How Trust Asset Management Can Help Keep Family Wealth Together — A Case Study on Generational Succession

The past four decades of the Hungarian economy have not only been a story of ‘big players’: alongside multinational companies and the two-tier banking system, the small and medium-sized enterprise sector has written some of the real success stories. Founders who are now of retirement age often built, without any meaningful capital, companies that today form the backbone of the domestic economy and are also significant employers — relying solely on their talent, hard work and willingness to take risks.

Just as this issue is far from indifferent to the founders and their families, it can — without exaggeration — be regarded as a matter of national economic importance: whether a carefully built entrepreneurial fortune can remain intact after the founders’ death, or whether it will be fragmented according to the logic of statutory succession. Trust asset management is one of the most effective legal tools for ensuring that generational succession happens not by chance, but in a planned manner, in line with the founder’s wishes.

Case study: a successful entrepreneur’s dilemma

Take Ferenc Példa, the owner of a mid-sized, successful construction company. Ferenc spent thirty years building a company that today employs more than a hundred people, has a stable client base, and whose team has renovated several of the busiest office buildings in Pest. The business is not merely a source of livelihood — it is the family’s pride, tangible proof of three decades of perseverance.

Ferenc has two children. The elder, Bence, graduated as an economist and has worked at the company for almost a decade since finishing university: first as an office employee, then as a project manager, and today he handles most of the day-to-day operational management. He has substantial industry expertise and — more importantly — a strong sense of commitment. His younger sister, Zsófi, by contrast, is in her third year of medical school: she wants to heal people, not oversee construction projects. She has no wish to be involved in the company, yet she is entitled to — and expects — her share of the inheritance.

This situation is far from unusual — in fact, it is one of the most common dilemmas faced ahead of a generational transition. The question is: how can control of the business be handed over to Bence in a way that also gives Zsófi her rightful share — without the company falling apart, without undermining Bence’s position, and without placing Bence in a position of excessive power over Zsófi?

Inheritance as a ticking time bomb

If Ferenc does not plan ahead, under the Hungarian Civil Code both of his children will inherit in equal shares after his death. At first glance this may seem fair, but in reality it can be problematic.

Half of the company’s business share (üzletrész) would pass to Zsófi. Although Zsófi has no wish to be involved in management, she would be legally entitled to claim dividends, to have a say in major decisions, and to initiate the sale of her share at any time — potentially bringing outside parties into the company. If she has no liquid assets with which to buy her out, Bence could find himself in a difficult position: he might have to take out a loan, make significant concessions to his sister, or even bring in an outside investor.

The situation can become even more complicated if death strikes unexpectedly and the heirs sit down at the table with different advisors and conflicting interests. During a probate process that can drag on for years, the company may lose clients, key employees and market position. Domestic experience with such inheritance disputes is sobering: more than one company worth hundreds of millions of forints has collapsed within a few years after the heirs failed to reach an agreement.

The solution: a rule-based framework set out in a trust asset management agreement

Trust asset management (bizalmi vagyonkezelés) offers precisely this kind of structured solution. The basic concept is as follows: Ferenc (as settlor) transfers, during his own lifetime, the company’s business share and other assets — real estate, savings, an investment portfolio — to a trustee (vagyonkezelő). In a legal sense, the trustee becomes the owner of the assets, but is obliged to manage them according to the terms and objectives set out in the trust agreement, for the benefit of the beneficiaries — Bence and Zsófi.

In the agreement, Ferenc can set out in detail the order, conditions and form in which the assets are to reach the beneficiaries. This flexibility is something that cannot be replicated in a will: even a carefully drafted will takes effect ipso iure — that is, by operation of law — at the moment of the testator’s death, the estate passing to the heir; there is no way to make it conditional on a future event (e.g. reaching the age of majority) or on a condition being met (e.g. obtaining a degree).

How would generational succession work for Ferenc and his family?

● Control of the company stays with Bence. The trust agreement can provide that Bence exercises the management rights attached to the construction company’s business share. The trustee does not interfere in day-to-day operational decisions, but as the legal owner, ensures that the company’s value is preserved and grows over the long term. This keeps Bence’s position stable — neither Zsófi nor any other heir can interfere in business decisions.
● Zsófi receives regular payments — but not a business share. The agreement can specify that Zsófi receives regular payments from the managed assets — for example, during her medical studies and while building her career — or a lump sum once she reaches a certain age. This solution protects Bence from being forced into a buy-out, while giving Zsófi a predictable position that does not depend on how much dividend the company happens to be able to pay at any given time.
● The assets cannot be divided up prematurely. The agreement may provide that neither Bence nor Zsófi can demand the assets placed into trust — in particular the company’s business share — be handed over in kind until specified conditions are met. The trust agreement can even provide that the trustee may not sell the company to a third party for a certain period, or can set a predetermined minimum sale price in advance — thereby preventing the business from leaving the family’s hands below its true value as a result of a potential dispute between the siblings.

Naturally, shaping the legal framework for a generational transition requires numerous further, detailed rules and careful consideration. In this example, we merely wanted to illustrate one of the most important functions of trust asset management: that the deceased’s way of thinking and set of values do not disappear with death. If Ferenc sets out that the company must be preserved, that employees must be protected, and that the generational transition should take place gradually, then Bence’s role within the family business can be preserved, the business can remain within the family’s sphere of interest, and Zsófi, too, can receive predictable financial support.

The asset-protection dimension

Trust asset management also performs another, less frequently mentioned but by no means negligible function: it protects the managed assets from claims that third parties may bring against the beneficiaries.

If Bence, as a private individual, incurs liabilities outside the company, or if he were to get divorced in the future, his creditors would not be able to make claims against the managed assets, thereby providing more effective protection for the family business and the family’s wealth as a whole. The same applies to Zsófi: if a malpractice claim or some other unforeseeable legal risk arises in the course of her medical career, the assets held in trust do not automatically become collateral available to a creditor.

Closing thought

While still in the prime of his life, Ferenc can decide not to leave the fate of his wealth to chance and to the mechanism of statutory succession, but instead to put in place — potentially with his family’s involvement — a trust asset management structure designed to secure long-term operation and the unity of the family wealth. This is one of the most important decisions a successful entrepreneur can make.

Disclaimer: this article is a translation of our original article written in Hungarian, which you can find here.