The secret life of the trust: the trust as an instrument of commerce

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)

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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.

1. 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.

A. Pension Trusts

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.

B. Investment Trusts

Next to the pension trust, the most prominent category of commercial trust is the investment trust,(37)
which exists in a variety of forms.

1. Mutual Funds

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 company, or of an investment trust. Currently, about half or more
of American mutual funds take the trust form.(40) I shall have more to say about why.(41)

2. Real Estate Investment Trusts (REITs)

The real estate investment trust (REIT

) is a mutual fund that invests in real property or in mortgages on real property, or in both. Congress
authorized REITs in 1960, amending the Internal Revenue Code to allow pass-through tax status to such
trusts.(42) Currently, there are 199 REITs that are nationally traded. Their capitalization as of May 1997
was over $98 billion.(43)

3. Oil and Gas Royalty Trusts 

Another asset-specific form of investment trust, found in the oil producing states, is the oil and gas
royalty trust. Such entities are tax-driven.(44) In a typical transaction, a corporation that has developed
an oil field (or some other extractive

 asset) will transfer ownership to a trust, distributing beneficial interests in the trust to the corporation's
shareholders. As owner of the royalty-bearing asset, the trust distributes directly to the beneficiaries of
the trust the royalty income that the trust asset generates. The beneficiaries then escape corporate-level
taxation.(45) These trust interests are marketable, and a number of the larger royalty trusts are stock-
exchange traded.(46)

4. Asset Securitization 

Asset securitization(47) has become one of the most important commercial uses of the trust. A large
fraction of all mortgage, credit card, automobile, and student loan debt is financed -- or somewhat more
accurately, refinanced -- through asset securitization trusts. I have not been able to locate reliable data
on the magnitude of asset securitization, but the sums involved number in the trillions of dollars.
Patchy Federal Reserve data shows nearly $1.9 trillion in mortgage pools and $225 billion in automobile
and other consumer credit as of July 1996.(48)

Asset securitization trusts are best understood by recalling the older pattern of bank-intermediated
financing that is now being displaced by asset securitization. Take, for example, the case of a bank that
used to finance credit card receivables in the ordinary way. These receivables are assets, debtors'
promises to pay credit card debt. The bank used to buy the receivables from merchants, thereby placing
them on the bank's books. To pay for these new assets, the bank required additional financing. Typically,
the bank borrowed from large institutional sources -- insurance companies, mutual funds, pension funds,
and so forth. These lenders acquired no ownership interest in the underlying receivables that induced
the bank to increase its borrowing. Rather, the lenders became general creditors of the bank, and the
receivables remained as assets of the bank.

Contrast the new pattern. The bank in my example, now called the originator or packager, buys the
credit card receivables as before, but then transfers them in trust to a separate trustee. Shares in that
trust are sold to various participating investors, who, under the new scheme, are not lenders to the bank
but share owners in the trust. Notice that I have taken a bank as my example, but
nonbank intermediaries such as General Motors Acceptance Corporation and Caterpillar also engage in
asset securitization, spinning off automobile and equipment debt into separate trusts, and then selling
shares in the trusts.

The asset securitization trust has two major advantages over conventional financing. First, securitization
is thought to lower the costs of some credit. Securitization separates the particular assets into a trust that
is distinct from the rest of the liabilities of the bank. Because these assets are specialized to a single
recurrent class, they are easier for outside investors and rating agencies to evaluate than is the bank's
general portfolio of assets. These assets are commonly less risky than the bank as a whole, for reasons
that include the high quality and fixed duration of most of the securitized credits, as well as various
credit-enhancing guarantees from the originator or other contractual parties. Investors in the trust accept
lower interest rates, commensurate with the reduced risk, thereby lowering the cost of capital.

In addition to this lowered cost of funds

, the other great advantage to the trust form(49) for these transactions is that, in the jargon of the
financial community, asset securitization trusts are "bankruptcy remote."(50) In the traditional, bank-
intermediated pattern of financing the credits, when the bank borrowed from the lender, the lender was a
mere creditor of the bank, exposed to default risk in the event that the bank became insolvent. Under the
regime of asset securitization, however, the investor is no longer a lender to the bank but rather the
owner of a beneficial interest in a distinct pool of trust assets. Should the bank that originates the trust
become insolvent, the trust and its shareholders would not be affected.

C. Corporate Trust Functions Under the Trust Indenture Act

Under the Trust Indenture Act of 1939,(51) most debt securities issued in the United States are required
to provide for the services of a corporate fiduciary to act as trustee for the bondholders or other obligees.
The magnitudes are large. The Federal Financial Institutions Examination Council estimates that as of
year-end 1994 corporate trust departments served as indenture trustees for just over $3 trillion in debt.
(52) The 1939 Act standardized a pattern of trust usage that had developed in financial practice across
the previous century.(53) Unlike a conventional private trust, and unlike the various forms of commercial
trust that I have previously discussed -- that is, pension and investment trusts -- under a bond indenture

 the trustee has less responsibility for the trust property. "The fundamental characteristic of the ordinary
personal trust is possession by the trustee of a specific trust res that he or she holds and administers for
the benefit of" the beneficiaries, whereas "[t]he trustee under a corporate indenture . . . has no
possession, or right to possession, of the mortgaged property until after a default occurs."(54) The
indenture trustee "has no control of the business of the obligor

 ... nor, except for infrequent and unusual circumstances, any voice in the management of its affairs."(55)
The trustee under a bond indenture acts primarily under the terms of the contract creating the
relationship, and acquires actual possession of the particular assets only in the event that the issuer
breaches the covenants of the loan agreement. The indenture regime imposes, therefore, a species of
contingent or standby trusteeship.(56)

What commends the trust form for these corporate and municipal bond transactions is the ability to have
a sophisticated financial intermediary -- that is, a trust company -- act on behalf of numerous and
dispersed bondholders in the event that a loan transaction does not work out routinely. The indenture
trustee overcomes the coordination problem that inheres in widespread public ownership of debt
securities. The trust form also starts from the well-developed platform of trust fiduciary law, which
specifies the duties of the trustee. The 1939 indenture legislation tailors the background norms of trust
fiduciary law to the indenture setting.(57)

D. Regulatory Compliance Trusts

The next stop on my tour of commercial trusts is a category I call the "regulatory compliance trust," a
trust created primarily for the purpose of discharging responsibilities imposed by law.(58) My examples
are illustrative only; anyone who cares to comb the statute books and the administrative sources can find
other. Indeed, pressure to use the trust form as a regulatory compliance device is also seen in the realm
of personal trusts. Congress has designed the transfer tax system to make use of the so-called "bypass"
or credit shelter" trust all but irresistible in estate planning for spouses with sufficient means.(59)

1. Nuclear Decommissioning Trusts

Federal law requires that when a public utility builds a nuclear power plant, the utility must make future
provision for the costs of "decommissioning
" the plant at the end of its safe period of use. The regulation invites the utility to save for the costs of
removing the plant from service and dismantling it safely through the device of a "nuclear plant
decommissioning trust fund."(60) The Internal Revenue Code contains a special provision(60) granting a
current income tax deduction

 for the money contributed to the trust, even though the contributed funds will be invested and not
expended for years to come.

2. Environmental Remediation Trusts
To facilitate tax exemption for compliance with environmental laws that require the cleanup of waste
sites and the like, the Internal Revenue Service has by rule authorized the creation under state law of so-
called environmental remediation trusts. The Service explains that the primary purpose of such a trust is
"environmental remediation of an existing waste site and not the carrying on of a profit-making
business."(62) The regulation envisages creation of such a trust "to resolve, satisfy, mitigate, address, or
prevent the liability or potential liability . . . imposed by federal, state, or local environmental laws."(63)

3. Liquidating Trusts

It may also be useful to view the so-called liquidating trust, which is a staple of tax practice in corporate
dissolutions, as a species of regulatory compliance trust. Assets in liquidation can escape entity-level
taxation when placed in trust. However, the Internal Revenue Service cautions, if the liquidation is
unreasonably prolonged or if the liquidation purpose becomes so obscured by business activities that the
declared purpose of the liquidation can be said to be lost or abandoned,(64) entity-level tax treatment
may result. When assets are segregated in a liquidating trust, the tax authorities are better able to
monitor the claim that the assets are being deployed in a dissolution mode.

