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 current blog will deal with the main types of trust.
Trusts have an array of unique characteristics originating from their nature. There are numerous differences between trusts according to the trust fund, the purpose of the trust, the status of the settlor, or the beneficiary, or other important aspects.
The trusts can be categorized in the following ways based on Act V of 2013 of the Civil Code of Hungary and Act XV of 2014 on Fiduciary Managers and on the Regulations Governing their Activities:
The trust can be established in multiple ways based on the primary purpose of the trust. The Civil Code offers two options:
1, Trust established through a contract
2, Trust established through a unilateral transaction
The trust established through a contract is an agreement created through the settlor and the trustee(s), according to the provisions found in the Civil Code on personal service contracts, in which the contracting parties determine the purpose of the trust; define the assets that will be included in the trust fund; and name the beneficiaries, potential protector, and – if necessary – the successor of the settlor. The duration of the trust; the potential conditions of termination; the manners of cessation; as well as the allocation of assets and yields is also stipulated in the agreement.
The trust established through a unilateral transaction has two main types. The first is when the settlor and the trustee are the same person, while the second is when the trust is established through a will. On both occasions, the provisions on trusts must be adhered to, and the transaction must be incorporated in a notarial deed. If the settlor and the trustee are the same person, then – according to the restricting provisions on beneficiaries – the only beneficiary of such a trust cannot be the settlor.
If the trust is established through a will, then the will stipulates the most important provisions on the trust. The trust enters into force with the death of the settlor, and with naming of the trustee and the acceptance declaration by the trustee in a notarial deed.
The status of the trustee can be divided into two categories according to Act XV of 2014, based on the framework laid out in the Civil Code. The trust may be:
The differentiation does not result in a mismatch in the rights and obligations stipulated in the Civil Code, although from the point of view of the trustee, the professional and non-professional trust does present a sharp distinction between the technical establishment and issues on guarantee for the trust.
Professional trusts occur, if a financial institution registered at the Hungarian National Bank (MNB) establishes multiple trusts with multiple settlors. The establishment of a professional trustee (or fiduciary asset management company) has certain personal and material conditions, which must be registered at the Hungarian National Bank. The main operational conditions according to the legal provisions are the following:
- provisions concerning a good business repute, clean criminal record, and no conflict of interest for chief executives and employees
- employment of a legal advisor, economist, and independent accountant
- establishment of financial security for 20% of the trust fund, or a minimum of 70 million and a maximum of 1,5 billion HUF
- continuous guarantee of at least 70 million HUF equity
- proper administrational system for the registry and surveillance of the trust and the activities of the trustee
- existence of necessary regulations for operation
- operational website, and mandatory display of transparent information on operations
The list of fiduciary asset management companies found in the registry must be published on the website of the Hungarian National Bank. The surveillance activities on fiduciary asset management companies of the Hungarian National bank extends to the registration, the evaluation of existence of personal and material conditions for the registration. In other words, the Hungarian National Bank does not monitor closely the activities of the fiduciary asset management company, nor are the companies obliged to file reports.
The Hungarian National Bank does not keep a registry on the individual trusts that the fiduciary asset management company is engaged in because it is the company itself that is required to keep such a registry.
A non-professional trust exists when a settlor mandates someone they trust to manage their separated assets. The non-professional trustee may be natural or a legal persons. There are no significant legal criteria for such a trust, and the settlor is responsible for all risks regarding their business partner (i.e. the person they entrust with their assets). The fiduciary management contracts are valid, if they are concluded in a notarial deed or are countersigned by a lawyer. The Hungarian National Bank operates a registry on non-professional trusts. The liability of the trustee is that they initiated the procedure to include the trust in the registry in accordance with the provisions stipulated in Act XV of 2014.
It is a legal expectation to prevent the avoidance of strict economic requirements, that neither the trustee, nor the chief executive – in the case of a legal persons – nor their relatives or related companies may perform activities of fiduciary management. During the registrational procedure, these requirements concerning the conflict of interest must be conveyed appropriately towards the Hungarian National Bank.
In accordance with the statements mentioned above, one may realize that there are several important arguments supporting the use of a trust, such as:
- the existence of personal and material conditions (e.g. financial security)
The main advantage of engaging in a non-professional trust, is the principle of trust established between the settlor and the trustee. Considering the settlor transfers ownership of the assets, the arguments supporting the utilization of a professional trust are overshadowed by the principle of trust that exists in the non-professional construct.