Common Law Trusts and Unincorporated Trusts

What “common law trust” means

The law of trusts grew up in the English courts of equity, so trust principles are often called common law. Today most states have also written much of that law into statutes, such as the Uniform Trust Code or a state probate code. Those statutes generally apply to any express trust, whatever its document calls it. In other words, a trust that calls itself a common law trust is still governed by the state’s trust statutes and court decisions.

Unincorporated and statutory trusts

Most trusts are not incorporated. A trust is a relationship in which a trustee holds property for beneficiaries, and in most states the trust itself is not a separate legal entity. Some states also allow statutory or business trusts that can act more like entities. For example, the Delaware Statutory Trust Act, 12 Del. C. § 3801 and following, governs Delaware statutory trusts. Business trusts are often used in real estate and investment funds.

“Pure trust” and asset-hiding claims

Some promoters sell “pure trusts,” “constitutional trusts” or “unincorporated business organizations” and say they remove property from taxation or lawsuits. In Notice 97-24, the IRS warned about abusive trust arrangements, including some business trusts and family residence trusts, that promise tax benefits while the owner keeps control. It explained that substance, not form, controls for tax purposes, that a sham trust can be disregarded, and that an owner who keeps control is taxed on the trust income under the grantor trust rules. Courts have likewise disregarded trusts as shams where the settlor kept full control and benefit of the property. Read the Theory Review for how courts have treated related claims.

What does change the result

• The trust terms: who controls the property and who can benefit.
• Whether the trust is revocable or irrevocable.
• Whether the settlor is also a beneficiary, which affects creditor rights.
• Proper funding and record-keeping, so the trust is respected as a real arrangement.

Trust law is state law. More than 30 states have adopted versions of the Uniform Trust Code, while others, including California, have their own trust codes. Read your state’s statute, and talk to a licensed estate planning attorney before you sign or fund a trust.

Researching common law trusts and unincorporated trusts in your state

First, find the statute or rule that governs common law trusts and unincorporated trusts where you live. State law controls most of these questions, so the answer can change from one state to the next. Next, read recent decisions from the appellate courts in your state. They show how judges apply the law today. Also, check the local rules of the court that would hear your case. Our state procedures guide links to each state’s official rules. In addition, the Research Center explains how to confirm a source is still good law.

Sources and further reading

Official sources used on this page:

• delcode.delaware.gov

Related reading on Lawtopolis:

• How a Trust Is Created: Formation Requirements
• Revocable vs. Irrevocable Trusts
• Protecting Property in a Trust