4. Prepaid Funeral Trusts

State governments require regulatory compliance trusts in a variety of settings. For example, many
states regulate the sale of prepayment plans for funeral services, requiring that the proceeds paid in
advance under contract for funeral services and related merchandise be placed in trust until the death
that occasions the mortician's performance of the contract.(65)

5. Foreign Insurers' Trusts

Many state insurance codes require foreign insurers to place assets within the United States to back up
the insurers' American risks.(66) The statutes allow an insurer to deposit these assets with the state
insurance commissioner or to place the assets in trust with an American trust company. The
Massachusetts act, for example, requires the assets to be placed "in exclusive trust for the benefit and
security of all [the insurers'] policyholders and creditors in the United States."(67) The National
Association of Insurance Commissioners sponsors a model act to facilitate this species of regulatory
trust.(68)

6. Law Office Trust Account

Another prominent species of regulatory compliance trust arising in response to state law is the trust
account that a law firm operates in order to discharge its duty to safekeep clients' funds.(69) Comparable
requirements exist elsewhere in state law, for example, for real estate brokers who handle client funds.
(70)

E. Remedial Trusts

Remedial trusts are created to settle or to resolve disputes in judicial or administrative proceedings. The
Internal Revenue Code was amended in 1986 to facilitate such trusts.(71) Section 468B authorizes the
creation of an entity called the "designated settlement fund," or DSF, which in practice utilizes the trust
form.(72) Congress envisioned the DSF as a vehicle for "resolving and satisfying present and future
claims ... arising out of personal injury, death or property damage."(73) The DSF "primarily grew out of
asbestos cases and other toxic tort litigation."(74) Since 1993, Treasury regulations have permitted the
use of the settlement trust in certain environmental and other nontort cases.(75) The court order do
creates the trust embodies the terms of the settlement agreement.

The DSF is, in large measure, tax-driven. It allows the defendant who pays into the fund to overcome the
constructive receipt
 doctrine, which would ordinarily prevent the taxpayer from obtaining a current income tax deduction for
a payment made as a business expense unless the payee

 recognizes current income.(76) A defendant who pays into a DSF obtains the current deduction even
though the fund may hold the proceeds for some years before making distribution to the ultimate payees.
(77)

F. Comparing Magnitudes

Having concluded my tour of prominent species of commercial trust, I want to tote up. Recall the
assertion voiced at the outset of this Essay, that in terms of assets, commercial trusts are far more
important than personal trusts.

The data available on the asset values of the various forms of trust has many shortcomings
, but the drift is unmistakable. Begin with personal trusts. We do not know how much money is held in
personal trusts in the United States. We do have reliable data from the federal regulatory agencies on
the assets held in trust by trust companies and other institutional trustees. As of year-end 1994, these
institutions managed $532 billion of discretionary personal trust assets, and they held another $140
billion of nondiscretionary assets (that is, assets managed by outsiders), for a total of $672 billion.(78)
This figure nay somewhat overstate the assets of strictly personal or family trusts because it includes
assets held in trust by financial institutions for charitable trusts and foundations. The $672 billion figure
understates the total assets held in personal trusts, however, became it does not include assets held
exclusively by individual (that is, noninstitutional) trustees. The use of individual trustees is quite
common in family wealth transmission, but mostly in smaller trusts. As a generality to which there
certainly are exceptions, I would posit that the larger the assets of a trust, the more likely it is that the
settlor will provide for an institutional trustee or cotrustee, which would cause the trust to show up in the
federal data that I have reported.

Turning to commercial trusts, recall that I reported pension trust assets at $4.6 trillion," and trust-type
mutual funds at perhaps $2 trillion (half the $4 trillion total for all types of mutual funds).(80) To this $6.6
trillion running total, I then add the $2 trillion in identifiable asset securitization trusts,(81) which takes my
total to $8.6 trillion. Next, I add the $3 trillion of trust-indentured corporate and municipal debt,(82)
bringing my tab to $11.6 trillion. I would need to add some further figures, surely in the hundreds of
billions of dollars, for the values in REITs, in royalty trusts, and in the various regulatory compliance
trusts and remedial trusts. On the other hand, an accurate total would also require a downward
adjustment to correct for instances of double counting
, for example, pension assets that are held in mutual fund shares or in indenture-backed bonds.

I regret that my data suffers from so many lacunae that it can only be suggestive. Nevertheless, the data
leaves me on solid ground in asserting, as I did at the outset of this Essay, that well above 90% of the
wealth in trust in the United States is held in commercial as opposed to personal trusts.

II. Attributes of the Trust That Invite Commercial Uses

What explains the attractiveness of the trust form for modem transaction planners in the world of
commerce? I find it useful to think of the trust as a competitor, locked in a sort of Darwinian struggle
against other modes of business organization and finance, in particular the corporation, but also the
partnership and the various techniques of secured finance. The challenge is to understand why the trust
prevails when it does.

I shall point to four key attributes of the trust device that entice the transaction planner. (1) the protection
of beneficial interests in the event that the trustee becomes insolvent; (2) the case with which the trust
lends itself to favorable, conduit-type taxation; (3) the protective regime of trust fiduciary law; and (4) the
trust's flexibility of design in matters of governance and in the structuring of beneficial interests.
A. Insolvency Protection

To the planners of commercial transactions, a central attraction of the trust form is the treatment under
trust law of an unusual but most worrisome event, the insolvency of the trustee. The rule is well-settled
that "[a]lthough a trustee becomes insolvent or bankrupt, the beneficiary retains his interest in the subject
matter of the trust" and, accordingly, the beneficiary "is entitled [to retain that interest] as against the
general creditors of the trustee."(83) The conceptual structure of the trust, which treats the trust
beneficiaries as the true owners of the trust property (that is, as the owners of beneficial or equitable
title), supplies the doctrinal

 justification for this treatment of trustee insolvency.(84)

Another foundational principle of trust law, the segregation requirement, reinforces the insolvency regime
by insisting that the trustee make a sharp distinction between the trustee's own property and the property
of the trust.(85) Associated rules require trust property to be earmarked appropriately and forbid the
trustee from commingling trust property with the trustee's own property.(86) This segregation regime
separates the trustee's trust property from nontrust property without having to lodge ownership of the
trust property in a distinct entity endowed with juridical

 personality, such as a corporation.(87) In the pension trust, for example, the segregation requirement
forces the employer or other sponsor of a pension plan to recognize that the plan's assets belong to the
plan participants, even when the employer continues to manage the assets.(88)

Consider how the insolvency regime functions in the pension trust to protect pension beneficiaries
against employer insolvency. Were the pension promise merely a liability of the firm, as it is in some
European systems,(89) the employee or retiree would be a creditor like any other. Were the employer to
become insolvent -- a common enough occurrence in commercial life -- the pension claims would be
exposed to reduction or loss in like measure with the employer's other debts. Under the trust
mechanism, however, the employer creates and funds a separate trust to defray

 the pension promises, and the employer's insolvency need not disrupt the pension plan because the
plan's assets are segregated in the trust. Present and future beneficiaries look to the trust, not to the
bankrupt employer, for payment of their pensions.

B. Conduit Taxation

The trust form invites pass-through or conduit taxation.(90) The corporation as a juridical entity has
attracted entity-level taxation in the American system
 of income taxation, resulting in double taxation when the corporation's shareholders are taxed again on
income they derive from corporate distributions. Because we treat the trustee's ownership of trust
property as merely nominal, with real ownership remaining in the beneficiary, we have tended to tax trust
proceeds at the beneficiary level only. This ability to use the trust form to avoid entity-level taxation has
been a driving force in the growth of commercial uses of the trust.

Consider, for example, the tax advantages of the pension trust.(91) The employer obtains a current tax
deduction for sums contributed to the pension trust, even though the employee receives no taxable
income until retirement, which may be years, even decades later.(92) Furthermore, the pension trust is
exempt from current taxation on its investment income,(93) and thus investment gains compound without
taxation. Contributions to and earnings of the pension fund are taxed only when finally distributed to
retirees,(94)_who are commonly in lower tax brackets than when they were in the work force.

