In the year 2019 many exciting new opportunities opened up due to the changes in the rules regarding the private foundations, especially the modifications in connection with the personal income tax on income stemming from such foundations, and the passing of a new law, which allows the granting of trust foundations. Due to these changes, we prepared a series of articles summing up the trust foundations in the light of both civil-, and tax law. The first part of this series will focus on the past and present of the foundations, trusts, and the trust foundations in the civil law environment.
When the Act V of 2013 on the Civil Code (hereinafter: new Civil Code) took effect, the foundations’ legal environment changed drastically. Based on the previous rules only public foundations were grantable, since a key condition was that the foundation had a lasting public aim. The new Civil Code however did not and does not contain such condition, it only requires a lasting aim, which opened up the opportunity to grant private foundations, taking the first step towards the liberalization of the foundation rules. After the modification, it was possible for example to grant a foundation to finance a person’s studies, something that earlier was –due to the lack of public aim– unimaginable. The foundations assets are granted by the founder, the value of which is determined in the founder’s resolution. This means that much like the companies, the foundations too have their assets separated from the founders, managed by the foundation for the lasting aim.
The trusts and their international traditions
One other reformation the new Civil Code had is the ability to grant trusts, which was something absolutely new on the Hungarian financial market and was created based on both the English trust and the German Treuhand and while the Hungarian trust took elements from both of these models, it mainly follows the German Treuhand’s. The Hungarian trust is a three-party legal relationship, where the principle transfers the managed assets into the fiduciary’s property, who then manages the managed assets on the behalf of the beneficiary, named by the principal. The term “property” should not be understanded in its general sense however, since it means an ownership that is limited in time. This ownership means every right that comes with the general ownership and property, but it only stands for the duration of the trust, which can be determined in the fiduciary agreement, or can be left undetermined. Even if it is undetermined however, it cannot be longer than 50 years, while the same goes if it is determined in a longer period than 50 years, viz. that it ceases to exist after that.
The two reforms mentioned above shook the financial market up a bit, in a good sense and although its’ reaction was a bit slow in the beginning, now many firms offer them as services. This ecosystem containing the foundations, trust and companies theoretically covered the needs of the financial market, although not every institution in connection with the trusts were lifted from the regimes that served as examples.
Such institution is a form of the English trust, which contains the conceptual elements of the Hungarian trust and foundation, a so-called private purpose trust. In this institution the principal gives the managed assets to manage to the fiduciary, however it is not managed for the beneficiary but rather for a purpose, an aim. This aim is quite similar to the lasting aim that is the condition to grant a foundation. This kind trust however is historically limited to public aims with a few exceptions. Such exception is for example in the Caymans the so-called STAR, as in special trust, which is of great popularity. István Sándor writes in the Fiduciary agreements and Trusts that the main characteristic of the hypermodern trusts are the protection of the managed assets from the creditors, which means that neither the fiduciary’s, nor the principal’s creditors cannot lead enforcements on the managed assets. In the case of the “STAR”, since there are no beneficiaries, the beneficiaries’ creditors cannot either.
The trust foundation
In this legal environment in the spring of 2019 a new law was passed, the Act XIII. of 2019 on the trust foundations (hereinafter: TF Act.) To summarize, a trust foundation is a special foundation, which is allowed to manage assets as a trust. On first look the definition is not striking, but one should look deeper into its meaning. The new Civil Code excludes the financial aims when talking about the foundations’ lasting aims, while the trusts main goal is to accumulate assets, or at least to preserve it. This means that the trust foundations are allowed to pursue financial activities in relation the managed assets, as per the provisions of the TF Act. It is also important to highlight the part of the definition, where it says that the trust foundation is a special form of the foundation, meaning that it is not a special form of the trusts, and although the rules of the trusts concern them in a modified way, the main difference does not stem from it. The trust foundation takes inspiration from the German-continental law, rather than from the English. This form of the trusts is used in Austria and Germany to keep the large family fortunes together.
Based on the provisions of the TF Act. the trust foundation is also appropriate for such; however, the asset minimum is 600 million Forints, meaning that it is a legitimate option only with truly large fortunes. Furthermore, a curatorial is also necessary to establish, which contains five natural persons, and acts as management. The establishment of a supervisory board is also compulsory, and to mandate an auditor, which further rise the costs of it operation.
The surplus that is achieved while the asset management is useable for the lasting aim that is determined in the founder’s resolution, while the foundation can also give allowances to the beneficiary, or beneficiaries. It is important to note that the beneficiary in the foundation terminology does not mean the same thing as it does in the trusts’. The foundations’ beneficiary is a person that is determined in the founder’s resolution as a person, to which allowances can be given against the foundation’s assets, while the trusts’ beneficiary is the person on behalf of which the asset management is carried out. As such it is important to clarify that the abovementioned allowance can be given to the foundation’s beneficiary, not the trust’s beneficiary. It is due to the fact that the beneficiary in the trust foundation is the foundation itself, based on the provisions of the TF Act. As per the provisions of the new Civil Code, the naming of the foundation’s beneficiaries is not compulsory, it is only an option. So it is possible to grant a foundation that is similar to the aforementioned STAR, which is eligible to manage assets as a trust, and where the beneficiary is rather an aim, than a person, one, which can be either private or public.
The trust foundation, as it seems from the above, is a quite interesting new legal institution. It is true, that due to its form as a foundation the operational costs are large, but it is exactly this form, that opens new opportunities. The question remains that how the domestic financial market will adapt this new institution, but if we have to predict something based on the neighboring countries, its popularity will be unquestionable.
If you have any further questions regarding the trust foundations, please do not hesitate to contact our collegues and experts!
In case of question please contact:
Dr. Balázs Békés
Dr. Levente Takács