Legal scholars who care about how law creates wealth and power cannot afford to disregard the trust. As Katharina Pistor mentions in her recent book, The Code of Capital, the trust stands out as one of Anglo-American law’s “most ingenious modules for coding capital.” Trusts are a longstanding component of the “feudal calculus” that Pistor shows us is still “alive and kicking” in our financial regulation. Since their inception in the early eleventh-century in England, trusts have been essential instruments in the great and continuing quest to preserve and protect family wealth.
Trusts have always played a central role because they partition assets, thereby confusing the question of true ownership. That is to say, because trusts divide legal and equitable ownership, the real owner of the assets – the beneficiary – doesn’t have legal title to the assets and the legal owner – the trustee – doesn’t have any real rights to the property. In this way, trusts magically code their managed wealth as obscure and unavailable, without a true owner who can be held accountable for debts and obligations. As Roger Cotterrell pointed out some thirty years ago, “[t]he trust provides a way of freeing the property owner from constraints which the ideology of property otherwise imposes on her or him through its logic.” Accordingly, trusts have helped high-wealth families avoid unwanted taxation, shelter assets from surviving spouses, circumvent all manner of creditors, and protect family fortunes from spendthrift children.
One would think that these legal privileges inherent in the traditional trust form would suffice for the purposes of wealth preservation. One would, however, be wrong. In the past several decades conventional trust codings and protections – strong as they are – have been superseded by new and emerging forms of asset protection. Old trust rules are being rewritten and a new and superior form of feudal calculus is emerging – let’s call it “trust law 2.0”, or “the new feudal calculus.” In the contemporary landscape of trust law 2.0, new trust forms are being dreamed up every day by financial institutions eager for lucrative trust business and these new trusts contravene all the old rules.
For example, one person can now establish a trust, act as trustee, and be the beneficiary – filling all the trust roles at the same time – and still receive asset protection. In addition, the asset protection available with these new trusts is extra-strength. Create a trust and you can protect your assets if a business venture takes a bad turn; you can strip your spouse of marital property, and in some states you can even avoid your child support payments. And as one state after another eliminates the rule against perpetuities, allowing for perpetual trusts, these benefits can last quite literally forever. As competition for trust business ramps up (one Wyoming company now calls itself “the onshore alternative for offshore trusts”), new trust features are dreamed up every day to allow for new combinations of flexibility and asset protection. To market these new products, trust companies have invented a host of novel and catchy names. Dynasty Trusts. Legacy Trusts. Millennium Trusts. Bloodline Trusts. One trust company even boldly markets a trust that promises both control over your assets as well as asset protection, calling it the “Have Your Cake and Eat It Too” Trust (HYCET Trust®) and proclaiming it to be “the trust for today’s times.”
Coding for trusts in this new age both fortifies and extends the characteristics that made trusts attractive in the first place (priority and durability, in Pistor’s framework). New trust coding also highlights the exceptional nature of the trust – that is to say, new coding makes remarkably clear that trusts allow high-wealth families and wealth holders to exempt themselves from the rules of ownership and obligation that govern everyone else. For example, while the majority of people are required to pay their debts, trusts exempt beneficiaries from obligations to “unintended beneficiaries” including the government and family members. Moreover, if a family has sufficient assets, they can take advantage of a roster of wealth management tools that code their assets as exempt from regulation. This is what I’ve called, elsewhere, the law of high-wealth exceptionalism. High-wealth families can create their own private trusts companies, choosing between unregulated or lightly regulated varieties. They can invest through a family office, exempt from certain SEC regulations. Or they can warehouse the family fortune in a family foundation, thereby exempting their assets from significant taxation.
From this perspective, trusts are at the heart of a complex constellation of wealth management codes and strategies designed to maximize wealth, guarantee privacy, and avoid state interference. These codings are part of a brave new world of wealth manipulation and, as Pistor says about other new financial products, had these wealth modules been “coded in earlier centuries, even decades, [they] may have been struck down by the courts” as being against public policy. Pistor also demonstrates that many of these creative, new codes have succeeded because they have been carefully crafted in law offices and corporate conference rooms across the globe, outside of legislative halls and away from public fora.
Trust reform has been bolder. In the trust law story, state legislatures are very much a part of the narrative, acting as major players collaborating with trust companies and banks to pass new trust laws. In 2015, for example, Ohio enacted a Family Trust Company Act, authorizing both licensed and unlicensed private trust companies for high-wealth families. The legislation, which passed by a vote of 84 to 8, was co-authored by a member of BakerHostetler’s Private Wealth Team and celebrated by another law firm that announced: “Families with significant wealth and succession concerns should carefully consider the advantages of OFCTs [Ohio Family Trust Companies] under the new law. This looks to be a game changer!” Law firms and wealth managers benefit from new business, high-wealth families benefit from increasingly liberalized rules, and state legislatures boast that reformed rules attract new business and tax revenue to the state.
Working in favor of legislatures and financial institutions as they radically reform trust law is a phenomenon that Pistor describes perfectly: “[T]hese rules … are so arcane, their passage ruffles few feathers in the day-to-day political process.” Sadly, there is no natural lobby for the rule against perpetuities or any of the other obscure rules that govern trust coding. Consequently, the process appears democratic as these families and their advisors “blend smoothly into the complex give and take of pluralist politics,” according to Jeffrey Winters and Benjamin Page. Nevertheless, as Winters and Page remind us, “their character, focus, and effect is different: it is to advance the basic material interests of the wealthy.”
So what’s a country with aspirations to equal opportunity and democratic fairness to do? Social movements and political candidates have begun to mobilize around the issue of wealth inequality and have initiated global conversations about the ever-increasing wealth gap and its economic as well as sociocultural consequences. In tandem with these kinds of conversations, one of the most important steps in recalibrating the levers of wealth and equality consists in understanding how each piece works in the puzzle of capital coding and high-wealth exceptionalism works and uncovering the hidden legal mechanisms that privilege high-wealth families and corporate entities. Radical restructuring of wealth and power in the United States cannot happen without a thorough understanding of just how biased the legal system is in favor of the ultra-rich and just how deeply entrenched the rules are. Trusts are at the epicenter of this legal bias and their capacity to act as a tool for the ultra-rich should not be underestimated.