On the other hand, tax-favored treatment need not be an inevitable functional attribute of the trust in its
struggle for turf with the corporate form. To the contrary, Subchapter S of the Internal Revenue Code
allows comparable treatment for certain corporations,9' and not all trusts qualify for conduit taxation.(96)
There is a rich literature arguing for complete elimination of the corporate income tax.(97) In 1936
Congress simply extended trust tax treatment to mutual funds organized in corporate form;(98) and in
1976 a similar step was taken to extend trust-type taxation to corporate-form REITs.(99) Thus, the trust
form undoubtedly facilitates favorable tax treatment, but Congress can always even that playing field for
other modes of business organization.

C. Fiduciary Regime

Another trait of the trust form that is of fundamental importance to transaction planners is that the trust
automatically invokes the distinctive protective regime of trust fiduciary law for safeguarding the interests
of investors or other beneficiaries. Effective management of modem financial assets usually requires do
the trustee be granted extensive powers to transact with the trust property.100 Trust fiduciary law offsets
and controls this power, requiring the trustee to exercise it in the best interests of the trust beneficiaries.
(101)

There are two great principles of trust fiduciary law: loyalty and prudence. The duty of loyalty requires the
trustee "to administer the trust solely in the interest of the beneficiaries,"(102) hence it forbids the trustee
from self-dealing in the management of trust asserts and from engaging in conflict-of-interest
transactions adverse to beneficiaries' interests. The other great principle of trust fiduciary law, the duty of
prudent administration, imposes a reasonableness norm that places the trustee "under a duty to the
beneficiary in administering the trust to exercise such care and skill as a man of ordinary prudence would
exercise in dealing with his own property."(103) Subrules of fiduciary law abound, implementing the
duties of loyalty and prudence in particular settings. Examples include the duties to invest prudently, to
diversify investments, to keep and render accounts, to preserve trust assets and make them productive,
to enforce and defend claims, and to minimize costs.(104)

In the development of American pension law, the ability to adopt and to adapt this potent fiduciary
regime was a central attraction of the trust form. ERISA was devised in part in reaction to scandals in
which congressional investigators discovered that corrupt labor union leaders had misappropriated
union-sponsored pension and benefit funds.(105)

Trust fiduciary law is default law that the parties can alter to their needs.(106) Often, however, the
protections of trust fiduciary law are exactly what the parties wish to absorb into their transaction. For
example, investors are more likely to buy into the deal when they can rely upon the managers being
bound by conventional fiduciary standards. Furthermore, in certain commercial trusts, such as
pension(107) and indenture trusts,(108) supervening regulatory law has forced the parties to the
business deal to incorporate some or all of the fiduciary regime. in such circumstances the regulatory
regime transforms default law into mandatory law.

D. Flexibility in Design

Transacting parties who employ the trust for commercial purposes appear to value the flexibility that trust
law permits, both in matters of internal governance and in the creation of beneficial interests. Investment
trusts provide the best examples. Transaction planners designing asset securitization trusts especially
welcome the freedom to carve beneficial interests without regard to traditional classes of corporate
shares. They have manipulated the trust form to create a dizzying array of so-called tranches,(109) each
embodied in its own class of trust security.

Why have so many mutual funds chosen to organize as trusts?(110) In the words of a practitioner's
manual, "[Tlhe business trust eliminates a layer of regulation, i.e., the state corporation statute."(111)
The flexibility to eliminate governance procedures that are obligatory under the corporate form has been
one great attraction of the trust form. For example, the trust instrument can be drafted to dispense
with routine shareholder meetings. As a result, the costs of proxy solicitation and other meeting-related
expenses that are mandated under corporation codes can be eliminated.(112)
Another aspect of the flexibility of the trust form that appeals to the mutual fund industry is the
comparative ease in creating and extinguishing trust shares. The so-called money market funds that
burst upon the scene in the mid-1970s, being quite sensitive to short-term interest-rate fluctuations, are
subject to large variations in the number of outstanding shares. When interest rates decline, redemptions
increase; when rates rise, billions of new shares are issued. Money market funds prefer the trust form
because the trust instrument can be drafted to allow an unlimited number of shares. Corporate law limits
a company to the maximum number of shares authorized

 in the corporation's certificate of incorporation.(113) Increasing that number puts the fund and its
shareholders to the expense of soliciting and obtaining shareholder approvals. On the other hand,
avoiding that expense by having the fund's certificate authorize some vast number of presently
unneeded and unissued shares has a different drawback: State corporate franchise and filing fees (taxes
in effect) increase with the number of authorized shares.(114)

The trust's inherent flexibility for tailoring beneficial interests and mechanisms of governance reflects, I
think, the origins of the Anglo-American trust as a donative transfer. If you start with the root principle
that the owner of property has absolute freedom to give it away as he or she pleases,(115) there seems
no basis for interfering with this liberty to make arrangements for giving the property away less than
absolutely -- no reason, in other words, for preventing the donor from tailoring whatever organizational
regime the donor cares to devise for implementing the gift. Compare the corporation, which is the main
competitor of the commercial trust. When the modern business corporation developed in the nineteenth
century, it emerged encumbered with restrictions of a regulatory character, designed to protect creditors
and shareowners. To be sure, across the twentieth century, the corporate form has become more
permissive

,(116) but the commercial trust continues to offer the transaction planner nearly unlimited flexibility in
design.(117) This flexibility harkens back to the origins of the trust form, in the absolute dominion of
donor over donative property.

III. The Relations of Personal and Commercial Trusts

I conclude this introductory investigation by inquiring about the relations of the commercial trust and the
conventional personal trust.

A. Straddling the Line Between Gratuity and Bargain

The distinction between gratuitous transfer and bargained-for exchange -- that is, between gift and deal
-- is a fundamental line in Anglo-American law.(118) A promise to make a gift is not enforceable,(119)
and different formalities pertain to gifts (delivery) and to contracts (consideration).

Ought it to matter that the commercial trust appears to straddle the two systems of exchange, gift and
bargain? Recall Rudden's account of the trust as "essentially a gift, projected on the plane of time and so
subjected to a management regime."(120) The commercial trust, by contrast, although still a
management regime, does not effect a gift. Does it matter that this staple mechanism of the law of gifts
is being put to use in the law of deals?

I have elsewhere made the point that even in the law of donative transfers the trust functions as a deal,
in the sense that what trust law does is to enforce the trustee's promise to the settlor to carry out the
terms of the donative transfer.(121) Thus, although the typical trust implements a donative transfer, it
embodies a contract-like relationship in the underlying deal between the settlor and the trustee about
how the trustee will manage the trust assets and distribute them to the trust beneficiaries. The difference
between a trust and a third-party beneficiary contract is largely a lawyers' conceptualism.(122)

When, therefore, we enforce a trust, even the conventional donative or personal trust, we are already in
the realm of contract-like behavior. That is why not much turns on the distinction between donative and
commercial trust. In the commercial setting, the typical wealth-holder, instead of transferring property for
his widow and orphans, is an investor buying shares in an asset pool for the investor's own benefit. In
either case, the wealth-holder places property at the trustee's disposal in reliance upon the safeguards of
the trust form.

The key insight is that the great principles of trust fiduciary law, loyalty and prudence, do not depend
upon the transferor's motive, whether making a gift or doing a deal. Hence nothing of importance is lost
by allowing the commercial trust to straddle the categories of gift and deal. The real advantage, already
observed,(123) form the proximity of gift to deal in the law of commercial trust, is the ability of the
transaction planner to draw upon that freedom of design that has so characterized the donative transfer.

Comparative law provides a compelling endorsement of the proposition that the trust need not be rooted
in donative transfers. Outside the Anglo-American legal system, the trust is generally unknown, except in
Japan.(124) The Japanese have built a trust industry with assets amounting to $2 trillion, all but
exclusively in various forms of commercial trusts, including mutual funds, real estate development trusts,
and various time deposit products.(125) Japanese experience shows that it is possible to have a vibrant
trust system that is virtually untouched by donative transfers.

B. Corporation and Trust

The commercial trust, I have said, is locked in a struggle for turf against competing modes of finance and
competing modes of business organization, especially the corporation. As I have explained, the flexibility
of the trust form has facilitated innovation in enterprise organization.

