the trust

a very special contract 

A trust is a private contract by which a person transfers property or rights to another person “he trusts”, to control and manage this property or these rights for the benefit of others, usually relatives or close friends.

Its first historical precedent is found in the Roman “fiducia”, causing it to be known as a “fiduciary relationship”. However, it is in the Middle Ages and in English Law, where it acquires its main current features.

At that time, it was common for knights who went to wars and crusades, to transfer their properties to a friend or trusted man called “trustee”, to manage them for the benefit of the former’s wife and minor children, who in those times could not exercise the rights of property directly. Normally, instructions were also given on how to proceed in case of the knight’s death.

Repeated abuses and depredations incurred by these “trustees” induced the Court of Chancery, which was the court of justice at the time, to develop a set of rules to ensure compliance with these particular relationships, which were named Trusts. It is at this point that they get full legal validity.

structure of a trust

Let us look more closely at the figures involved in this particular contract:

Settlor: the person who originally owns the property and decides to transfer it.

Trustee: A person or entity responsible for managing the property.

Beneficiary: the person(s) designated to receive the profits of the property, and on expiration of the contract, the property itself.

Assets: the property or properties under the contract.

Trust deed: the private agreement which sets out the conditions to be met by the trustee.

Protector or appointor: an optional figure that can be designated to supervise the trustee or can even be given the power to substitute him by another if necessary. Normally, the protector is a person trusted by the settlor.

legal vs. beneficial ownership

The key to understand the functioning of the Trust is to be found in the English “Common Law” interpretation of property rights. Common Law recognizes two different ways to exercise ownership. On one hand there is a legal ownership or legal estate, i.e. who “legally owns” the property. On the other hand, there is the so-called beneficial ownership or equitable estate, which could be defined as the right to use and enjoy. This confers certain rights on the property to a person other than the legal owner.

This produces a complex situation in which the trustee is the legal owner of the property, but does not have complete control or dominion over it, as he has a personal obligation to the beneficiaries. These have a right to receive the property at the time that is stipulated in the trust deed, and in some cases, to use it and enjoy it for the duration of the contract, and before it is resolved.

For instance, if the contract is a real estate property, such as a house, the trustee is registered as legal owner on the Deed of Sale. His dominion over the house, however, is not complete, as he will have the legal obligation to transfer it to beneficiaries at the moment that has been previously established. On the other hand, the beneficiaries, if it has been agreed on this way, could have the right to enjoy the house, for example, to live there.

This type of legal situation is regulated and accepted naturally by English Common Law. This is mainly for historical reasons. In the Anglo-Saxon tradition, the only absolute owner of the land was the king, who gave his vassals the use and enjoyment of the same and the power to dedicate it to different purposes. The ultimate owner was still the king, while his vassals were converted into mere “tenants” of the land. So, the distinction between legal and beneficial ownership was already made in the Middle Ages, as we mentioned earlier.

That is why the Trust is a legal concept closely linked to Common Law and is accepted in most countries of Anglo-Saxon tradition, such as the United States or the countries of the Commonwealth of Nations, which are former British colonies. On the contrary, it is absent in almost all states that base their legal systems in the so-called Civil Code or Continental Law, i.e., many European nations or countries with colonial influence of the continental powers like France, Portugal or Spain.

The Civil Code refers to the right of property as an absolute, exclusive, definitive, and therefore considers it as indivisible. There is only one type of property: something does or does not belong to us. There is no middle ground. It is this concept of dual ownership, accepted only by Common Law, which makes the Trust an extremely versatile instrument with many possibilities and applications in the private sector, such as finance and trade.

main uses of the trust

Different types of Trusts are used to serve the most varied purposes. To mention some examples, they can be used in the business world to co-invest, to group the shares of small shareholders, so they can exercise their right to vote at a meeting of shareholders, to manage private investment in public office and avoid conflict of interest, or to ensure the proper performance of a major transaction. This latter type is known by the name of “escrow”, and its use has become popular lately because it is being used to secure payments and transactions on the Internet.

In private life, they are often used as an alternative or supplement to a will (Testamentary Trusts or “Mortis Causa”) or to manage different private and family interests. The latter is done through so-called Living Trusts or “Inter Vivos”, which can take many different forms.

In recent decades the so-called Offshore Trust, which derives its name because it is incorporated in a tax haven or offshore jurisdiction, has grown popular. It is used mainly for tax relief and tax planning, but often also to protect personal and family assets from potential creditors or plaintiffs (for various reasons such as divorce, labor disputes, civil suits, etc.).

Some offshore jurisdictions have enacted strict laws especially favorable to endow Trusts constituted on their territory with greater protection and legal certainty. However, their use by citizens living in countries with Civil Law codes has not been without its difficulties.

Although it is established abroad, the Trust usually manages assets and rights that are located in the country of residence of the settlor or the beneficiaries. Therefore, it will also have legal and tax implications in that country. The lack of recognition of the trust by the law of the country in which the economic interests are located, and the different interpretation of property rights, can lead to serious legal problems.

These occur especially in taxation, those related to the transfer of assets (especially real estate property) or in the course of lawsuits or claims for any other reason. In this case, court decisions, due to the lack of applicable law, are often unpredictable and unfavorable.

Trying to offer a solution to these problems, on July 1st, 1985, the “Convention on the law applicable to trusts and on their recognition” was presented in The Hague. This treaty finally came into force on January 1st, 1992, but there have been very few countries that have ratified it to date. Apart from the Netherlands and Luxembourg, Italy, and most recently in 1997, Switzerland.

Outside the treaty, there are currently only three European countries under Civil Law that not only recognize the Trust, but have included it in their legistlation. Apart from The Netherlands, which allows the constitution of a very limited version, the other two cases involve tax havens.

On one hand Monaco recognizes it provided it has been created outside of its borders and even allows its creation within the Principality, when people who do so are citizens of countries which in turn permit it too. This means that only citizens of Common Wealth countries can do so. The Principality of Liechtenstein is the only Civil Law jurisdiction in Europe, which fully accepts it in its legal system and also permits its constitution without limitations.

On the other hand, several Latin American countries have introduced in their legislation a figure that closely resembles the Trust. This is the “fideicomiso”. However, as it is typical in Civil Law jurisdictions, the fideicomiso is much more limited in its applications.
This is because the Law does not recognize the existence of the “double property” typical in Common Law which we commented on previously. For this reason its use is generally limited to business, especially for the lodging of guarantees for different types of transactions.

But if there is a legal entity fairly similar in Continental Law, it is undoubtedly the so-called Private Interest Foundation. The best known are Panama’s and Liechtenstein’s, but there are also variants with more or less restrictions in various European and Caribbean countries, or even in Belize or the Seychelles. These foundations can be used very efficiently for tax planning and asset protection. They can even perform similar functions to a trust.

It is noteworthy however that its unique versatility and flexibility makes the Anglo-Saxon Trust an extraordinary tool for managing both corporate and private interests, thus being a unique legal and economic figure in the world.

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