In the universe of the trust, there are several different worlds. There’s the civil law world and the common law world. There are also legal systems with mixtures of common and civil law ideas. Neither the common nor the civil law world is entirely clear-cut, though, and subdivisions abound. After examining some very different approaches, I’ve concluded that increased statutory expression would lead to an improved understanding of trust law across all systems and traditions.
Civil vs. Common Law
The trust is generally acknowledged as the creative product of the English common law tradition. Some Scots disagree. Indeed, “the close association of the trust with English law is misleading [and there] would be nothing particularly surprising if Scots law had developed the trust wholly independently.”1 On the whole, the common law relies on case law and precedent. The civil law relies on legislation and codes (such as the Louisiana Civil Code and the many civil codes modelled after the Napoleonic original). The civil law evolves mostly through legislative interpretation and academic writings, although judges play an increasingly important role in the development of national law.
Civil Law Approach to Trusts
The civil law has its own distinct idea about the nature of the trust relationship. In particular, notions of trustee management and control, regardless of whether they’re tagged as ownership, continue to subvert fundamental concepts of the private law in both pure and mixed civil law systems. For example, a recent attempt to introduce a new statute in Seychelles—a jurisdiction with a private law in the French legal tradition—was met with robust opposition. Its bar association railed against the Trusts Bill, 2011:
. . . any move to tinker with our system of property ownership laws or any other aspect of our private law should be done with great caution and wider and intensive consultation with the public.
The bill—the bar association added—was “disturbing…and undermines our property laws (and in particular individual property rights) and the coherence of our legal system.” The Seychelles bill hasn’t moved forward.
Some mixed systems—Scotland and Quebec, for example—have sidestepped the civil law’s focus on unitary ownership, that is, ownership that can’t be divided into legal and equitable interests. Scotland has advanced the notion of dual patrimony.2 Under this theory of fiduciary ownership, a person has a private patrimony and, upon becoming a trustee, acquires a trust patrimony, which, effectively, constitutes a separate legal entity (but without legal personality). In Scotland, the beneficiary only has personal rights to enforce a trustee’s obligations. In Quebec, on the other hand, unitary ownership has been jettisoned. No one has real or in rem rights against a trust fund. Rather, there’s a new taxonomy of trustee duties and powers and beneficial entitlements. Civil law property in Quebec isn’t about squeezing things in or out of the Roman law ownership paradigm, and its trust recognizes that a trustee’s role is properly understood as a management and control operation. Something fresh has been created in Quebec, which pays no homage to courts of chancery of the common law tradition.
France, a key civil law country, has a private law, the coherence of which, arguably, has been sullied by the trust idea. The fiducie (the French word for “trust”) is mostly used for commercial and securitization purposes. In French university quarters, there’s still a strong sense that the private trust is a fraud on creditors, spouses, the treasury and heirs. Even in the fashion press, trusts have had a bad rap. The French edition of GQ, reporting last year on the troubles of the Wildenstein family, holds the view that trusts are independent patrimonies commonly created by “Anglo-Saxons” (who are these people?) that facilitate “completely impenetrable” transfers of tangible and intangible property.3 The French have participated actively in international trust meetings since the 2007 introduction of trusts into its Civil Code.
Yet, they have nothing to say in their internal law on trusts as wealth preservation devices. Indeed, donative transfers into trust are expressly prohibited on public order grounds.4 Most think it’s a matter of time before the French trust is extended to gifts, if only to control and tax the resulting transfers.
Switzerland and Italy are two civil law systems that fully recognize foreign trusts, but haven’t introduced trust legislation into their domestic private law. Yet, Italy has an increasingly thriving home-grown industry. Trusts of Italian property are drafted in Italian, settled by Italians for Italian beneficiaries or Italian purposes and administered by Italian trustee companies. Offshore common law governs these trusts, the law of Jersey being the recipe of the month.
Switzerland and Italy are signatories to the 1985 Hague Convention on the Law Applicable to Trusts and on their Recognition (the Convention). Elsewhere, the Convention has had a poor track record of recognition by major jurisdictions due to its dodgy definition of the trust and its deference to settlor autonomy in the choice of governing law. Nonetheless, the Convention has been extended or has been ratified by a large number of offshore jurisdictions and the British Antarctic Territory (but not Cayman!). On the date of its conclusion, the Convention arguably didn’t understand trusts in the way we understand trusts today. The current international “trust deal” simply didn’t exist when the Hague delegates discussed and exchanged drafts in the 1980s. Moreover, settlor-directed trusts, arguably, fall afoul of the trust concept as defined under the Convention.
The Convention requires the trustee to have title. Title is a legal weasel that means more (internationally) than simple documentary recordation of a trustee’s interest.
On the whole, it seems that civil law countries will continue to promote their own kinds of trusts to reflect their particular notions of property and contract. They’ll also continue to develop their own trust literature. Already, in Italy, there’s extensive trust case law reporting and doctrinal authority.