Innovations pioneered in the trust form sometimes spread through legislation to the corporation. I have
mentioned this phenomenon in connection with trust-type conduit taxation, which Congress has
extended to mutual funds and REITs.(126) Likewise, under the Investment Company Act of 1940,(127)
Congress made identical fiduciary standards applicable to the managers both of investment companies
and investment trusts.(128)

In the 1980s, the state of Maryland, which is home to the T. Rowe Price firm, one of the largest American
mutual fund groups, amended its corporation law to allow investment companies to ape the flexibility of
the commercial trust in governance.(129) A Maryland investment company may now provide by charter
for dispensing with annual meetings(130) and their attendant proxy costs, one of the distinctive
advantages of trust-type mutual funds. A survey in the late 1980s found that half of all newly organized
mutual funds took the form of trusts, but that a further 28% were organized as Maryland corporations.
(131) Once again we see the pattern that commercial trust innovations are absorbed into corporate
practice. But the balance of advantage is slight, and a counter-trend can also be detected. In 1988,
Delaware, long the home of permissive business corporation laws, enacted a liberal business trust act.
(132) Mutual funds wishing to escape state corporate franchise taxes have since
reorganized themselves as Delaware business trusts.(133) Sixteen states in addition to Delaware have
legislation authorizing business trusts.(134)

From our understanding that the trust and the corporation are competitors for organizing commercial
activity, it follows that we should in principle be able to specify why one or the other prevails in a
particular setting. I am not yet able to do this. Sometimes the cumulative weight of the advantages of the
trust form appear unbeatable, as for example in the pension trust. Sometimes, by contrast, the trust and
the corporation seem the closest of substitutes, as in the case of the mutual fund, where both forms are
in current use. We are reminded that in the world of nonprofit organizations, both the charitable trust and
the charitable corporation have remained in constant use for decades.(135)

IV. Conclusion: The Commercial Trust in Legal Culture

I conclude where I began, with the puzzle of legal culture. The commercial trust is vastly more important
in raw economic terms than the personal trust. Yet those of us who think of ourselves as trust lawyers
often have scant exposure to commercial trusts, and we have little awareness of their size and extent.
Why is the magnitude of commercial trust practice not appreciated? Why do we continue to think of the
trust as a branch of the law of gifts?

I could point to convenient targets -- the first and second Restatements of Trusts, and Austin W. Scott,
the Restatement reporter and treatise writer, who labored to exclude the subject of the commercial trust
from polite discourse in the United States.(136) If Bogert rather than Scott had been in charge of the
Restatement,(137) the Restatement would have noticed commercial trusts.

A better explanation for the neglect of commercial trusts in our trust tradition is the relative recency of so
many of the commercial uses of the trust. To be sure, the business trust was already a prominent device
for the conduct of enterprise in the nineteenth century,(138) until the general corporation statutes made
the company form easily available. American competition law still bears the curious label of "antitrust," a
legacy from the monopolists of the Gilded Age, who organized their firms as trusts. With the routinization
of the corporate form, the trust fell from scholarly attention among business lawyers. Meanwhile, among
trusts and estates lawyers, preoccupied as ever with family wealth transmission, the commercial trust
was distant turf.

The main forms of commercial trust that I have discussed in this Essay have been twentieth-century
inventions. The mutual fund industry was effectively organized in the 1920s. Indenture trusts took their
modern form with the 1939 legislation. The pension trust was a trickle until after World War II. REITs
appeared in the 1960s, while asset securitization was unimportant into the 1970s. The ink is hardly dry
on the legislation that has called forth nuclear decommissioning trusts and designated settlement fund
trusts.

I should also emphasize that commercial trust practice has grown up in the hands of specialized bars,
out of contact with the trusts and estates bar. Securities lawyers have nurtured mutual funds, the real
estate bar has handled REITs, pension law was a subspecialty of taxation in most law firms
 until well after the enactment of ERISA in 1974, and asset securitization has been centered in the hands
of the banking and commercial transactions bar.

The lack of awareness of commercial trusts among American trust lawyers thus reflects both the
antiquity of the trust in the practice of donative transfers and the relative recency of so many of the forms
of commercial trust. The ultimate challenge of this intriguing topic is to explain when and why trust
dominates corporation for particular commercial tasks. Although that is supremely a question for
business law scholars, as a trust lawyer I still find it odd to be admitting that the trust in its most important
dimension -- as an instrument of commerce -- has become the province of others.

There is no mystery, however, in understanding why the trust appears so attractive as a commercial
form. Although the trust resembles the corporation in supplying for the particular venture a highly
adaptable, contract-like regime of rights, of fiduciary duties, and of internal governance, the trust offers
investors an insolvency regime superior to that of corporate law, packaged in a way that facilitates pass-
through taxation.

(1.) See, e.g., Jesse Dukeminier & Stanley M. Johanson, Wills, Trusts, and Estates (5th ed. 1995); John
Ritchie et al., Decedent's Estates and Trusts: Cases and Materials (8th ed. 1993); Eugene F. Scoles &
Edward C. Halbach, Jr., Problems and Materials on Decedents' Estates and Trusts (5th ed. 1993);
Lawrence W. Waggoner et al., Family Property Law: Cases and Materials on Wills, Trusts, and Future
Interests (2d ed. 1997).

(2.) See, e.g., Cal. Prob. Code [sub-sections] 10400-21406 (West 1993); Unif. Probate Code [sections]
7-101 to -307 (1983).

(3.) I have recently summarized the historical literature on the origins of the trust in John H. Langbein,
The Contractarian Basis of tile Law of Trusts, 105 Yale L.J. 625, 632-43 (1995).

(4.) Bernard Rudden, John P. Dawson's Gifts and Promises, 44-Mod. L. Rev. 610, 610 (1981) book
review).
(5.) Restatement Second) of Trusts [sections] 1 cmt. b (1959). The full text of the pa&sage reads: A
statement of the rules of law relating to the employment of a trust as a device for carrying on business is
not within the scope of the Restatement of this Subject. Although many of the rules applicable to trusts
are applied to business trusts, yet many of the rules are not applied, and there are other rules which are
applicable only to business trusts. The business trust is a special kind of business association and can
best be dealt with in connection with other business associations. Id.

(6.) Neither the text of the Restatement's official comment, nor the reporter's note, supplies any authority
for Scott's claim that "many of the rules" of trust law do not apply to business uses of the trust.

(7.) See 1 Austin W. Scott & William F. Fratcher, The Law of Trusts [sections] 2.2, at 40 (4th ed. 1987)
(excluding "the so-called business trust or Massachusetts trust").

(8.) See George Gleason Bogert & George Taylor

 Bogert, The Law of Trusts and Trustees [sub-sections] 247-251, 255 (rev. 2d ed. 1992) (introducing
business trusts, investment and real estate trusts, bond indenture trusts, and pension trusts).

(9.)L See Langbein, supra note 3.

(10.) See id. at 627-28, 650, 657-60.

(11.) The assets of charitable trusts and foundations are consolidated with those of personal trusts for
federal reporting purposes, in Federal Fin. Insts. Examination Council, Trust Assets of Financial
Institutions -- 1994 (1995) [hereinafter

 Trust Assets]. On the choice between trust and corporate form for the conduct of charity, see infra

 note 135 and accompanying text; on the character of charitable purposes, see Restatement (Second) of
Trusts [sections] 368 (1959).

(12.) 26 U.S.C. [sections] 9508 (1994).

(13.) 42 U.S.C. [sections] 14211 (1994).

(14.) 26 U.S.C. [sections] 9503 (1994).

(15.) For example, federal law requires that such funds limit their "investing" to "buying" federal
government paper. 26 U.S.C. [sections] 9602 (1994).

(16.) Search of Westlaw, FL-ST-ANN Database (Sept. 1, 1997) (search for records containing
"regulation" and "trust fund").

(17.) See Fla. Stat. Ann. [sections] 601.15(7) (Harrison 1978 & Supp. 1996).

(18.) See Fla. Stat. Ann. [sections] 215.2D(4)(y) (Harrison Supp. 1996).

(19.) See Fla. Stat. Ann. [sections] 240.276 (Harrison Supp. 1996).

(20.) "Appointment of a trustee is extraordinary," requiring "clear and convincing evidence" of the danger
of fraud, gross mismanagement
, or other such cause. 3 David G. Epstein et al., Bankruptcy [sections] 10-8, at 17 (!992).

(21.) Comparable officers. serve in the nontrust legal systems of the Continent, further indication that our
tradition of calling this court functionary a trustee is a misnomer

. For a capsule treatment, see European Bankruptcy Laws (David A. Botwinik & Kenneth W. Weinrib,
American Bar Ass'n, eds., 2d ed. 1986).

