Long before the United States became an independent nation, people in the British-run colonies of North America brought with them a tradition of creating trusts that permitted the distribution of income or principal to individuals during their lives, with the remainder designated for a charitable organization.
Charitable remainder trusts, the most flexible and generally useful arrangement in modern charitable gift planning, and other tools such as lead trusts and pooled income funds, are a subset of trust law. Trusts are such an important tool in today’s gift planning, some context may be welcomed by readers interested in the deep international roots of modern American trusts.
The early history of trusts and trust-like arrangements is a favorite topic of dispute by scholars. Today we have substantial reference works devoted to the law of trusts, but the concept of “trusts” as the subject of a unified body of law began in the 19th century.1 People used trusts and related arrangements for many centuries before scholars developed a systematic legal framework.
The common practice of creating a trust that provided income for a spouse and/or children for their lives, with the remainder going towards a charitable purpose, was unremarkable. The sole reason that a reference book on trust law published in 1862 gave two examples of trusts that provided life income to surviving family members was to analyze contests over the trust remainders. (The Law of Trusts and Trustees, as Administered in England and America Embracing the Common Law by Joel Tiffany and E.F. Bullard, Albany, NY: W.C. Little, pages 264-266 and 337-339). A subsequent 938-page text on trust law does not even mention life income provisions with a charitable remainder. (A Treatise on the Law of Trusts and Trustees by Jairus Ware Perry, Boston: Little, Brown, 1872)
The absence of attention to the history of charitable life income trusts is frustrating, but understandable: there were no income or estate tax implications for these arrangements, so rules and regulations to prevent self-dealing abuses were not seen as necessary until after the modern U.S. income tax was ratified in 1913.
Trusts that provided life income and charitable remainders have existed for many centuries. Arrangements for holding and administering property “either for the benefit of someone else or to further some particular purpose,”2 including charitable purposes, became available in medieval European countries before the year 1000. A similar Islamic charitable endowment called a waqf was documented in 876.
There is a growing consensus that, while Roman law did not recognize a trust, Roman concepts relating to fiduciaries and executors provided essential elements in the development of charitable trusts in Europe. Legal historians Sir Frederick Pollock and Frederic William Maitland traced the practice of giving land to a clergyman “for the use of the church” to an ancient period “far before the Norman Conquest.”3 As early as the year 825, Maitland “found evidence of conveyances to bishops to the use of churches and monasteries.”4
During the Crusades (1095-1291), an English warrior might travel to distant countries and convey title to a trusted friend to safeguard property for the use of the warrior’s wife and children until his return, or entrust gifts of land or money to a fiduciary for use by a religious institution’s library or infirmary.
The first large-scale application of a recognizable trust arrangement came about through Franciscan missionaries. Fifteen years after the founding of their order in Italy by St. Francis of Assisi, nine Franciscan friars arrived in Dover, England, on September 10, 1224. Barefooted, they walked 16 miles to the city of Canterbury. Sympathetic donors wished to provide the friars with living quarters, a chapel, and land for farming, but strict Franciscan vows of poverty were a challenge, as described by the British legal historian Frederic Maitland:
The rule of their order prescribes the most perfect poverty: they are not to have any wealth at all. They differ from monks. The individual monks can own nothing, but a community of monks, an abbey, a priory, may own land and will often be very rich. On the other hand, friars’ priories are not to have property either individually or collectively. Still, despite this high ideal, it becomes plain that they must have at least some dormitory to sleep in. They have come as missionaries to the towns. The device is adopted of having land conveyed to the borough community to the use of the friars . . . Very soon in various towns in England a good deal of land is held thus.
The creative use of trusts for the Franciscans was widely imitated. In 1225 a wealthy London merchant arranged for Franciscans in London to use land. A house was constructed, for which King Henry III sent timber from Windsor forest. Another contingent of Franciscans moved to the university town of Oxford, where they received a house and garden. All of these properties were owned by trusts managed by cities for the use of the friars.
Between 1225-1230 at least 13 Franciscan communities were founded under the same trust arrangements in places such as Cambridge, York, Lincoln, Salisbury, and Bristol. By the year 1255 there were 49 houses in England with 1,242 friars. In the last half of the 13th century the Franciscans launched a building program to construct churches, dormitories, and libraries, continuing to hold all property, including their books and vestments, in trust.
