Arsboni and BekesPartners are launching a new column called Built on Trust. The choice of title reflects a twofold intention: on the one hand, a significant part of the content will be related to the topic of trusts and family foundations, as this is one of BekesPartners’ core businesses, and on the other hand, we want to build a similar trust in our readers as we do in our relationship with our clients.
Our first article provides a brief insight into the legal concept of trusts, subject to the space limitations of this column.
The separation of ownership from decision-making regarding the use and disposal of the object of ownership is a fundamental element of the modern economy. A common feature of the asset management models and arrangements established in the various national laws is that, under the legal relationship which provides the framework for asset management, one entity transfers the right to dispose of the assets it owns to another entity which, by exercising the decision-making power thus conferred, utilizes the assets entrusted to it in the interests of the transferor or a third party.
Asset management forms
The above possibility can be provided by several legal instruments in Hungarian law. Which form of asset management best suits a given purpose depends primarily on the objectives to be achieved by the party (parties) in the settlor position, the regulatory constraints and the transaction costs. Companies, foundations, trust foundations and trust funds are legal entities, whereas trusts are contractual arrangements, of the accounting and corporate tax status of the assets under management, and have been introduced in the Civil Code as a specific type of contract within the law of obligations.
Thus, when the settlor decides to make use of the assets and, in so doing, decides to use a third party to dispose of them, he can essentially choose from a range of instruments offered by civil law. The fundamental difference between a trust and a company, a foundation and a trust foundation or trust fund is that, while a trust is a contractual arrangement, the former are legal persons created by registration.
Fiduciary asset management
The main function of a trust is to transfer and protect assets across generations, but it can also be used for investment purposes. The essence of trusts is that the owner of the assets, the settlor, transfers ownership of all or part of his assets to a trustee, including the right of disposition, who manages the assets and then, after a period or subject to conditions determined by the settlor, transfers the assets and the benefits accruing therefrom to the person(s) designated by the settlor, the beneficiary(ies). The key figure in the trust relationship is the trustee, whose main duty is to protect and properly manage the assets under trust, whether the trusteeship is commercial or non-commercial.
The disadvantage of trusts is that they do not provide legal personality and thus do not offer the fundamental advantage of legal personality, such as the stable existence and operation independent of changes in the identity of the members, which is facilitated by the conversion of property rights and contractual positions into organisational membership relationships, thus eliminating the instability of the contractual legal construct.
At the same time, the primary advantage of trusts is that they provide the settlor with a highly flexible legal framework for shaping their purpose and content and are therefore distinctly more advantageous and more suitable for achieving specific, personal objectives than the other legal entity instruments listed above. In fact, flexible regulation allows for any formalised or less formalised decision-making mechanism. The objectives, structure, detailed regulation, and operation of a fiduciary relationship can be set within the general limits of contractual freedom, which gives the parties a high degree of flexibility both in the form of the trust and in the objectives pursued by the settlor. With regard to the principle of dispositive regulation in the Civil Code
IN THE DEFINITION OF THE OBJECTIVES OF THE TRUST AND IN THE OPERATION OF THE TRUST, PARTICULAR EMPHASIS IS PLACED ON THE CONTENT OF THE CONTRACTUAL RELATIONSHIP BETWEEN THE PARTIES, WHICH ALLOWS THE TRUST INSTRUMENT TO BE TAILORED ALMOST ENTIRELY TO THE NEEDS OF THE CLIENT.
It is with this in mind that the members of the BekesPartners’ trust administration team and the Sine Qua Non Trust commercial trust administration staff carry out their creative work – there are clients and families where structures with more classical trust administration elements and a more rigorous framework are designed, at the same time, the legal institution also provides scope and opportunity to incorporate the ‘sprezzatura’ approach used by the Neapolitan ‘su misura’ tailors, i.e. to design more flexible and tailored trust structures.
The creation of a trust agreement requires careful and professional preparation, which, in addition to the legal tasks involved, entails the examination and proper management of a number of issues that go beyond the contractual legal framework and require tax planning and economic considerations, in particular with regard to the scope and liability of the trustee(s). In setting up a trust, which is a solution for many situations in life, it is therefore advisable to involve experienced experts who can offer a tailor-made solution, bearing in mind the advantages of the trust instrument and making the best use of it.
The content of this post does not constitute legal or tax advice and does not create an engagement. In each case, detailed knowledge of the individual case is necessary to assess it and to find a tailor-made solution. If you have any questions, please do not hesitate to contact us at http://www.bekespartners.com/.