Regulation of Argentine trusts under the new Civil and Commercial Code

By Javier Canosa TEP, Canosa Abogados (www.canosa.com)

On August 1, 2015, a new civil and commercial code (the “new Code”, Law No. 26.994) will become effective in Argentina which introduces new regulations in connection with trusts in Argentina. The new Code amends existing Argentinian trust law (Law No. 24,441, the "Trust Law").

Trusts are regulated in Chapter 30 of the new Code, which incorporates case law and the suggestions of legal scholars with respect to certain issues of interpretation and application of trust law.

The main additions of the new Code are the following:

• Property that may be held in trust

Pursuant to s1670 of the new Code, the entirety of an individual or company's assets may be held in trust. However, future inheritances cannot be held in trust.

Moreover, security rights cannot be assigned without the credit that they are to guarantee. In other words, interest in secured property cannot be assigned without their secured credit guaranteed, and therefore, they cannot be held in trust. In this sense, s2186 of the new Code establishes that "[…]interest in secured property is accessory to the secured obligation. It is not transferable without the secured obligation, and is terminated with the secured obligation, except when established by law[…]".

• Duty to contract with an insurance company

Section 1685 of the new Code establishes that "notwithstanding [the trustee's] responsibility, the trustee has a duty to purchase insurance against civil liability to cover damage caused by the trust property". This will increase the cost of setting up and managing a trust.

Furthermore, this section provides that when the trustee fails to purchase insurance or when the insurance coverage proves to be inadequate with respect to risk or amounts, the trustee is responsible under the terms of s1757. Therefore, in this case, the trustee is strictly liable for the damage caused by the risk or defect of the assets held in trust.

• The trustee may also be a trust beneficiary

Although the current Trust Law did not expressly establish a prohibition for the trustee to be a trust beneficiary, most experts believed that this prohibition was implied. From August, under s1673 of the new Code, it is expressly established that the trustee can also be a trust beneficiary; in which case, however, he/she must avoid any conflict of interest, and must act for the benefit of the other parties to the trust agreement.

Section 1672 of the new Code provides that the trustee cannot also be a remainder beneficiary.

• Trust-backed obligations – guarantee trust (fideicomiso en garantía)

Section 1680 of the new Code introduces the definition of the guarantee trust or "fideocomiso en garantía" that allows for trust-backed obligations, establishing that if a specified obligation is backed by a trust, the trustee may apply the sums of money constituting the trust property, including sums of money coming from judicial or extrajudicial recovery of claims or rights in trusts, to the payment of the secured obligation.

To conclude, the new Code not only maintains the structure of Law No. 24.441 (the Trust Law) but it also introduces certain improvements and explanations that clarify issues for the correct functioning of trusts.

Sources

• STEP LATAM Forum (entry from Nicolás Malumian TEP)