(22.) The Uniform Probate Code treats the personal representative as "a fiduciary who shall observe the
standards of care applicable to trustees," Unif. Probate Code [sections] 3-703 (1993), and it requires the
conservator to "act as a fiduciary and observe the standards of care applicable to trustees," id. [sections]
5-416.

(23.) Grant S. Nelson & Dale A. Whitman, Real Estate Finance Law [sections] 1.6, at 11 (3d ed. 1994).
Trust-based conveyancing is also common in England, although for other reasons. See, e.g., Angela
Sydenham, Trusts of Land (1996).

(24.) See Pension Investment Report -- 1st Quarter 1997 (Employee Benefit Research Inst.,
Washington, D.C.), July 1997, at 29 thl.13 [hereinafter Pension Investment Report] (on file with the Yale
Law Jounal).

(25.) See id. On the trust-like character of life insurance separate accounts, see Langbein, supra note 3,
at 668-69.

(26.) See Pension Investment Report, supra note 24, at 29 tbl.13.

(27.) Data is collected in John H. Langbein & Bruce A. Wolk, Pension and Employee Benefit Law 20 (2d
ed. 1995).

(28.) 29 U.S.C. [sub-sections] 1000-1461 (1994).

(29.) ERISA [sections] 403, 29 U.S.C. [sections] 1103. In drafting ERISA the congressional conference
committee explained that it wanted to "apply rules and remedies similar to those under traditional trust
law to govern the conduct of [ERISAI fiduciaries." H.R. Rep. No. 93-1280 (1974), reprinted in 1974
U.S.C.C.A.N. 5038, 5076.

(30.) See ERISA [sections] 403(b)(i)-(2), 29 U.S.C. [sections] 1103(b)(i)-(2). The Internal Revenue Code
is in accord with this exception. See I.R.C. [sub-sections] 403(a), 404(aX2) (1994) (stating that the
requirement of mandatory trusteeship does not pertain to a plan funded exclusively by insurance or
annuity contracts).

(31.) See Revenue Act of 1921, ch. 136, [sections] 219(f), 42 Stat. 227, 247 (codified as amended at
I.R.C. [sections] 401(a) (1994)) (insisting upon the use of the trust as a condition of what we now call
"qualifying" a pension plan for tax benefits).

(32.) Labor Management Relations (Taft-Hartley) Act, ch. 120,61 Stat. 136 (1947) (codified as amended
at 29 U.S.C. [sections] 141-144, 151-167, 171-187, 557 (1994)).

(33.) See Labor Management Relations (Taft-Hartley) Act [sections] 302(c)(5), 29 U.S.C. [sections]
186(c)(5).

(34.) See ERISA [sections] 404(a), 29 U.S.C. [sections] 1104(a) (1994) (codifying the principles of
loyalty, prudence, and diversification).

(35.) "ERISA's legislative history confirms that the Act's fiduciary responsibility provisions ... `codif[y] and
mak[e] applicable to [ERISA] fiduciaries certain principles developed in the evolution of the law of
trusts."' Firestone Tire & Rubber Co. v. Bruch, 489 U.S. 101, 110 (1989) (quoting H.R. Rep. No. 93-533,
at 11 (1973), reprinted in 1974 U.S.C.C.A.N. 4639, 4649). ERISA's "fiduciary duties draw much of their
content from the common law of trusts, the law that governed most benefit plans before ERISA's
enactment." Varity Corp. v. Howe, 116 S. Ct. 1065, 1070 (1996).

(36.) Transfer on death of undistributed account balances pursuant to a beneficiary designation is

characteristic of defined contribution plans, see I.R.C. [sub-sections] 401(k), 403(b) (1994), as well as
individual retirement accounts (IRAS), see I.R.C. [sections] 409 (1994). Defined benefit plans commonly
make no provision for survivor benefits other than for spouses. Pension law also resembles conventional
family wealth-transmission law in mandating spousal shares. As amended in 1984, ERISA requires most
pension benefits of a married worker to be distributed in the form of a joint and survivor annuity for the
lives of both spouses, thus transferring a portion of the worker's retirement savings to the spouse. See
ERISA [sections] 205(A), 29 U.S.C. [sections] 1055(A) (1994); I.R.C. [sections 401(a)(11) (1994); see
also Langbein & Wolk, supra note 27, at 553 (describing the ERISA spousal entitlement as "a federal-
law,.asset-specific forced-share system, a forced share for pensions"). Many forms of financially
intermediated wealth may now be subject to transfer-on-death (TOD) instructions. On the causes of this
practice, see John H. Langbein, The Nonprobate Revolution and the Future of the Law of Succession,
97 Harv. L. Rev. 1108 (1984). A widely enacted uniform act encourages the use of TOD designations for
securities and mutual fund accounts. See Unif. Transfer on Death Sec. Registration Act, 8B U.L.A. 479
(1993) (codified as Unif. Probate Code art. 6, pt. 3 (1993)).

(37.) This category obviously overlaps the pension trust in the sense that a main function of the pension
trust is to invest workers' savings for retirement. When I speak of investment trusts, however, I refer to
general-purpose vehicles, not those limited to retirement plans.

(38.) Regarding disclosure of fund investment policies, see 3 Tamar Frankel, The Regulation of Money
Managers: The Investment Company Act and the Investment Advisers Act, ch. 24, [sections] 8.3, at 472-
78 (1980 & Supp. 1996).

(39.) The precise figure is $3,904.6 billion, according to data supplied by the Investment Company
Institute (ICI), the industry's trade association. See Facsimile from Investment Company Institute (July 8,
1997) [hereinafter ICI

(40.) A total of 1562 of the 2345 mutual funds surveyed by ICI were organized as trusts. The ICI's data,
however, covers less than half the approximately 5900 mutual funds that report to the ICI. See Letter
from Amy Lancellotta, Associate Counsel, ICI (June 11, 1996) (on file with the Yale Law Journal).

A sample of mutual funds formed during the period July 1985 through December 1987 found that half
were organized as Massachusetts business and and 28% as Maryland business corporations. See
Sheldon A. Jones et al., The Massachusetts Business Trust and Registered Investment Companies, 13
Del. J. Corp. L. 421, 422 (1988). On the preference for Maryland corporations, see infra text
accompanying notes 129-131, regarding the revisions to Maryland law that now allow the corporate form
to approximate more closely the advantages of the trust.

(41.) See infra text accompanying notes 126-135.

(42.) See Real Estate Investment Trusts Act, Pub. L. No. 88-272, 74 Stat. 1004 (1960) (codified as
amended at I.R.C. [sub-sections] 856-858 (1995)). In 1976 the Code was further amended to allow such
real estate investment funds to use the corporate form. For a detailed exposition of the current tax
treatment of REITs, see Steven F. Mount, Real Estate Investment Trusts, Tax Mgmt. Portfolios (BNA)
No. 107 (1996).

(43.) See National Association of Real Estate Investment Trusts, Document on Demand -- Document
#201 (visited June 25, 1997) <http://www.nareit.com/faxondem/201.html>.
(44.) In addition to dispensing with corporate-level taxation, see infra text accompanying note 45, some
oil and gas royalty trusts are structured as tax credit royalty trusts under I.R.C. [sections] 29 to maintain
the benefits of tax credits awarded for the production of unconventional fuels. See John L. Crain et al.,
Section 29 Tax Credit Royalty Trusts: A Win-Win Proposition for Investors and Oil and Gas Companies,
43 Oil & Gas Tax Q. 295 (1994). Illustrative transactions are discussed in industry journals. See, e.g.,
Danielle Robinson, Royalty Trust Is a Break for Burlington Resources, 61 Petroleum Economist 70
(1994); BP Raises $334 Million Through Sale of Royalty Interest in Prudhoe Bay Output, Platt's Oilgram
News, Mar. 3, 1989, at 2; Williams Raising Additional Cash for Further Pipeline Expansions, Inside
F.E.R.C.'s Gas Market Rep., Nov. 6, 1992, at 2.

(45.) On the mechanics, see Thomas Crichton IV, Royalty Trusts and Other Exotic Distributions to
Shareholders, 1 N.Y.U. Fortieth Ann. Inst. Fed. Tax'n (MB), [sections] 12.04, at 12-17 to 12-25 (Nicolas
Likias ed., 1982); and Stephan G. Dollinger & Jeanne K. Helsley, Royalty Trusts, 30 Oil & Gas Tax Q.
262 (1981). For a comparison with the partnership structure, see John L. Crain et al., A Comparison of
Royalty Trusts and Master Limited Partnerships, 36 Oil & Gas Tax Q. 29 (1987).

