In the culture of Anglo-American law, we think of the trust as a branch of the law of gratuitous transfers. That is where we teach trusts in the law school curriculum,(1) that is where we locate trusts in the statute books,(2) and that is where American lawyers typically encounter the trust in their practice. The trust originated at the end of the Middle Ages as a means of transferring wealth within the family,(3) and the trust remains our characteristic device for organizing intergenerational wealth transmission when the transferor has substantial assets or complex family affairs. In the succinct formulation of Bernard Rudden, Anglo-American lawyers regard the trust as "essentially a gift, projected on the plane of time and so subjected to a management regime."(4)
The Restatement (Second) of Trusts, the most authoritative exposition of American trust law, exemplifies our tradition of thinking about the trust exclusively as a branch of the law of gratuitous transfers. Austin W. Scott, the reporter, excluded commercial trusts from the Restatement on the ground that "many of the rules" of trust law are inapplicable in commercial settings.(5) Scott offered no support for that claim,(6) which is mistaken. The familiar standards of trust fiduciary law protect trust beneficiaries of all sorts, regardless of whether the trust implements a gift or a business deal (unless, of course, the terms of the transaction expressly contraindicate). Indeed, one of the great attractions of the trust for the transaction planner who is designing a business deal is the convenience of being able to absorb these standards into the ground rules for the deal, merely by invoking the trust label.
Scott carried his disdain for commercial trusts into his treatise, refusing to speak of them.(7) George G. Bogert, the other leading American treatise writer on trusts, was more tolerant; his book supplies introductory (although now quite antiquated) coverage of some types of commercial trust.(8)
My theme in this Essay is that the American legal intellectual tradition, which characterizes the trust as a branch of the law of gratuitous transfers, is at odds with the reality of American trust practice. In truth, most of the wealth that is held in trust in the United States is placed there incident to business deals, and not in connection with gratuitous transfers. It will be seen that well over 90% of the money held in trust in the United States is in commercial trusts as opposed to personal trusts.
In Part I of this Essay I undertake to identify and categorize the principal types of commercial trust that are currently employed in the United States. Part II points to the attributes of the trust that make it attractive as an instrument of commerce. Part III offers some thoughts about the puzzling neglect of the commercial trust in our juristic tradition -- why, that is, we so resolutely conceive of the trust as a mode of gift, even while we employ it ever more as an instrument of commerce.
I touched upon the subject of commercial trusts in an earlier article in the Yale Law Journal, discussing the contractarian basis of trust law.(9) I observed that even conventional donative trusts have a contract-like character, in the agreement between trustee and settlor about the terms of the trust.(10) Trust and third party beneficiary contract are the closest of substitutes. The commercial trust, because it arises in a business setting and lacks all donative purpose, is the easiest case for the view that trusts are deals. The present Essay directs attention to a very different question -- not whether commercial trusts are deals, but why deal-makers choose the trust form.
Varieties of Commercial Trusts in the United States
A word about definitions: When I speak of a commercial trust, I refer to a trust that implements bargained-for exchange, in contrast to a donative transfer. Accordingly, I exclude the charitable trust from the category of commercial trust. Charitable trusts and foundations originate as donative transfers; they are gifts for the benefit of persons and causes beyond the family.(11)
I exclude from this discussion all the various governmental budgeting conventions that have appropriated -- I am tempted to say misappropriated -- the trust label. Things such as the Leaking Underground Storage Tank Trust Fund(12) the Violent Crime Reduction Trust Fund,(13) or the Highway Trust Fund(14) have, at best, only a metaphorical connection to actual trust practice.(15) They are, however, ubiquitous. A computer search of state statutes turned up 677 purported trust funds in Florida alone,(16) including the Citrus Advertising Trust Fund,(17) the Quarter Horse Racing Promotion Trust Fund,(18) and the Florida Law Review Trust Fund.(19)
I also exclude from my account of commercial trusts some activities such as the administration of bankrupt or decedents' estates, in which the nomenclature of trusts and trustees appears, but without the substance. Bankruptcy only infrequently leads to the appointment of a trustee.(20) Unlike the trustee under an intentional trust, the bankruptcy trustee is essentially an officer of the court,(21) Who operates under statutory authority to disregard the terms of many of the antecedent commercial transactions that led to the bankruptcy. For similar reasons, I exclude the work of personal representatives, guardians, and conservators, who are held to trustee-like standards in administering the assets of decedents' estates and of protected persons.(22)
Finally, I exclude for present purposes the deed of trust mechanism that is used for transferring real property. In California and other states in which this mode of conveyancing is prevalent, real estate finance takes the nominal form of the trust rather than the mortgage. "This device normally involves a conveyance of the realty to a third person in trust to hold as security for the payment of the debt to the [lender] whose role is analogous to that of the mortgagee."(23) The deed of trust, when properly drafted, is essentially indistinguishable in function from a conventional mortgage. The so-called trustee is a stakeholder, not a manager of the trusteed property.
