New ground for the trust concept

Sunday, 01 December 2013
Hungary has recently introduced trusts to its Civil Code. Dr Ákos Menyhei reviews the new legislation.

Hungary has not yet ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition. However, the Hungarian International Private Law Act recognises trusts as a foreign legal solution and states that foreign regulations should be applied in legal disputes where there is no domestic (Hungarian) solution. There is as yet no case law on the recognition of foreign trusts in Hungary, and if there were it would have no bearing on other cases; nevertheless, some Hungarian lawyers use foreign trusts as participation owners in company structures. Whether trusts will be recognised in real estate ownership registration is also unclear. To avoid this uncertainty, practitioners register a holding company owned by the trust, and then acquire the real estate through the holding company.

The new trust legislation

In March 2013, the Hungarian Parliament passed legislation that seeks to incorporate the trust concept into the legal system. This trust regime forms part of the new Hungarian Civil Code, and will come into force from 15 March 2014. The incorporation of this legislation has created opportunities to use trusts for estate planning and asset protection purposes. The main features of the trust framework are summarised below.


Creation of the trust

The creation of the trust follows the usual rules. The framework requires a written trust deed – there is no distinction between the trust deed and trust settlement – which should include details on the appointment of the trustee, the identification of the settlor, the description of the managed assets and the ownership transfer. The purpose of the trust is that legal ownership of the assets is transferred to the trustee for the benefit of the beneficiaries.

The settlor must determine the identity of the beneficiaries, and the conditions of the start and end of the beneficiaries’ entitlement. A beneficiary may be described by reference to the class of the beneficiaries; this allows the trustee to define the proportion of the beneficiaries and creates the opportunity to set up discretionary trusts.

The settlor may appoint the beneficiary, or the class of beneficiaries, and determine conditions for the distribution of the managed assets. The settlor may also require the managed assets to be transferred back to the settlor, to the settlor’s heirs or to a third person wholly or partially on the occurrence of any specified conditions, or after a specified period of time. The trustee cannot be appointed as a beneficiary, but the settlor and the trustee may be the same person – although in this case the trust must be created by irrevocable statement of the settlor registered in a public document. Creating a testamentary trust is possible, but acceptance of the appointment by the trustee is required. The trust may be created for a definite or indefinite period of time, up to a maximum of 50 years.

The trust assets

To ensure legal certainty for the managed assets, strict rules apply for the separation of the managed assets from the trustee’s own assets. The rules ensure that the managed assets are separate from the trustee’s personal assets and any other assets managed by the trustee.

The rules protecting the managed assets are clear, and aim to provide a legal guarantee for complete asset separation. The trustee’s spouse, registered partner and creditors, and the creditors of any other assets managed by the trustee, cannot lay any claim against the assets held in the trust as it is legal title of the managed assets that rests with the trustee, not economic ownership.

The beneficiary may ask the trustee to distribute the managed assets and the income in accordance with the trust deed. The beneficiary’s creditors may enforce claims against the trust assets only after the due date of capital or income distribution to the beneficiary.

The beneficiaries and the settlor are not allowed to give any instructions to the trustee, creating a clear separation between the settlor’s and the beneficiary’s assets from a management and administration perspective. Nevertheless, the settlor and the beneficiary may control the activity of the trustee in respect of the trust.

The trustee is obliged to protect the managed assets from predictable immediate risks in compliance with commercial rationality. Moreover, in accordance with the fiduciary requirements of the trust, the trustee must act primarily for the benefit of the beneficiary’s interests. The trustee is liable for damages to the managed assets when this is caused by breaching the obligations towards the settlor or the beneficiary, according to the general rules of liability for damages. Rules regarding the liability of the trustee towards third persons are also included in the Civil Code.

The trust framework gives wide scope to the trustee to dispose of the managed assets, subject to the trustee’s obligation to dispose of the assets in accordance with the trust deed. The framework includes rules protecting the interests of the settlor and beneficiary against any breach by the trustee of their obligations.

Confidentiality and record-keeping

Trustees are required to keep confidential all information acquired in connection with the trust. This obligation is independent from the establishment of the trust and exists after termination of the trust.

Rules relating to accounting and record-keeping are also included in the Civil Code. These rules protect the interests of the settlor and beneficiary by obliging the trustee to inform the settlor and the beneficiary about the managed assets upon their request, providing information about the actual and expected enrichment of the managed assets, the properties and value of those assets, and any commitments in connection with them.

Appointment of trustees

The settlor may appoint more than one trustee. In the case of joint trustees, their liability is joint and several for decisions adopted jointly. The settlor retains control of the trust during their lifetime; they are entitled to recall the trustee by appointing another trustee. However, if the settlor dies or its corporate existence is terminated and the managed assets have no other settlor, the court is entitled to recall the trustee upon the request of the beneficiary by appointing another trustee, but only if the trustee has breached the trust deed seriously. If the beneficiaries exercise this right jointly, the court is able to decide whether to terminate the trust, or appoint new trustees, or both, on request of any of the beneficiaries. If all the beneficiaries object to the person the court suggests is appointed, the person will not be appointed trustee.

Termination

The trust will be deemed terminated if the managed assets run out, if the expiration time passes or if the trustee terminates the trust giving a three-month notice period. In the latter case, the trust is deemed to be terminated only if the managed assets have no trustee for more than three months, or if the settlor dies and was the sole beneficiary. The trust does not expire if the settlor becomes the successor of the trustee, if the settlor dies, or if the corporate existence of the settlor, trustee or beneficiary is terminated.

In the case of termination of the trust, the trustee is obliged to inform the settlor and then provide accounting of the managed assets. If the termination of the trust endangers the managed assets, the trustee must take necessary measures to protect the assets.

After termination of the trust the trustee must transfer the managed assets, together with their obligations, to the new trustee appointed by the settlor or, in the absence of a trustee, to the settlor. Where there is more than one settlor, the settlors are entitled to distribution of the assets in proportion to their original contribution, and they are liable in the same proportion for the obligations of the managed assets.

Fees

Last, the new legislation includes rules securing the trustee’s fee, as long as the trustee is entitled to satisfy the claims for fees or justified costs directly from the trust assets. The trustee may claim reasonable remuneration and costs, even if it carries out its activity free of charge. 

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Dr Ákos Menyhei

Dr Ákos Menyhei TEP is Managing partner of H&M Trust LLC and Senior partner of H&M Legal – Hajdu and Menyhei Attorneys at Law.

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