(46.) See John L. Crain, Royalty Trusts Continue To Play Useful Role, 133 Trusts & Estates 25 (1994)
(reporting more than 20 publicly traded oil and gas royalty trusts created since 1976, most of which are
still trading).

(47.) I follow the insightful introductory account by Steven L. Schwarcz, The Alchemy of Asset
Securitization, 1 Stan. J.L. Bus. & Fin. 133 (1994); and the treatise by Tamar Frankel, see Tamar
Frankel, Securitization: Structured Financing, Financial Assets Pools, and Asset-Backed Securities

 (1991 & Supp. 1995).

(48.) See 82 Fed. Reserve Bull. at A35 to A36 tbls.1.54, 1.55 (1996). For a useful account of finance and
tax issues arising in connection with mortgage-backed securities, see Gary J. Silversmith, REMICs and
Other Mortgage-Backed Securities, Tax Mgmt. Portfolios (BNA) No. 117 (1996). Regarding the newest
entity, the Financial Asset Securitization Trust (FASIT), approved in the Small Business Job Protection
Act of 1996, Pub. L. No. 104-188, 110 Stat. 1867 (codified at I.R.C. [sections] 860H-L (1997)), see 82
Fed. Reserve Bull. at A-113 to A-120.

(49.) Securitization can take the form of a share company owning the assets, but the trust form is
thought to bring superior protection against the risk of insolvency of the bank or other originator.

(50.) See, e.g., Lynn M. LoPucki, The Death of Liability, 106 Yale L.J. 1, 23-30 (1996).

(51.) Pub. L. No. 76-253, 53 Stat. 1149 (1939) (codified at 15 U.S.C. [sections] 77aaa (1994)).

(52.) See Trust Assets, supra note 11, at 98 tbl.C1-A.

(53.) See Bogert & Bogert, supra note 8, [sections] 250.

(54.) Robert I. Landau, Corporate Trust: Administration and Management 25 (4th ed. 1992). Landau,
author of the leading text on trust indenture practice, explains the trustee's role:

[T]he essential function of (such] a trustee is the administration of the

security provisions of a

contract between the issuing corporation and the holders of the indenture

securities....

... [I]f the issue is secured in any way, the trustee holds and deals
with the security....

[For example, i]f the security for the bond issue is personal property,

such as equipment, the

trustee will normally "perfect" its security interest in the property by

filing a financing statement

pursuant to the Uniform Commercial Code of the applicable state.

... [A]s administrator of the contract, the trustee has the

responsibility of making sure

that the covenants and other indenture provisions are performed in the

agreed manner....

... [I]n the event of default the trustee has a primary responsibility

for enforcing the

remedial provisions of the contract. Id. at 54.

(55.) Id. at 25.

(56.) Hence, a commentator can ask the question posed in Martin D. Sklar, The Corporate Indenture
Trustee: Genuine Fiduciary or Mere Stakeholder?, 106 Banking L.J. 42 (1989). See also Martin Riger,
The Trust Indenture as Bargained Contract: The Persistence of Myth, 16 J. Corp. L. 211 (1991).

(57.) See Trust Indenture Act of 1939 [sub-sections] 315-318, 15 U.S.C. [sections] 77ooo-rrr (1994).

(58.) Two of the categories of commercial trust noticed earlier can be said to straddle this category. The
bond issue (under the Trust Indenture Act of 1939) and the pension trust (pursuant to federal pension,
tax, and labor law) now require the trust form, but these varieties of commercial trust appeared in
practice before regulation mandated them. See supra text accompanying notes 31-33, 53.

(59.) The bypass trust avoids taxation in the decedent's estate by utilizing the unified credit, currently
$600,000, see I.R.C. [sections] 2010 (1994), and it avoids taxation in the surviving spouse's estate by
limiting the spouse to an income interest that expires on the spouse's death.

(60.) 18 C.F.R. [sections] 35.32(a) (1994).

(61.) See I.R.C. [sections] 468A (1994).

(62.) 26 C.F.R. [sections] 301.7701-4(e)(1) (1996); see also William P. Streng, Choice of Entity, Tax
Mgmt. Portfolios (BNA) No. 700, at A-16 (1993) (reviewing regulations).

(63.) 26 C.F.R. [sections] 301.7701-4(e)(1).

(64.) See 26 C.F.R. [sections] 301.7701-4(d) (1996); see also Streng, supra note 62, at A-15 (reviewing
regulations and discussing patterns of use). For a recent case holding that a liquidating trust could not
escape coverage under the Coal Act, 26 U.S.C. [sections] 9701-22 (1994), and rejecting the trust's claim
that it was no longer "in business" under the terms of the Act, see Lindsey Coal Mining Co. v. Chater, 90
F.3d 688, 692 (3d Cir. 1996).

(65.) See, e.g., 225 Ill. Comp. Stat. 45/1 (West Supp. 1996); Ind. Code [sections] 30-2-10-2 to -3 (1989).

(66.) See, e.g., Ala. Code [sections] 27-3-14 (1975); Md. Code Ann., Ins. [sections] 4-106 (1997); Okla.
Stat. tit. 36, [sections] 613 (1990).

(67.) Mass. Ann. Laws. ch. 175, [sections] 155 (Law. Co-op. 1996); accord, e.g., Cal. Ins. Code
[sub]sections] 1583(d), 1596(c) (West 1996); Del. Code Ann. tit. 18, [sections] 514 (1996); Okla. Stat. tit.
36, [sections] 613(B)(3).

(68.) See State of Entry Model Law [sub-sections] 3(A)(2), 4, 5 (National Ass'n of Ins. Comm'rs 1993).

(69.) On the lawyer's duty to segregate client funds and prevent commingling with personal funds, see
Charles W. Wolfram, Modern Legal Ethics [sections] 4.8, at 175-84 (1986). In addition to trust law
remedies, the lawyer's duty Annotation, Attorney's Commingling of Client Funds with His Own as Ground
for Disciplinary Action -- Modern Status, 94 A.L.R.3d 846 (1979).

(70.) See, e.g., Minn. Stat. Ann. [Sections] 82.24(l) (West Supp. 1997).

(71.) See Pub. L. No. 99-514, [Sections] 1807(a)(7)(A), 100 Stat. 2085, 2814 (1986).

(72.) I.R.C. [Sections] 468B (1994).

(73.) I.R.C. [Sections] 468B(d)(2)(D).

(74.) William L. Winslow, Resolving Mass Torts with Designated Settlement Funds-, TRIAL, Oct. 1994, at
82. Regarding the most prominent examples of mass tort DSFs to date, see Kenneth R. Feinberg, The
Dalkon Shield Claimants Trust, 53 Law & Contemp. Probs. 79 (1990); and Frank J. Macchiarola, The
Manville Personal injury Settlement Trust: Lessons for the Future, 17 Cardozo L. Rev. 583 (1996).

(75.) These trusts are known as "qualified settlement trusts." 26 C.F.R. [Sections] 1.468B-B.5 (1995).

(76.) For a general explanation of the constructive receipt doctrine, see 4 Bories I. Bittker, Federal
Taxation of Income, Estates and Gifts [Paragraph] 105.2.3 (1981).

(77.) The pension trust also overcomes the constructive receipt doctrine, because the employer receives
an immediate deduction for contributions to the plan, while the corresponding pension benefits are not
fully paid out until the retirement or death of the worker (and spouse), commonly decades later.

(78.) See Trust Assets, supra note 11, at 9 tbl.A-2.

(79.) See supra text accompanying notes 24-26 (reporting $3 trillion in trusteed private pension plan
assets and $1.6 trillion in state and local government plans).

(80.) See supra notes 39-40.

(81.) See supra text accompanying note 48.

(82.) See supra text accompanying note 52.