I turn now from excluded categories to the task of identifying the principal forms of commercial trust presently used in the United States.
The species of commercial trust that is perhaps best understood in its relation to the personal trust is the pension trust. American pension trusts have attained stupendous size and importance. As of year-end 1996, the assets of American private (that is, nongovernmental) pension funds held in trust were valued at $3 trillion.(24) (These plans held nearly a further $900 billion of assets in insurance company accounts, mostly so-called life insurance company separate accounts, which are trusts in all but name.)(25) State and local pension plans for governmental employees held another $1.6 trillion in assets, mostly in trust form.(26) American pension funds own more than a quarter of American equities and about half of all corporate debt.(27)
The pension trust arises from the contract of employment, providing for deferred compensation to be paid in retirement. The Employee Retirement Income Security Act(28) (ERISA), the pension regulatory law enacted in 1974, imposes a rule of mandatory trusteeship, requiring that "all assets of an employee benefit plan shall be held in trust."(29) (There is an exception for plan assets that take the form of insurance contracts.)(30) Actually, the federal policy of promoting the trust form for pension funds is older than ERISA. As far back as 1921, the Internal Revenue Code effectively required pension funds to utilize the trust form (unless the plan assets were entirely invested in insurance contracts).(31) In 1947, the Taft-Hartley Act(32) imposed a similar requirement for collectively bargained multiemployer pension plans.(33)
Of the varieties of commercial trust that I discuss in this Essay, only the pension trust has been much assimilated to conventional trust law. ERISA codifies the central principles of trust fiduciary law,(34) and ERISA's legislative history makes clear that Congress meant to track the common law of trusts.(35) Thus, agencies and courts interpreting and applying ERISA have inclined to rely upon the Restatement of Trusts and upon the major trust-law treatises. In turn, the updaters of these authorities have tended to collect the decisions of courts that cite them. Another reason that it has been easier to relate pension trusts to personal trusts is that most pension plans, in addition to facilitating retirement saving for the worker, provide for the transfer of undistributed pension account balances to the worker's survivors.(36) In this respect the pension trust exhibits a hybrid trait: Although it is a commercial trust, it commonly gives rise to a gratuitous transfer.
Next to the pension trust, the most prominent category of commercial trust is the investment trust,(37) which exists in a variety of forms.
Until recent decades, the investor who wished to own stocks, bonds, or other financial assets generally had to assemble a portfolio of individually selected securities. Today's investor increasingly prefers to buy shares in a Pooled investment vehicle, usually a mutual fund. Investment professionals select and manage the fund's assets, according to guidelines that define the fund's investment objectives.(38) The mutual fund offers expertise, economies of scale, and a level of diversification far superior to that obtainable by the typical investor constructing an individual portfolio. Since the 1970s, the trend toward investing in mutual funds has become immensely important in American financial markets. As of May 1997, American mutual funds held nearly $$ trillion in assets.(39) A mutual fund can take the form either of a corporation, called an investment...