The various States have many different rules governing the manner in which the trustee shall invest the trust property. The subject is largely controlled by legislation setting forth the specific types of securities which the trustee may purchase. Corporate bonds of approved railroads and public utility companies are generally con sidered legal investments and a few of the States permit invest ments in the common stock of reputable corporations. Though mortgages upon real property are permissible investments, real estate as such is commonly considered too speculative and too unconvertible for purchase by the trustee. Two different rules prevail in America concerning the distribution of income of trust estates as between life tenants and remaindermen. When such income is represented by dividends, the rule of some States re quires the payment of cash dividends to the beneficiary, whereas stock dividends are to be held as capital. Other States, however, regard the source of the dividend as the test, holding that all dividends whether in stock or cash accruing from profits earned subsequent to the creation of the trust are payable to the bene ficiary.
Of interest also is the development in America of the institution of the trust as a means for aggregations of capital to carry on business. This development should be distinguished from the monopolistic illegal "trust." The legal trust contemplates contri butions by a number of persons of capital to trustees who, under a declaration of trust executed to them, carry on the business for the benefit of such persons as are beneficiaries. Transferable certificates are issued to the contributors and income from the conduct of the trust is paid to them in the manner of dividends. Since the organization is simply an adaptation of the common law trust no legislative authorization is a condition precedent to the right to carry on business in this manner. The declaration of trust also provides that only the trust property and neither the trustees nor the shareholders are to be individually liable to creditors. The chief distinction between such an organization and a partnership is that the shareholders as beneficiaries cannot con trol the management of the business by the trustees, and if power to manage the business is vested in the shareholders or if they are permitted to appoint and remove trustees at will, the courts treat the organization as a partnership. Though this application of
the trust is not unknown in England (see Smith v. Anderson, 15 Ch. D. 247), conditions peculiar to America have made for its extraordinary growth in the latter country. The device originated in Massachusetts, hence the term "Massachusetts trusts," due to the fact that the laws of that State did not allow corporations to deal in real estate. Experience refined the forms of organization to permit their application to other enterprises, but until late years the device was not generally employed in other States. But when legislation during the beginning of this century sought to impose onerous burdens upon the doing of business in the cor porate form, especially upon corporations of other States, the trust device was generally resorted to in order to avoid these burdens. The business trust thus became a familiar type of organization. It was expressly recognized by legislation in Okla homa in 1919, and since then by a few other States. Some State courts, however, have as yet failed to recognize the possibility of adapting the trust as a form of business organization.
Another adaptation of the trust for business purposes is the voting trust, a device whereby the stock of shareholders is de posited with a trustee for the purpose of controlling the policy of a corporation. The interests of the shareholders are commonly represented by transferable certificates. Though in some States such trusts cannot be employed to control certain types of business, their legality is recognized provided that all shareholders shall be permitted to avail themselves of the trust agreement and provided that its purpose is to benefit all shares alike.
BIBLIOGRAPHY.-American Law Institute, Restatement of Law of Trusts (in preparation) ; Bogert, Law of Trusts (1921) ; Fletcher, Cor porations, vol. 9 (192o) ; Loring, Trustee's Handbook (2d ed. 'goo) ; McKinney, Liabilities of Trustees (2d ed. 1927) ; Perry, Law of Trusts (6th ed. '910 ; Sears, Trust Estates as Business Companies (2d. ed. ig2i) ; Warren, Corporate Advantages without Incorporation (1929) ; Wrightington, Unincorporated Associations and Business Trusts (2d ed. 1923). (J. M. LA.)