For the next several hundred years, while maintaining their vows of poverty, the Franciscans received gifts through charitable trusts. These gifts were most often given by subscription (what we would now call annual pledges) by living donors. Many other gifts came through bequests:
The communities received a good deal of property, both financial and otherwise, in legacies. Hundreds of wills are known to have contained gifts to the friars . . . Some of the richer benefactors were buried in the Franciscan churches, no less than 765 tombs having been recorded in the friars’ church in London . . . If the friars accepted a person for burial in their church or cemetery they expected to collect the customary fee and often suggested, or demanded, substantial legacies as well.
If legacies are anything to go by, there is clear evidence that people were glad to leave money to the friars. It is estimated that, of all known wills of Oxford citizens, one third contain bequests to the Friars Minor; and the same would be true of other places.
The Black Plague and the effects of poverty diminished the population of the Franciscans in England. By the time of the Dissolution of the monasteries in 1538 and the dismissal of the friars, all that remained of value in their trusts was the use of real estate, which was soon redirected to other purposes.
Trusts became quite popular in France and England during the Renaissance.
Trusts for the benefit of the church or for the poor were known as charitable uses. In modern law, a use is a trust.
The Statute of Charitable Uses enacted in 1601 under Queen Elizabeth is a profoundly influential statement affirming the rights of charitable donors and is “generally regarded as the starting-point of the modern law of charity.”
The definition of charitable activities in section 501©(3) of the U.S. Internal Revenue Code is derived from the Statute. Robert Bremner begins his valuable list of important dates in American philanthropy with this 1601 statute, and it is the first document contained in Making the Nonprofit Sector in the United States: A Reader.
The Elizabethan statute “was a ‘great gathering act’, bringing under codification a long development and a fruitful national experience in the growth of charitable trusts as instruments of social betterment.”
Like the Tax Reform Act of 1969, the Statute provided a “safe harbor” for certain approved gift arrangements: “The statute exempted charitable gifts from the many technical traps and pitfalls of common law conveyancing, which had earlier been used to thwart charitable gifts.”
The American law of charity is based on the Preamble of the Statute of Charitable Uses, enacted by the English Parliament in 1601 to identify charitable purposes that promoted the general welfare, and to provide a review process to prevent self-dealing through the abuse of trust assets for personal benefits. After listing approved activities (such as “relief of aged, impotent and poor people”) that later became defined as charitable purposes in the laws of Great Britain and the United States, the Preamble pointed out typical abuses by trustees, observing that some charitable trust assets:
… have not been employed according to the charitable intent of the givers and founders thereof, by reason of frauds, breaches of trust, and negligence in those that should pay, deliver and employ the same.5
Jordan notes that the Statute gave donors confidence in the legal foundations of their gift arrangements: the Statute “vastly stimulated constructive and well considered charitable giving by lending full and most formidable protection to the aspirations of donors” who wished to bequeath their assets to permanent endowments for charitable purposes through a trust arrangement.
Until the Tax Reform Act of 1969 compelled the use of unitrust and annuity trust forms of payments, charitable remainder trusts in the U.S. were called life income trusts, because the trusts paid out the actual income earned by the trust principal.
Life income trusts were administered by banks or trust firms whose charter empowered them to do so until 1828, when the Chancery Court of New York State approved a life income trust created in the will of Nicholas Anderson to be administered by St. George’s Episcopal Church, incorporated in lower Manhattan.
Anderson bequeathed $4,000 in trust for the church to invest and to pay the income to his housekeeper for her life, with the remainder to become an endowed fund of the church. The church invested the trust principal in municipal bonds and mortgages that paid the housekeeper the trust income of “at least 6% per year.”
1 Itinera Fiduciae, p. 41.2 “Preface” to Itinera Fiduciae: Trust and Treuhand in Historical Perspective, ed. by Richard Helmholz and Reinhard Zimmerman (Berlin: Duncker & Humblot, 1998), p. 5.
3 Sir Frederick Pollock, The History of English Law before the Time of Edward I, vol. 2 (Cambridge: Cambridge University Press, 1898), page 229; see esp. the extended discussion of the history of trusts and uses on pages 226-39.
4 F.W. Maitland, Equity: A Course of Lectures, revised by John Brunyate (Cambridge: University Press, 1936; reprinted 1969), page 25.
5 Preamble to the Statute of Charitable Uses (1601), quoted by Edith L. Fisch, “American Acceptance of Charitable Trusts,” Notre Dame Law Review, Volume 28, Issue 2 (Feb 1, 1953)