A Divided Common Law
The trust as differently imagined by common and civil law systems is an ongoing topic of the conference circuit. Yet, the real divide in contemporary understanding of the trust is never addressed at international meetings. What divide? The divergent focus of U.S. and Commonwealth trust law. This divergence isn’t discussed in London. London cares only for its own trust ideas. Indeed, the important work of the Uniform Law Commission and the scholarly endeavors of the American Law Institute are entirely unknown in the Commonwealth outside high academic circles. Moreover, there’s scant professional knowledge and interest in the three Restatements (Third)—of Trusts; of Property: Wills and Other Donative Transfers; and of Restitution and Unjust Enrichment. The Uniform Trust Code (UTC) doesn’t convince, and the Uniform Statutory Trust Entity Act brings no one to their feet. Authors George Bogert and Austin Scott are U.S. luminaries, but their thinking isn’t widely accessible or known to most.
Why is this? One reason is the vast bulk of U.S. trust law. Another reason may be the bad conceit that Commonwealth and Irish works of reference set out all necessary concepts and information. However, the principal reason is likely, once again, the divergent focus. In the modern era, U.S. trust law has favored the settlor, while Commonwealth trust law has been traditionally organized around the beneficiary. Additionally, U.S. trust law has the strong perfume of contract. England and its followers continue to understand the trust as a property device. Finally, unlike the United States, where revocable trusts are wildly popular, the trust elsewhere has been traditionally irrevocable.
Although the Restatement (Third) of Trusts emphasizes that a private trust is for the beneficiaries, the Restatement (Third) of Property: Wills and Other Donative Transfers emphasizes that the donor’s intention should be given effect to the maximum extent allowed by law. Trust expert Professor Thomas P. Gallanis has taken note of these contrasting approaches.5 He believes that U.S. trust law is moving away from its recent focus on the settlor towards a new interest in the rights (and obligations) of beneficiaries. Yet, the wide use of revocable trusts and the recent explosion of directed trustee statutes confirm that the everyday U.S. trust is for the settlor, at least initially, and under the direction of persons and institutions that the settlor controls. Moreover, indestructible and dynastic trusts continue to seduce—no matter what the American Law Institute might like to say on the foolishness of perpetual trusts.6
Settlor-centric U.S. trust law is now doing its work in offshore jurisdictions. Over the last three decades, there are new directions in the Commonwealth and offshore. Three trends are manifest: First, there’s the “statutorification”7 of trust law. Second, settlor-reserved powers are becoming the new norm of the offshore trust, with revocable trusts soon to follow. Third, the notion that the trustee’s liability is representative is increasingly prevalent.
By and large, the traditional Commonwealth trust statute is concerned with various trustee powers and prerogatives. The courts deal with beneficiaries’ rights. In the 1980s, the Channel Islands began to codify trust law—the Trusts (Jersey) Law 1984 (the Jersey Law) expressly denying that it was doing so—by enacting architecture more comprehensive than an incoherent listing of trustee powers. The Jersey Law was soon applauded. It initiated a movement that’s now widely afoot, and it’s likely that other jurisdictions, such as Scotland, will soon have a new statute that’s clear and useful. The Scottish Law Commission reports that it will publish a new Trusts (Scotland) Bill in the early part of 2013.
In November 2012, New Zealand reviewed its law of trusts.8 Trusts are very popular there, due to favorable tax treatment. New Zealand aspires to modern legislation that, in the words of its Law Commission:
. . . [would include] general explanations and principles in the statute [that] would make the legislation more understandable and useful to non-lawyers, and set clear benchmarks for how a trust is to be used and managed.9
New Zealand thinks that a good statute should have the following features: mandatory rules should be clearly expressed; trustee accountability should be enhanced; and beneficiaries should have greater ability to apply for judicial review of trustee decisions. Curiously, the following is reported: “Departure from the law in jurisdictions such as England, Australia and Canada should occur only where it is justifiable based on the New Zealand context.”10 Its Law Commission considered (and rejected) several approaches of the UTC. On the whole, the U.S. trust experience doesn’t seem to have impressed.
The second trend is offshore enactment of shopping lists of settlor-reserved powers. These powers typically include the power to revoke the trust, appoint or remove the trustee and retain a beneficial interest. Many more powers can be reserved, as the Trusts (Guernsey) Law, 2007 demonstrates.11 There’s widespread concern that this type of innovatory legislation has moved the trust to quasi-agency, in which the settlor is dominant. Yet, this concern also recognizes that settlor retention of benefits and powers is part of the trust deal. On the topic of revocable trusts, the recognition by the UTC that duties are owed exclusively to the settlor12 has little currency outside the United States. With time, however, and with increased settlor retention of the power to revoke, settlor-revocable and settlor-directed trusts are bound to be more extensively imitated, whether under the management of a directed trustee or a private trust company.
