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The federal courts are currently divided on how to determine the diversity citizenship of trusts. Several circuits hold that trusts take the citizenship of their trustees. Another circuit holds that trusts take the citizenship of the trust’s beneficiaries, and yet another considers the citizenships of both the trustees and the beneficiaries. But beyond this circuit split, a more significant problem plagues the law in this area: The courts of appeals have failed to recognize the distinction between traditional and business trusts. The former—what is most commonly thought of as a trust—is a gift and estate planning tool. The latter is an alternative to incorporation, and is designed to run a business and generate profit for investors.

In this Note, I examine the differences between traditional and business trusts in the context of federal diversity jurisdiction. After discussing the history of diversity jurisdiction and the nature of these two forms of trusts, I explore the current circuit split over the citizenship rules for trusts. I then propose a new rule that fits within the current Supreme Court case law in the field: Traditional trusts take the citizenship of their trustees, while business trusts take the citizenship of their members—the beneficiaries. Having proposed a rule that depends upon the type of trust at issue, I conclude by explaining that a trust can be classified by determining the primary purpose for which it was organized.

Americans currently hold more than $9 trillion in retirement savings accounts. Those accounts, together with the family home, are the principal source of wealth for most working and retired Americans. But when a retirement accountholder dies prior to exhausting retirement savings, what governs the distribution of the account? Most often, not the accountholder’s will or trust, but a one-page fill-in- the-blanks beneficiary designation form that the accountholder filled out, typically without advice of counsel, when she or he opened the account.

When accountholders fill out beneficiary designation forms, they are focused on starting a new job or beginning to save for retirement, not on estate planning. Yet the accountholder’s beneficiary designations often trump express provisions in a will, trust instrument, prenuptial agreement, or divorce decree—documents prepared with inheritance in mind. Moreover, the accountholder may neglect to change the beneficiary designation to take account of changed life circumstances, causing his or her retirement assets to pass to a beneficiary he or she never would have chosen later in life. To make matters worse, although wills doctrine has developed a set of constructional rules to deal with changes of circumstance, those rules do not generally apply to beneficiary designation forms. The current legal framework often frustrates the intent of the accountholder.

This problem, which has already spawned a significant volume of litigation, will become exponentially worse over the coming decade, as more holders of substantial accounts reach the end of their life expectancy. Reform is critical. The financial intermediaries who currently draft beneficiary designation forms have little incentive to improve them because accountholders and employers are unlikely to choose providers based on the quality of their forms. Federal and state legislation is necessary to ensure that these assets are distributed consistently with accountholders’ intentions.

There are important uses for trusts that are essentially unavailable in China. Family trusts and larger-scale trusts run by private parties for the public interest are extremely rare and face a difficult regulatory environment. While China’s Trust Law itself recognizes a distinction between “civil” and “commercial” trusts, the regulations governing trust businesses recognize no such distinction. These regulations impose conditions that make small-scale family trusts and collective civil trusts almost impossible. It is unclear whether these regulations apply to all trusts, but even if they do not, the narrow view of trusts that they promote limits the usefulness of trusts in other areas. However, these types of trusts could be accommodated by easy reforms revising the regulatory and legal framework to permit and facilitate family and public interest trusts.

This Article investigates why North American businesses typically do not adopt the trust form, other than as a financing vehicle. It examines an episode in Canada in which the trust form became very popular amongst publicly traded businesses. Until 2006, there were significant tax advantages associated with adopting an “income trust” structure. Regardless of the tax motivations for the form, the income trust offered businesses greater flexibility in choosing their governance rules than that offered by the corporate form. Income trusts often took advantage of this flexibility, deviating from mandatory corporate law rules on a number of dimensions. This Article finds that there were positive market reactions to innovations in governance by income trusts. However, once the law changed to remove the tax advantages of income trusts, the form all but ceased to be adopted—despite relatively low costs of adoption. On balance, this Article suggests that innovative trust structures are not especially valuable from a pure governance perspective, though governance innovations may be valuable if combined with tax advantages.