Discussions About Trust
In simple terms, a trust is a mechanism by which one party holds rights on behalf of one or a number of people. Trusts can arise for a variety of reasons. A trust may be created by a settlor, if he or she considers the beneficiary to be incapable of managing their own affairs - perhaps due to infancy or mental disorder. Trusts are popularly employed in commercial settings, are used to advance charitable causes and can also be utilised to protect family assets. Trusts, however, have not always been used for legitimate ends and some believe that this is one of the reasons why they are sometimes regarded with suspicion.
The Development of the Trust in the English Common Law System
Trusts developed in the English common law system through the principles of equity as applied in the Court of Chancery. Equity originated from dissatisfaction with the common law. Those who were unsatisfied with a decision made at common law would petition the King to complain. The King would pass these petitions to the Lord Chancellor to consider. Originally, the Lord Chancellor would look at the petitions and advise the King. Over time, however, the Lord Chancellor began to hear the petitions personally and the Court of Chancery was created to enable him to do so.
Cases in the Court of Chancery were decided on the basis of equity and provided a fair - or ‘equitable' remedy where the slow and inflexible common law could not. The Court of Chancery was free to exercise its discretion and as such, its decisions could support, supplement or oppose those made at common law. In developing the notion of trusts, the Court of Chancery acted to alleviate an unfairness that could arise under property ownership rights at common law. Under common law, the legal owner of property was free to use it for their own purposes, even if they were given the legal title, on the basis that they would hold the property for the benefit of another. The Court of Chancery considered this to be unfair and so developed the notion of a trust. This meant that anyone agreeing to hold property for the benefit of another had to do so and could not use the property for their own benefit instead. In addition, such a person was obliged to act according to the terms of the trust and to exercise reasonable care when dealing with trust assets.
If there was conflict between equity and the common law, equity was taken to prevail. Clearly this duality within the English legal system led to problems, not least of which was the fact that a single case would have to be dealt with in both the common law courts and the Court of Chancery. Changes were made to address the situation, which ultimately led to the mergence of both jurisdictions under the Judicature Act 1873.
The Primary Features and Purpose of Trusts
A trust creates a binding obligation on a nominated person or persons known as trustees. Trustees are obligated to administer the trust assets on behalf of a third party. For a trust to exist, a ‘settlor' must transfer assets to a trustee or number of trustees with the intention of creating a trust. This may be during the lifetime of the settlor or after their death and is usually done by way of a trust deed.
When a trust is created, a settlor must stipulate the beneficiaries or persons to whom the trustees are obligated. The trustees hold the legal ownership of trust assets but the beneficiaries possess the equitable title. A trustee may be one of a number of beneficiaries but can never be the sole beneficiary.
Trustees must implement the terms of the trust, protect the trust assets and act in the interests of the beneficiaries. If the trust has a charitable purpose, the trustees must act to advance this. A trustee must ensure that accurate accounts are kept. Any assets belonging to the trust should be kept separate from trustee's own property and may not be claimed by personal creditors of the trustee(s). Beneficiaries will have the right to ask the courts to enforce the terms of the trust.
There are several different types of trust. Common types include the 'bare trust' which gives each beneficiary the right to take immediate possession of the trust assets. An 'interest in possession trust' means that the beneficiaries receive an income from the trust but do not have any claim to the trust capital, which may well pass on to another person at some point in the future. 'Discretionary trusts' allow trustees to decide how the income should be used and gives them discretion over, amongst other things, who the money should be paid to, how much each beneficiary should receive and under what conditions. 'Accumulation and maintenance trusts' enable settlors to delay the age at which beneficiaries are entitled to receive either income or assets. The features of different trusts may also be joined to create mixed trusts. Trusts may also be created to serve a particular purpose.
There are a variety of reasons why a person may want to create a trust. They may wish to stipulate how their assets should be divided upon their death, including making provision for their families. Trusts may be used to protect those that are too young or too infirm to properly deal with their personal affairs. Settlors may also wish to ensure that any family wealth is kept within the family. Others use trusts to help them to reduce tax liabilities, including inheritance and income tax. Trusts are also used to facilitate investments, for pension plans, to advance charitable causes and to provide security in financial dealings.
The Reasons Behind the Absence of Trusts in Civil Law Countries.
