Beefed-up trusts: regulation of trusts under the new Argentine Civil and Commercial Code

Thursday, 05 November 2015
Javier Canosa discusses the regulation of trusts under the new Argentine Civil and Commercial Code.

Key points

What is the issue? On 1 August 2015, the new Argentine Civil and Commercial Code came into effect.

What does it mean for me? The new Code introduces trust regulations and amendments.

What can I take away? Practitioners should inform themselves of the main amendments to the structure of trusts.

Argentina’s Civil Code and Commercial Code contained the principal legislation applicable to citizens in their daily lives, as well as entities and individuals doing business in Argentina. There have been many unsuccessful attempts in the past few decades to unify the two codes. However, on 1 October 2014, Law No.26,994 was enacted, which derogated from both the Civil Code and the Commercial Code, and created a new unified Civil and Commercial Code, which became effective on 1 August 2015.

The new Code introduces regulations in connection with trusts, and amends chapter 30 of the Argentine trust law, Law No.24,441, which was enacted in January 1995.

Amendments to Argentine trust law

Trusts have been the most commonly used vehicle for structuring real estate projects in Argentina over the past 15 years. The new Code introduces some amendments to the structure of trusts. These amendments do not affect trusts’ existence or application, but practitioners, nevertheless, should be aware of them.

The main changes to trust law provided for in the new Code relate to: property that may be held in trust; the duty to contract with an insurance company; trustees; and trust-backed obligations.

Property that may be held in trust

Law No.24,441 established the type of property that may be held in trust. However, s1670 of the new Code amends, and arguably improves, this provision by establishing that the entirety of an individual or company’s assets may be held in trust. However, future inheritances cannot be held in trust.

Moreover, interests in secured property cannot be assigned without their secured credit, and, therefore, they cannot be held in trust. Section 2186 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’. The cost of setting up and managing a trust will considerably increase due to this provision.

Furthermore, s1685 provides that, whenever the trustee fails to purchase insurance or when the insurance cover proves insufficient with respect to risk or amount, the trustee is responsible under the terms of s1757, which refers to strict liability. Therefore, in this case, the trustee is strictly liable for the damage caused by the risk or defect of the assets held in trust.

Trustee may also be a beneficiary

The main aim of every trust and, therefore, the duty of every trustee is to benefit the beneficiaries according to the terms of the trust. The trustee does not benefit from the trust. A trustee holds legal title to the property contained in the trust and has the duty to act in the best interest of the beneficiaries, who hold the equitable title to the trust property.

Although Law No.24,441 did not expressly establish a prohibition on the trustee being a trust beneficiary, most scholars believed this prohibition was implied, the main reason being that there may otherwise have been a conflict of interests between the trustee and the beneficiary. A trustee must act with honesty, good faith and prudence in administering the trust, and must exercise a high degree of loyalty toward the beneficiary, keeping trust assets separate from the trustee’s own assets. A conflict of interest arises whenever the trustee acts in their personal interest, instead of acting in the exclusive interest of the beneficiary.

Section 1673 of the new Code expressly establishes the possibility of the trustee being a trust beneficiary. In such cases, however, the trustee must avoid any conflict of interests and must act for the benefit of the other parties to the trust agreement.

The trustee cannot be a remainder beneficiary

Section 1672 of the new Code provides that the trustee cannot be a remainder beneficiary (fideicomisario). Furthermore, the new Code provides that a remainder beneficiary has the same rights and obligations as a beneficiary. This is fair, in the sense that both the remainder beneficiary and the main beneficiary have equal interests in the trust property. However, unlike other Latin American jurisdictions’ legislation, where both terms are synonymous, in Argentina the terms differ in that the remainder beneficiary is the person to whom the trust assets are assigned exclusively upon termination of the trust.

Trust-backed obligations: guarantee trust (fideicomiso en garantía)

Trusts function as warranties generally. Pursuant to chapter 3 of Law No.24,441, all trusts function as warranties by introducing the concept of ‘separate property’ (patrimonio de afectación). Therefore, although trusts are created for investment or management, the main advantage arising from a trust is the fact that the vehicle is ring-fenced from any collection action by creditors of either the settlor, trustee or beneficiaries.

Section 1680 of the new Code introduces the definition of the guarantee trust or fideicomiso en garantía, which allows for trust-backed obligations; 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.

Other amendments and improvements

Section 1666 of the new Code clearly defines the concept of a trust: ‘A trust agreement shall be created when one party, known as the trustor (also called settlor), transfers or promises to transfer the trust property to another person, known as the trustee’. This means that agreements to create trusts (boleto de fideicomiso) have the same nature as trust agreements that have already been executed, despite the fact that the agreements to create trusts lack trust assets.

In addition, s1688 establishes that the perpetuity period of the trust is 30 years, as from the execution of the agreement. Testamentary trusts are an exception to this rule; the 30-year term begins upon the death of the trustor.

Multiple co-trustees

Section 1674, paragraph 2 expressly establishes that two or more trustees may be appointed to administer the trust property: ‘In the event that more than one trustee is appointed for the purpose of acting simultaneously, the trustees shall be jointly liable for the performance of the obligations arising from the trust.’

Also, s1688 states that, where there are two or more trustees, there will be fiduciary co-ownership. The trustees must act jointly, except as otherwise provided in the trust agreement. None of them is entitled to distribute the trust assets while the trust agreement remains in force.

Fiduciary ownership

Section 73 of Law No.24,441 introduced the concept of fiduciary ownership, defined as ownership arising from the creation of a trust either by agreement or by will. Fiduciary ownership ceases on termination of the trust, for the purpose of delivering the trust property to the beneficiary, as established by the trust agreement or law.

The new Code amends and improves on this concept, establishing that the rules applicable to real property may also be applicable to fiduciary ownership. Moreover, the new Code establishes that the rights of holders of fiduciary ownership may be included in the trust agreement.

Section 1703 of the new Code states: ‘Fiduciary ownership constitutes the exception to the general provisions of ownership, more particularly imperfect ownership, in the sense that the limitations on the rights of owners, which are set forth in the provisions of chapter 30 and 31, may be included in the trust agreement.’

Takeaways for international practitioners

  • The new Code reduces the forced heirship portion in favour of offspring from 80 to 66 per cent.
  • Testamentary trusts in favour of relatives with special needs can now be created with the entire free heirship portion (which increased from 20 to 33 per cent), plus 33 per cent of the forced heirship portion. The trust can be created in Argentina or abroad and can now be established for the duration of the beneficiary’s life (i.e. they are not bound by the 30-year perpetuity period).
  • The general rule with regard to agreements on inheritance rights is still that future inheritance rights cannot be the object of a contract. Nevertheless, contractual agreements in relation to a going concern or participations in companies of any kind, aimed at preserving the integrity of their administration, are valid even when the deceased is not a party to the contract.
  • There are no changes in relation to the recognition of foreign trusts under Argentine law. They are still considered valid if they comply with the formalities required by the place of creation of the trust.
  • Married couples can opt to separate their assets. Before the new Code, the only possibility for married couples was to hold property jointly (they had to share in equal portions any gain obtained during the marriage).

Nicolás Malumián TEP is a Partner at Malumián & Fossati

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Javier Canosa

Javier Canosa TEP is a Partner with Canosa Abogados in Argentina.

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