(83.) Restatement (Second) of Trusts [Sections] 12 cmt. f (1959). I have elsewhere had occasion to
observe "how central this topic is in the comparative law literature. Europeans, who lack the trust, regard
the law of trustee insolvency as a defining element of the Anglo-American trust, and they find this feature
of the trust perhaps the hardest to replicate in purely contractual arrangements." Langbein, supra note 3,
at 667-68. In emphasizing the import of insolvency protection as a fundamental characteristic of trust
law, I wish to acknowledge my debt to the unpublished paper, Henry Hansmann & Ugo Mattei, The
Comparative Law and Economics of Private Trusts 21-25 (Sept. 1995) (unpublished manuscript, on file
with the Yale Law Journal), which contrasts the advantages of the insolvency protection under the Anglo-
American trust with the devices available in European legal systems.

(84.) "The beneficiary of a trust has the beneficial interest in the trust property," whereas a creditor of a
trustee "has merely a personal claim against the debtor." Restatement (Second) of Trusts [Sections] 12
cmt. a.

(85.) See id. [Sections] 179.

(86.) See id. [Sections] 179 cmts. b, d.

(87.) In conventional trust doctrine, the trustees are the juridical persons who own the trust property, but
subject to their trust duties. This contrast between corporation as entity and trust as personal obligation
has eroded in common parlance. The draft Restatement (Third) of Trusts remarks:

Increasingly, modem common law and statutory concepts arid terminology tacitly recognize the trust as a
legal entity," consisting of the trust estate and the associated fiduciary relation between the trustee and
the beneficiaries. This is increasingly and appropriately reflected both in language (referring, for
example, to a trustee's duties or liability to M trust") and in doctrine ....

Restatement (Third) of Trusts [Sections] 2 cmt. a (Tentative Draft No. 1, 1996). By way of illustration,
consider the provisions of the Uniform Prudent Investor Act of 1994 that, while authorizing trustees to
delegate investment and management functions to an agent, impose a duty of care that the agent owes
No the trust." Unif. Prudent Investor Act [Sections] 9(b), 7B U.L.A. 30 (Supp. 1997). The trustee who
complies with the standards of the Act governing delegation "is not liable to the beneficiaries or to the
trust" for the agent's conduct. Id. [Sections] 9(c), 7B U.L.A. 30.

(88.) ERISA spells out the requirement that "all assets of an employee benefit plan shall be held in trust,"
ERISA [Sections] 403(a), 29 U.S.C. [Sections] 1103 (1994), and ERISA imposes fiduciary
responsibilities on anyone who "exercises any authority or control respecting management or disposition
of [plan] assets," ERISA [Sections] 3(21)(A)(i), 29 U.S.C. [Sections] 1002(21)(A)(i) (1994).

(89.) In Germany and elsewhere in Europe, where pension credits are "book reserved" on the employer's
accounts, the employer is required to buy external insurance to protect workers against the risk of
employer default. See James H. Smalhout, The Uncertain Retirement: Securing Pension Promises in a
World of Risk 223-30 (1996); see also Employee Benefit Research Inst., Pension Plan
Termination Insurance: Does The Foreign Experience Have Relevance for the Unite States? 31-41
(1979).

(90.) Subchapter J of the Internal Revenue Code allows a trust to qualify for conduit treatment -- that is,
for exemption from taxation -- when the trust distributes its income to the beneficiaries, who are taxed
directly on the income. See I.R.C. [Subsections 641(a), 651, 661 (1994). See generally Mark L. Ascher,
Federal Income Taxation of Trusts and Estates (2d ed. 1996); M. Carr Ferguson et al., Federal Income
Taxation of Estates, Trusts, and Beneficiaries (2d ed. 1993 & Supp. 1996).

(91.) For summary treatment of the tax advantages of qualified plans, see Langbein & Wolk, supra note
27, at 149-50; for greater detail, see id. at 147-374. Regarding the nontax reasons for employers to
sponsor plans, see id. at 30-33.

(92.) See I.R.C. [Subsections] 401(a)(9), 404(a)(1) (1994).

(93.) See I.R.C. [Sections] 501(a) (1994).

(94.) See I.R.C. [Sections] 402(a) (1994).

(95.) See I.R.C. [Subsections] 1366-76 (1994).

(96.) See I.R.C. [Sections] 641(a) (1994).

(97.) This literature is extensively canvassed in U.S. Dep't of the Treasury, Report of the Department of
the Treasury on Integration of the Individual and Corporate Tax Systems: Taxing Business Income Once
(1992).

(98.) See Revenue Act of 1936, Pub. L. No. 74-740, 49 Stat. 1648 (1936); see also Jones et al., supra
note 40, at 448-49.

(99.) See Tax Reform Act of 1976, Pub. L. No. 94-455, 90 Stat. 1520 (1976); see also Jones et al., supra
note 40, at 453.

(100.) See Frank H. Easterbrook & Daniel R. Fischel, Contract and Fiduciary Duty, 36 J.L. & Econ. 425,
426 (1993).

(101.) See generally Langbein, supra note 3, at 640-43 (discussing the evolution of fiduciary obligation
as a response to de growth of trustees' powers of management).

(102.) Restatement (Second) of Trusts [Sections] 170(1) (1959), continued in Restatement (Third) of
Trusts: Prudent Investor Rule [Sections] 170(l) (1992). The Restatement (Third) slightly revises the text
of section 170(l) but leaves the official comments from the Restatement (Second) in force.

(103.) Restatement (Second) of Trusts [Sections] 174. The Restatement (Third) applies the prudence
norm to investing and managing the trust assets. See Restatement (Third) of Trusts: Prudent Investor
Rule [Sections] 227. The prudent investing standards of the Restatement (Third) are codified in the Unif.
Prudent Investor Act, 7B U.L.A. 18 (Supp. 1996), which has thus far been enacted in 19 states;
comparable nonuniform legislation has been enacted in Florida, Illinois, and New York. For detail, see
John H. Langbein, The Uniform Prudent investor Act and the Future of Trust investing, 81 Iowa L. Rev.
641 (1996).

(104.) See Restatement (Second) of Trusts [Subsections] 172-78; Restatement (Third of Trusts: Prudent
Investor Rule [Sections] 227(b).

(105.) The origins of ERISA are discussed in Michael S. Gordon, Overview: Why Was ERISA Enacted?,
in U.S. Sen. Special Comm. on Aging, 98th Cong., The Employee Retirement Income Security Act OF
1974: The First Decade 6-25 (1984), substantially reprinted in Langbein & Wolk, supra note 27, at 67-78.

(106.) Even the duty of loyalty is default law that yields to contrary terms of the trust deal. The
Restatement says: By the terms of the trust the trustee may be permitted to sell trust property to himself
individually, or as trustee to purchase property from himself individually, or to lend to himself money held
by him in trust, or otherwise to deal with the trust property on his own account. Restatement (Second) of
Trusts [section] 170(1) cmt. t, discussed in Langbein, supra note 3, at 659.

(107.) See ERISA [section] 403(aX1XD), 29 U.S.C. [section] 1104(aX1XD) (1994).

(108.) See 40 U.S.C. [section] 121 (1994) (precluding exculpation clauses).

(109.) A tranche is simply a slice of a deal, a payment stream whose expected return increases with its
riskiness. Speaking of collateralized mortgage obligations (CMOs), a prevalent form of asset
securitization, Crawford and Sen report: Today, most CMOs have a large number of tranches, each
geared to a specific customer's needs. In 1982, one of the earliest CMOs was issued for $50 million: It
had two tranches. In 1983, there were eight CMO

 issues, with a dollar volume of $4,748 million, and an average of 6.6 tranches. In 1992, them were
approximately 375 CMOs issued for $188,458 million, with an average of 17.7 tranches. George
Crawford
 & Bidyut Sen, Derivatives for Decision Makers 45 (1996). Regarding the design and administration of
tranches in CMOs, see id. at 43-45.

(110.) For discussion of the advantages of the trust form for a mutual fund, see Jones et al.,supra note
40, at 452-58. The main disadvantage to the trust form for the mutual fund industry, by comparison with
the corporation, has been the concern that the legal doctrine is not absolutely unambiguous on the
question of whether investors are protected from personal liability for the obligations of the trust, even
though no such liability has ever been imposed. See id. at 439-43. Thus, limited liability, the central trait
of the corporate form, continues to exert a powerful attraction in the competition between corporate and
trust forms. A mutual fund organized as a trust typically contains language in its organizing and
disclosure statements declaring that the shareholders shall not be liable for the obligations of the trust
and, furthermore, indemnifyimg shareholders from the assets of the trust in the event that the declaration
were to be disregarded. See id. at 441. Delaware's recently enacted business trust act attempts to
resolve the matter by providing that shareholders of a business trust are entitled to the same limitation of
personal liability as shareholders of a business corporation. See Del. Code Ann. tit. 12, [section] 3803(a)
(1995); see also infra notes 132-133 and accompanying text.