The third trend started in Jersey in 1984 with the admission that creditors have direct recourse to the trust property: “. . . any claim . . . shall be against the trustee as trustee and shall extend only to the trust property.”13 The Law Commission of Scotland has suggested that a similar reform would be appropriate there.14 England seems stuck in the mud and hasn’t advanced comparable reform proposals. The Jersey provision has now survived nearly 30 years without any related judicial decisions, although the Royal Court in Guernsey is expected in early 2013 to hand down a judgment more clearly defining the representative liability of a trustee under Jersey law.
These trends and others, particularly treating a business trust as a legal entity capable of transacting in its own name, indicate that there should be more sustained interest by the Commonwealth and offshore jurisdictions in U.S. trust thinking.
Is there a best approach to the trust in contemporary private law—an approach straddling common and civil law systems or harmonizing the Commonwealth and U.S. positions? Is there a high-level best-approach discourse that can capture the trust and deliver it to us as a discrete object?
Every approach has merit when considered on its own terms, for its own purposes and in its own culture. The best trust for one system isn’t the best trust for all. There’s no trans-jurisdictional best. The trust experience is mediated. Critical appreciation of the trust is a function of personal contact with it. Accordingly, there’s a significant subjective and ideological content to any discussion of the trust. The trust must be assessed as an institution of a kind of law (the Anglo-American tradition) and a type of legal system (a common law system) that are unswayed (or no longer swayed) by the revolutionary principle that wealth is for the living and for present enjoyment. Indeed, if any particular system is convinced that wealth is for the living, then the trust—as a paternalizing device—should have little, or no, part to play in it. Most civil law systems continue to subscribe, at least textually, to ideas of family and social cooperation and property organization that are expressed in the present tense. Broadly speaking, these systems have no law, or need for a law, of future or contingent interests.
In this decade, Commonwealth jurisdictions are exploring the U.S. adventure of settlor-revocable and settlor-directed trusts as a way forward. Perhaps, therefore, the trust divide isn’t between common and civil law trusts or between Commonwealth and U.S. trust law, but rather between kinds of trusts. Should there be a kind of trust that provides that trustees must follow directions of the settlor, a kind of trust that instructs the trustee to comply with the instructions of a trust director who has the power to direct the trustee on any matter and a kind of trust in which the trustee is duty bound to devote itself exclusively to the welfare of the beneficiary without the interference or intervention of any other person? The U.S. experience teaches that different kinds of trusts can co-exist and, if properly regulated and defined, can coherently embrace different legal realities: administration for self, on the one hand, and administration for the benefit of others, on the other hand.
A New Discipline
What is this teaching experience, and what U.S. innovation merits further investigation by Commonwealth and civil law jurisdictions? The innovation relates less to the content of the trust and more to the statutory expression of that content. Indeed, greater “statutorification” is needed. The Scottish and New Zealand law commissions have recognized this, but might not fully appreciate that separate statutory expression must be accorded to trusts that are agencies, trusts that are quasi-agencies or custodial arrangements and trusts that are trusts. A modern failing of Channel Island trust legislation is the structural confusion unhappily promoted by statutes mixing up agency and trust and ignoring commercial trusts. Lawmakers in Jersey and Guernsey, and in the Commonwealth generally, would be well advised to distinguish different kinds of trusts, some of which might be personified or “entified.” At one time, there were few types of companies and fewer types of partnerships. Now there are many. The trust needs to adhere to this same disciplined specification.
1. See G. Gretton, “Trusts” in K. Reid and R. Zimmermann (eds.), A History of Private Law in Scotland (Oxford University Press, 2000), vol. 1 at pp. 484-5.
2. On Scottish trust law, see the various reports of the Scottish Law Commission at www.scotlawcom.gov.uk/law-reform-projects/trusts. In particular, see “Nature and the Constitution of Trusts” (October 2006) (Discussion Paper No. 133) at pp. 5-18.
3. GQ (Feb. 3, 2012), www.gqmagazine.fr/pop-culture/gq-enquete/articles/quand-gq-revelait-l-affaire-wildenstein/3240/page/2.
4. See Article 2013 of the Code Civil.
5. Thomas P. Gallanis, “The New Direction of American Trust Law,” 97 Iowa L. R. 215 (2011).
6. See generally Restatement (Third) of Property: Wills and Other Donative Transfers, VIII, 27, Introductory Note (2011).
7. For the use of the word “statutorification,” see John H. Langbein, “Why Did Trust Law Become Statute Law in the United States?” 58 Ala. L. Rev. 1069, 1078 (2007).
8. Law Commission (New Zealand), Review of the Law of Trusts—Preferred Approach (November 2012) (NZLC IP31), available at www.lawcom.govt.nz/project/review-law-trusts?quicktabs_23=issues_paper.
9. Ibid. at 8.
11. The Trusts (Guernsey) Law, 2007 at Section 15.
12. See Uniform Trust Code (amended 2005), 7C U.L.A. 407 (2006) at Section 603.
13. Trusts (Jersey) Law 1984 at Article 32.
14. See Scottish Law Commission, www.scotlawcom.gov.uk/law-reform-projects/trusts “Liability of Trustees to Third Parties” (May 2008) (Discussion Paper No. 138) at pp. 10-14.