Can they all be wrong? Are they all right? Whom can we trust when we seek liability protection for our businesses by means of a trust arrangement? The intent of the following article is finally to put to rest any misunderstandings regarding the Pure Irrevocable Business Trust in words that are direct, simple and incapable of being misunderstood.

There are literally hundreds of different kinds of trust. A glance at Black’s Law dictionary confirms the formidable array of equitable trust instruments which have been the subject of litigation in the past. This categorization also suggest to the uninitiated that any trust must follow precise guidelines and must confirm to prescribed patterns, or it can be broken in court. The truth is that although many trusts must conform, the Irrevocable Pure Business Trust need not and should not conform to any specific rule of law for trust, for it is not truly a trust. It is a contract in the form of a trust. This is the great "secret" that has confused and misled so many trust writers in the past.

Two Categories of Trusts

It is helpful to divide trusts into two broad categories, the first being those trust created by privilege, and the second, those which arise as a matter of right. Those trust which are created by privilege are by far the most common. A brief discussion of both types will serve to illustrate the essential difference between the two.

Statutory Trusts

Trusts which are defined in precise terms and which are bound by procedural structure fall into the category of trust in which arise by privilege. In those cases, some deciding authority or agency, whether the I.R.S., the American Law Institutes Committee on Trusts, or some other body or agency, has seen fit to describe and limit a particular kind of trust. "charitable" trust, "family" trust, "grantor" trust, and so on, are describe and limited by the form given them by some committee or agency, which in turn has based its findings upon judiciary conclusions as provided in case law. In Restatement of the Law of Trust we read: "… The sections of the Restatement express the result of a careful analysis of the subject and a thorough examination and discussion for pertinent cases. The accuracy of the statement of law made rest on the authority of the institute. They may be regarded as the product of expert opinion and as the expression of the law by the legal profession."

In other words, the form of a trust normally depended upon prior case law, and the authority of the "law" is based upon opinion. When we think of law, we normally think of statues passed by the legislature , not rules passed by administrative agencies, or opinions of judiciary committees based upon prior case history. The legislature does not directly describe the form a particular trust is to take; But the legislative does have the power to delegate certain powers to other governmental agencies, including the authority to make their own rules. These rules are termed "administrative law" and become law (or the "rule of law") simply by being published in the Federal Register. The trust maker is then forced to choose the form of his trust from among what is offered. When he does so, he is accepting a privilege from (ultimately) the legislature. A privilege, of course, is that which is granted by the good pleasure of the author of that privilege. Privileges can be withdrawn, revised or modified by the grantor of the privilege. The judiciary, on the other hand is faced with what is know as the "Rule of Law," as formidable combination of rules and case law.

Case law can be quite flexible. For every case which points in one direction, there always, seems to be another which points in he opposite one. We may conform as precisely as possible with the "rule of law" in forming a trust, and yet it can still be attacked in court by an opposing attorney. Certainly a traditional trust of this nature can successfully avoid probate court (if you have a good lawyer).

But what about total liability protection? What about privacy and tax reduction? Unfortunately, most trusts fail in this regard. They fail because they compromise the basic principle which lies at the foundation of all trusts, the transfer of direct ownership, which carries with it the consequent transfer of liability. Liability always follows direct ownership. A trust transfers, direct ownership to an artificial body, the "corpus" of the trust. But if that transfer is challenged in court, on the basis of the proper "form" of the trust, then the liability may be removed from the trust, usually to the detriment of some individual.

Contractual Right

The other broad category of trust is that create by contractual right. Privileges can be withdrawn , revised or modified by their giver. But a right is that which incapable of revision or modification, and cannot be statutorily abridged. In Restatement of the law of Trust, which quoted earlier, we read: "A statement of the rules of law relating to the employment of a trust as a device for carrying on business is not with the scope of the Restatement of this subject. Although may of the rules applicable to trusts are applied to business trusts, yet may of the rules are not applied, and their 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"

The American Law Institute’s classic multi-volume study of trust fails even to discuss the irrevocable business trust! Why? They won’t discuss it because it really isn’t a trust, and the rules for trusts just don’t apply to it. In reality, it is a contact in the form of a trust.

As business people, we all want security. We want security for our businesses and we don’t want someone else telling us how to organize or run our businesses. We conduct business by entering into contract. An irrevocable Pure Business Trust permits us to organize our trust upon the principle of contract rather than quasi-legislative privilege. Article I Section 10 of the Constitution provides that; "No state shall… pass… any law impairing the Obligation of Contracts."

That section of the Constitution provides in a nutshell, the sum strength and structure of the Irrevocable Pure Business Trust. Any other position serves only to weaken the essential nature of the business trust. Indeed, the Courts have ruled that: "A pure trust is not so much a trust as a contractual relationship in trust form." (Berry v. McCourt, 204 NE2d 235).

The right to contract is protected, as we have pointed out, by the constitution: "A pure trust is established by contract, and any law or procedure in its operation, denying or obstructing contract rights impairs contract obligation and is, therefore, violates of the United States Constitution." (Smith v. Morse, 2CA 524)

And again… "The right to create the business trust is based on the common-law right to contract by individual establishing it." (Cleason v. MacKay, 134 Mass, 419)

It is very important to construct the business trust such that every officer or party of interest has a contractual relationship to the trust; otherwise, the protection of the contract is lost. The trustees must be appointed and must accept their position by contract. The business manager must be contract in the same manner. Every party in interest must have dome kind of contractual relationship with the business trust. If the trust should ever once partake of the privileges afforded by legislatively granted agencies, then it will compromise the strength of its own position.

Written by Arthur Thomas, Life & Health Insurance Sales, August, 1993