trusts is to avoid court processes, such as guardianship in the event of the grantor’s incapacity, or probate in the event of the grantor’s death. Revocable trusts also offer privacy of one’s financial affairs both in lifetime and in death as opposed to court processes that are public.
Eventually, however, even in revocable trusts, the grantor will not be able to serve as his own trustee.
Like the Earl’s choice in selecting the Earl, the choice of your successor trustee will be paramount to the success of any estate plan. Anyone can have the best legal documents in the world, but if they select the wrong trustee, the whole plan can unravel. The importance of selecting a trustee is so crucial, I wrote an entire book on the subject entitled, appropriately, Selecting Your Trustee.
In future columns I’ll focus on how one may serve as a trustee in the most effective way possible not only when you’re serving for your own trust, but more importantly when you’re serving for others. In fact, I’m in the process of writing a new book on the subject.
When you’re acting as trustee, you have a “fiduciary” responsibility to the beneficiaries of the trust. A fiduciary puts the beneficiaries’ interests ahead of his own and is bound both legally and ethically to do so.
This isn’t always so easy. Whenever you have human interaction, particularly when it concerns money and property, strange things can happen. A trustee might play the parts of financial advisor, psychologist and counselor during any given day.
Moreover, an entire body of the law has developed concerning trustee fiduciary responsibility. Failure to understand and follow the law could result in personal liability. The office of trustee is therefore not to be taken lightly.
©2023 Craig R. Hersch. Learn more at www.floridaestateplanning.com