How Trusts Came to Be

When watching The Green Knight with her daughter, our president Nancy embarked on a history lesson about the origin of trusts. The movie tells the story of King Arthur and his knights, but it also sparked a few financial questions from Nancy’s family – like what even is a trust?

Trusts are difficult to define. They are a legal contract where Party A entrusts ownership rights of property and transfers the rights to Party B to manage the property for the benefit of Party C. It is one of the most common fiduciary relationships there are. The first mention of trusts are in Roman Law. In ancient Rome the wealthy trusted their friends to manage their property in favour of the principal’s wife and heirs after his death. This was because under Roman law, unless the wife was a Roman citizen, she could not inherit property herself. Roman law was known by the word “fiducia”, which ultimately resulted in fiduciary principles.

However, most historians agree that the first formal creation of trusts came from Medieval England. They were first developed in the 12th century, beginning during the Crusades. These crusading English knights did not want to leave their estates without a solid plan; therefore, they would pass ownership of their lands to another. This was to ensure that in their absence the estate would be managed, receive feudal dues, and their families were looked after. Unfortunately, it was also quite common for crusaders to return to their estates or manors and find that the person they entrusted their property to was unwilling to return it. This led to a new set of laws needing to be created, and the principle of equity was born. After the crusades, trusts allowed one person to hold legal title of a property but administer the property in the interests of another. At the core trusts are a way for more than one person to own and manage property at the same time, which remain the basic tenets of the system we still use today.

Who is involved in a trust?

Settlor: The original owner and creator of trust

Trustee: The legal title owner

Beneficiary: The owner to get the benefit of the ownership, as managed by the Trustee

When is a trust useful?

When a person wants to give ownership to the intended beneficiary, but not to give ownership totally. We call it “give but not give”.

For example, children who are minors cannot legally own property. However, a parent who dies wants their children to benefit from the estate. Therefore, a parent in the will can set up a trust which is created upon death so a trustee can legally own the estate for the benefit of the minor children. Of course, the trust will set out the terms in detail (such as directions to the trustee, and when the children can inherit the ownership outright).

They provide legal protection for a person’s assets. They are most commonly used for the administration of personal wealth, which can include providing a source of income for a spouse, or ensuring a child’s education is paid for.

Who invented the modern trust?

John D. Rockefeller (1839-1937) formed the first trust in 1882 with the establishment of the Standard Oil Company.

Trusts have been used for estate planning and asset protection for centuries and will continue to be useful tools in many modern day situations.