A trust is a unique legal institution, which offers a sound solution to issues that go hand-in-hand with the accumulation of wealth. The purpose for the blog series is to entice the reader with a basic introduction to this institution, especially by presenting its construct, its personal and material scope, its types, and its guarantees. The second part of the series examined the trust types. By now, the reader will have a stronger grasp of what a trust is, so it’s time to jump into the deep end and discuss those control mechanisms, which serve as a safety net for the settlor and beneficiary.
How do I know, whether the trustee is doing his job properly?
It’s only natural, that when we hand someone something of value, we will be anxious about the state of that item. This anxiety only increases when the value of the item increases, and the entrusted person is unknown. The ability to inspect whether the trustee is performing their obligations according to the agreement is one of the ways in which we may settle our nerves, and for this reason the law requires the trustee to provide information and make available the books at the behest of either the settlor or the beneficiary. Furthermore, upon the expiry of the trust, the trustee is obliged to make available the books for inspection. In those cases, where neither the settlor nor the beneficiary is in the position to inspect the activities of the trustee (due to a lack of time, energy, or professional knowledge), the law provides for the opportunity to mandate a so-called protector, who performs these types of tasks in their stead.
What happens, if the trustee performs their duties in a negligent manner?
The ideological basis for the diligent performance of duties by the trustee is the duty of loyalty. The trustee is obliged to act in the interests of the beneficiary without exception, even at the expense of the trustee’s own interests. The duty of loyalty is a combination of two parts: first, the conflict of interest means that the trustee is barred from acquiring any other gains for their position as a trustee other than those stipulated in the agreement (for example, they may not lease a garage to themselves at a price lower than the market price); second, the trustee is obliged to actively facilitate the interests of the beneficiary, in other words, they are prohibited from neglecting their duties.
While the duty of loyalty answers the question of what is allowed and what is prohibited, the prudential requirements prescribe the required duty of care. The Hungarian laws require a heightened degree of care as compared to the care demonstrated by the trustee in their own business. It goes without saying, that this degree is not a strict standard, therefore a court must determine whether a specific trustee performed their duties in a diligent manner in a specific situation regarding the level of care that they perform their own duties with. Naturally, the actions of the trustee will be influenced by the authority granted to him in the agreement as to whether the duties should be performed in a conservative manner, or whether they are encouraged to invest boldly.
Nevertheless, if the trustee breaches their obligations, then they are liable for the resulting damage, except if the trustee proves that the damage occurred in consequence of unforeseen circumstances beyond their control, and there had been no reasonable cause to take action for preventing or mitigating damage. If the damage caused was intentional, the trustee is liable for all damages. If, however, the damage caused was a result of negligence, then the trustee is only liable for damage caused to the trust fund.
How can the trustee be removed from their position, if we become aware of their incompetence?
Because the settlor and the beneficiary are entitled to inspect the performance of the trustee, it quickly become obvious, if the trustee is incompetent or unwilling to perform the duties stipulated in the agreement. The law permits the settlor to remove the trustee from their position, and to mandate a new trustee in their stead, or if this is not an option, then the trust can be unilaterally terminated. Due to its nature, a trust often survives the death of the settlor, which makes the aforementioned solution an impossibility. In such a scenario, the beneficiary can request the court to remove the trustee and replace them with a new trustee.
Can we recover an asset, if it has been sold by a trustee through a breach of contract?
The trustee is, on the one hand, obliged to perform according to the agreement, while on the other hand, to always perform according to the best interest of the beneficiary. There are circumstances, however, when – by breaching either of these conditions – the trustee transfers or burdens the asset. In this case, the settlor and the beneficiary receive rights in rem alongside the rights in personam (the right to claim damages from the trustee for damage caused), and in doing so, the settlor is entitled to claim the asset from the spouse or life partner of the trustee, the trustee’s personal creditors or creditors of other trust funds, as well as any third person, who did not attain the asset in good faith and/or for countervalue. The asset may only be recovered from a third person, who had not attained it in good faith and/or for countervalue, otherwise the third person is entitled to own the asset, and the settlor or beneficiary may only claim damages through rights in personam through the trustee. If the asset is successfully recovered, neither the settlor nor the beneficiary gains ownership, but rather it is returned to the trust fund.
Can the creditors of the trustee ascertain the assets in the trust fund?
As discussed earlier, a trust creates a unique legal situation, in which the trustee is the owner of the trust fund, yet their rights are not unrestricted. This means that the trustee is entitled to manage the trust fund between the limitations erected by the beneficiary’s interests and that the trustee’s personal creditors have no right to demand recompense through the trust fund, as it embodies a separate entity from the other possessions of the trustee. This restriction includes those cases, where the liquidation procedure, the enforcement procedure, or succession procedure is initiated regarding the trustee, since all of these exclude the trust fund. If the asset is transferred to a third person in the aforementioned instances, then the settlor or the beneficiary may reclaim the asset.
The reader has had the opportunity to become more closely acquainted with the more important aspects of a trust, and now has sufficient knowledge to realize that such a three-dimensional legal institution is worth taking advantage of, irrelevant of the goal. Although more pieces on the topic are to follow, it would be advantageous to run to your closest and most trusted professionals to establish your own special, individual trust.
In case of question please contact:
Dr. Balázs Békés