(111.) Philip H. Newman et al., Legal Considerations in Selecting the Form and Jurisdiction of
Organization of a Mutual Fund, A.L.I.-A.B.A., Continuing Legal Educ., May 11, 1995, at 21, 23.

(112.) See id.; see also infra note 133.

(113.) See, e.g., Del. Code Ann. tit. 8, [section] 102(4) (1995).

(114.) See Jones et al., supra note 40, at 454-55; see also infra note 133. Regarding other minor state
tax advantages to the trust form over the corporate form in Massachusetts, see Jones et al., supra note
40, at 456-57. The greater flexibility of the trust form has also been noted in connection with its use for
REITs: REIT trusts offer "[g]reater flexibility in ... conferring powers on the trustees," "[l]ow or no
franchise and/or income tax," and flexibility in the issuance of shares. Stephen P. Jarchow, Real Estate
Syndication: Securitization After Tax Reform [section] 7.2, at 221 (2d ed. 1988).

(115.) This freedom, of course, does not include perpetuities and similar dead hand protections.

(116.) The trend is well summarized in Bernard S. Black, Is Corporate Law Trivial?: A Political and
Economic Analysis, 84 Nw. U.L. Rev. 542 (1990). Some nonwaivable features of Delaware
corporation law are catalogued in Jeffrey N. Gordon, The Mandatory Structure of Corporate Law, 89
Colum. L. Rev. 1549, 1553 n.16 (1989).

(117.) This intrinsic flexibility includes the settlor's power to surrender some of the flexibility -- for
example, by restricting the trustee's powers to transact, or by tailoring particular standards for amending
or terminating the trust. Regarding the settlor's power to impose a regime for amending or terminating
the trust, see Bogert & Bogert, supra note 8, [section] 1001.

(118.) See, e.g., John P. Dawson, Gifts and Promises 1-3 (1980).

(119.) See E. Allan Farnsworth, Contracts [section] 2.5, at 69-71 (2d ed. 1990).

(120.) Rudden, supra note 4, at 610.

(121.) See Langbein, supra note 3, passim.

(122.) "[T]he three-cornered relation of settlor, trustee, and [beneficiary is] ... easily explained in the
modern law in terms of a contract for the benefit of a third party." F.H. Lawson, A Common Lawyer Looks
at the Civil Law 200 (1953), discussed in Langbein, supra note 3, at 628.

(123.) See supra text accompanying notes 109-117.

(124.) See William F. Fratcher, Trust, in 6 International Encyclopedia of Comparative Law (1972)
(pamphlet print). Various microstates operating as tax havens have imitated Anglo-American trust law to
facilitate offshore flows. For a compilation of these and other foreign trust laws, see International Trust
Laws (J. Glasson ed., rev. ed. 1994).

(125.) The trust "was introduced [into Japan] in 1900 or thereabouts from the United States primarily to
provide a business framework for investment management by trust companies." Makoto Arai & Koichi
Kimura, Financial Revolution and Trust Banks in Japan
: Challenges in the Deregulation and Internationalisation Process, 4 J. Int'l Tr. & Corp. Plan. 67, 68
(1995). "[T]he use of trusts for inheritance purposes is quite rare in Japan." Id. at 68 n.1. Current usage
is discussed in Makoto Arai, Japan, in International Trust Laws, supra note 124, at A2l-A23.

(126.) See supra notes 98-99 and accompanying text.

(127.) Pub. L. No. 76-768, 54 Stat. 789 (codified as amended at 15 U.S.C. [sub-section] 77b, 80a-1 to
80a-64, 80b-1 to 80b-21 (1994)).

(128.) See Jones et al., supra note 40, at 450.

(129.) See 1987 Md. Laws 242.

(130.) See Md. Code Ann., Corps. & Ass'ns [section] 2-501 (1993).

(131.) See Jones et al., supra note 40, at 422.

(132.) See Delaware Business Trust Act, 66 Del. Laws 279 (1988) (codified as amended at Del. Code
Ann. tit. 12, [sub-section] 3801-3820 (1995 & Supp. 1996)); see also supra note 110. For an overview on
the topic, see Wendell Fenton & Eric A. Mazie, Delaware Business Trusts, in 2 The Delaware Law of
Corporations and Business Organizations [sub-section] 25.1-25.12 (R. Franklin BaLotti & Jesse A.
Finkelstein eds., Supp. 1997).

(133.) See, for example, the September 11, 1996, proxy statement of the Van Kampen
 American Capital Fund, proposing the conversion of two Texas-based funds from Maryland corporations
to Delaware business trusts: There are two principal reasons for reorganizing the Maryland Funds in
Delaware as business trusts. The first is to take advantage of certain beneficial aspects of Delaware law
with respect to business trusts. The second reason is to eliminate the payment of an annual Texas
franchise tax by each Maryland Fund. Delaware law provides that the trustees of a Delaware business
trust may authorize for issuance an unlimited number of shares. Maryland corporate law provides that the
articles of incorporation of a Maryland corporation must set forth the number of shares authorized for
issuance. In addition, Delaware law with respect to business trusts has been specifically drafted to
accommodate the unique corporate governance needs of investment companies and provides that its
policy is to give maximum freedom of contract to the trust instrument of a Delaware business trust.
Maryland corporate law, although it contains many provisions specifically applicable to investment
companies, is less customized for use by investment companies. Each Maryland Fund is subject to Texas
franchise tax. A Delaware business trust is not subject to Texas franchise tax. Consequently, the
reorganization into a Delaware business trust will eliminate the need for each Maryland Fund to pay a
Texas franchise tax [which in 1995 amounted to $18,600 for one of the two funds and $7,800 for the
other]. Van Kampen American Capital Funds, Notice of Joint Annual Meeting of Shareholders 14 (Sept.
11, 1996) (on file with the Yak Law Journal). Similar reasons were given in 1984 when the Fidelity
Magellan Fund converted from a Massachusetts business corporation to a Massachusetts business trust.
See Mary Ann Tynan, Form of investment Organization: Corporation vs. Massachusetts Business Trust,
in Investment Companies 1986, at 55 app. at 66 (PLI Corp. Law & Practice Course Handbook Series No.
515, 1986) (reprinting Fidelity Magellan Fund, Inc., Notice of Special Meeting in Lieu of the Annual
Meeting of Shareholders). In 1994, Fidelity converted a group of money market funds from
Massachusetts business trusts to Delaware business trusts, in part because Delaware's statutory
business trust law allows fewer shareholder meetings and a smaller quorum of voting shares. See Karen
Blumenthal, Fidelity Sets Vote on Scope of Investments, Wall St. J., Dec. 8, 1994, at C1.

(134.) See Irving S. Schloss, Some Undiscovered Country: The Business Trust and Estate Planning, 22
Tax Mgmt. Ests. Gifts & Trs. J. 83, 83 (1997).

(135.) Among the factors that bear on that choice, the charitable trust can be created more rapidly and
without the risk of publicity attendant to a public filing with the secretary of state for a nonprofit
corporation charter. The corporation is thought to offer superior protection to directors in the event of
liability for tort, because while the liability of a trustee is in theory personal and unlimited, see
Restatement (Second) of Trusts [section] 402 (1959), the liability of a corporate director is limited to the
assets of the corporation. Similarly, the standard of care for administration of the entity is nominally less
onerous in the case of a corporation -- the business judgment rule as opposed to the trust standard of
prudent administration. See generally James J. Fishman & Stephen Schwarz, Nonprofit Organizations 61-
65 (1995). For historical background on the two forms, see Marion R. Fremont-Smith, Foundations and
Government 36-43 (1965).

(136.) See supra notes 5-7 and accompanying text.

(137.) See supra note 8 and accompanying text.

(138.) Early 20th-century treatises collect the case law. See, e.g., William C. Dunn, Trusts for Business
Purposes (1922); John H. Sears, Trust Estates as Business Companies (1912); Sydney R. Wrightington,
The Law of Unincorporated Associations and Similar Relations (1916); see also Guy A. Thompson,
Business Trusts as Substitutes for Business Corporations (1920); Edward H. Warren, Corporate
Advantages Without Incorporation (1929).