EW JOURNAL

In the Michaelmas term of 1472 a fiction was argued before the Court of Common Pleas at Westminster, and every party to it knew it was a fiction. A landowner bound by an entail wished to sell; the law said he could not. So he conveyed the land to a lawyer acting for him, who was then sued for it by a third man acting for the purchaser, and the lawyer, when called upon to defend the title, declined to appear. Judgment went against him by default. The land passed to the demandant free of every restriction that had bound it, the entail evaporated, and the heirs whom the deed had been written to protect were left with a theoretical claim against a lawyer who had no assets and had never owned the estate in the first place. The procedure was called a common recovery, the case is remembered as Taltarum’s Case, and for the following three and a half centuries this collusive nonsense was among the most important instruments in English property law.

The thing it was designed to defeat deserves a proper description first, since the defeat turns out to be more interesting than the device.

Parliament had created the fee tail in 1285, in the statute De Donis Conditionalibus, and the thing it created was an estate that descended to the heirs of the body and could not be alienated away from them. A man holding land in tail held it for his life and held it for a line of descent. He could occupy the land, farm it, and be buried on it; selling it was the one thing the law would never let him do. The point of the arrangement, as every settlor understood, was to bind not the present holder but every holder after him, guarding against a descendant the ancestor had never met but could already distrust: a spendthrift, a gambler, or someone talked into the wrong scheme by the wrong friend. Later English conveyancers refined this into the strict settlement, in which the head of the family held only a life interest, the remainder was tied up for the eldest son, and the son on coming of age was persuaded (the documents always found a gentler word for it) to resettle the whole arrangement upon his own unborn heir. The estate passed down a family for two hundred years, and at no single moment in those two hundred years was there anybody alive who could sell it.

German-speaking Europe had its own version, and gave it a heavier name: the Fideikommiss bound estates across Austria and the German lands to an unbroken line of inheritance, fixed by family statute instead of common-law fiction. English lawyers reached for judges and collusive lawsuits; the continental families simply legislated themselves into permanence, a blunter tool aimed at the same target.

Somewhere in the middle of such a structure stands the man the documents never quite describe. He inherits a great house, the park around it, the farms beyond the park, and the mortgages attached to all of them, and he possesses, by any strict legal reckoning, almost nothing he could convert to cash outright. His creditors tended to work this out before he did. He lived at a scale his cash flow could not support, borrowed against an expectation he could not pledge, and discovered that the family’s protection was constructed in such a way that it could not be relaxed for his benefit by anyone, himself included. Possession and ownership had come apart for him in a way the law never bothered to name, and the gap between them was where he spent his life.

Whether the whole edifice ever held is the question the common recovery answers, and the answer is that it held about as well as any arrangement that depends on nobody minding very much. The courts could have refused to entertain a suit in which the defendant deliberately lost. They declined to refuse it for three hundred and sixty years, which tells us something about how the legal establishment actually regarded perpetual restraints on land: theoretically admirable, practically intolerable, and best circumvented by a procedure so obviously artificial that nobody needed to pretend it was anything else. The Fines and Recoveries Act of 1833 finally swept away the fiction and gave the tenant in tail a direct statutory power to bar the entail, which read more as an admission than a liberalisation. Chancery had meanwhile developed its own boundary in the Duke of Norfolk’s Case of 1682, the rule against perpetuities, which fixed a horizon beyond which a settlor’s intentions simply ceased to bind. A dead man might govern his property for a generation or so past his death. He could not govern it forever.

That was the settled English position for three centuries, and it has been quietly dismantled in our own lifetimes, in a jurisdiction that never had an aristocracy to worry about. South Dakota repealed its rule against perpetuities in 1983, and Alaska, Delaware and Nevada competed on similar terms; the perpetual trust, the thing Chancery spent four hundred years declaring impossible, is now a product with a brochure. The competition among these jurisdictions has its own scoreboard now, published and updated like a golf leaderboard: South Dakota typically ranked first, with Nevada and Alaska close behind and Delaware, despite its head start, well down the table. Nevada set itself apart further still, permitting a trust to run for three hundred and sixty-five years exactly, a number presumably chosen for the pleasure of choosing it, not for any legal necessity. States compete for this business because administering trusts is a fee-generating industry in its own right, and a state with no income tax and favourable trust law can attract capital that never physically arrives and never needs to. Reporting on the Pandora Papers put customer assets in South Dakota trusts at something in the region of 360 billion dollars, quadrupled over a decade. Whether that figure captures the whole industry I do not know; the nature of the instrument is that nobody outside it is quite counting.

Present-day arrangements reach for a duller vocabulary, though the architecture underneath is one any eighteenth-century settlement would recognise instantly. Discretionary trusts, private foundations, closely held companies, shareholder pacts laced with transfer restrictions: a beneficiary can live very well while owning, in the operative legal sense, almost nothing outright. Distributions arrive when a trustee decides they arrive, and a right that depends on someone else’s discretion is a right no bank will lend against. The label on this arrangement is asset protection, which is honest enough, provided one asks the second question: protection against whom. The paperwork says creditors, which is true as far as it goes: the structure most reliably defends the money against the future version of the person who is going to inherit it, his debts, his divorces, his enthusiasms, and nobody sits him down to explain this part of the deal when he signs it.

Arithmetic bites hardest here, and in a direction the marketing literature never discusses. Every layer inserted between a person and what he owns makes that wealth more durable and the owning thinner, and thinness has a price that is measurable. An asset that cannot be sold cannot be pledged; an interest that cannot be pledged cannot be borrowed against; and a beneficiary facing a liquidity need that the trustee declines to meet is, for that afternoon, a poor man living in a large house. Corporate finance prices this routinely as an illiquidity discount, and the discount is a real, measurable one: restricted holdings trade below freely transferable ones, and the gap widens exactly when cash is scarce and buyers are few. The structure that makes a fortune permanent is the same structure that guarantees it will be least available in the year it is most needed. Both halves of that sentence are consequences of the same clause. The documents celebrate the first and are silent on the second: an ordinary enough choice, since these instruments have always been written for the family. The individual holder was never really the point.

At sufficient scale the direction of ownership reverses without anybody noticing the moment. The family ceases to hold the structure and the structure begins to hold the family, allocating, permitting, declining, outliving its settlor and eventually its purpose. A fortune turns durable exactly when it stops belonging to anyone in particular, and there is something almost touching in the confidence of the ancestor who arranges this, since he is betting that trustees not yet appointed will serve a family not yet born better than the family would serve itself. He may be right. He usually is, in the aggregate.

What the entail could never explain to the heir, and the trust deed still cannot, is that he has been protected by being partially dispossessed.