The traditional argument given for the absence of trusts in civil law jurisdictions is centred on the notion that the Roman legal system did not enable the division of property. Roman law was applied throughout the vast majority of Europe for centuries and it is not surprising, therefore, that many of the civil law jurisdictions now in existence have much in common with it. Since the development of modern civil law draws heavily from Romanic law, it is argued that the absence of trusts is due to the fact that, by their very nature, they require division between legal rights and equitable ones.
Some have argued, however, that the notion that fiduciary relationships did not exist under Roman law is a fallacy. They state that clear examples of trust-like devices can be seen including the 'fideicommissum' which was commonly employed in the sphere of Roman inheritance law. In "On Fitting Trusts into Civil Law Jurisdictions," Honoré acknowledges that such fiduciary institutions did not lead to the development of equitable courts nor create a distinction between legal and equitable title however, parallels with the law of trusts can still be drawn.
In “Why No Trusts In The Civil Law,” Bolgar argues that the long held view that Roman law rendered property indivisible is in fact based on an erroneous belief. Bolgar cites the Romanic distinction between dominion and possessio, and notion of community ownership in Rome as evidence of such. The notion of the wife's separate property or ‘dos' in Roman law also bears a similarity to the division of interests under a trust.
Bolgar argues that there are three main obstacles preventing the existence of trusts in modern civil law. The first is that there was a “profound deviation in the traditional doctrine of the civil law regarding property,” after the Code Napoleon was introduced. The ‘Code Napoleon' or French civil code is the term given to the codification of French law. The desire to codify the law had been in existence since the French Revolution but was not really undertaken until the Napoleonic period. The aim was to replace the various laws and customs in operation with a single, coherent law which would reflect the aims of the Revolution. As such, property was defined in absolute terms and the idea of indivisible autonomous ownership therefore developed. The strength of this argument may be assessed by considering the position of trusts in those countries outside the influence of the Code Napoleon. Bolgar cites the examples of South Africa and Quebec, amongst others, as supporting evidence. These countries were not influenced by the French civil code and trusts are a common concept in both of them.
The second reason cited by Bolgar - and others, to explain the absence of trusts in civil jurisdictions is the existence of the “numerous clauses” or ‘closed number' principle. Put simply, European civil codes require official registration of property rights but only have limited categories of recognised property rights that can be entered onto the registers. This means that only rights listed in the code may be entered onto the register and any that are not listed - such as trusts, may not be recorded. This therefore results in a closed number of rights in rem meaning that new property rights cannot be recognised.
The final reason given by Bolgar for the non-existence of trusts is the fact that similar devices have now been developed in many civil law jurisdictions so that there is no need to introduce them. Countries will usually prefer their own methods and will see no reason why domestic arrangements should be swept aside in favour of an “alien institution.”
Kotz suggests that the reason why trusts have not developed in Germany may be due in part to its religious and political history. Additionally, he maintains that there is no German equivalent of the charitable trust created by wealthy testators because it is the state who is seen as “the main provider of public benefits.”
Remy states that there are two reasons why the trust is unknown in France. Firstly, the idea of dividing property rights “is contrary to the exclusive and absolute nature of the concept of ownership under French law.” Secondly, Article 2092 of the French Civil Code prevents the existence of trusts as it prevents assets being held in reserve for a particular purpose.
Remy states that there is still no equivalent of the German fiduziarische Treuhand despite the fact that the Ministry of Justice introduced a bill creating the fiducie. The bill was not adopted and Remy cites reasons including the possibility of tax evasion and fear of fraud to explain its failure.
There are therefore a number of reasons given to explain the absence of trusts in civil jurisdictions although not everybody agrees that the ones suggested thus far adequately do so.
How The Role of Trust Has Been Fulfilled In France and Germany
France
Without a trust mechanism, those wishing to replicate its effects in France have considered the concept of agency. Under an agency agreement, the agent has authority to carry out the principal‘s instructions. Agency agreements do not carry the same safeguards as trusts, however, not least because of the very limited powers possessed by the agent. Since such agreements are not ideal when trying to protect the interests of third parties, both business and the French legislature have devised different methods of employing the type of fiduciary relationships central to the trust concept.
Despite no official recognition of a French mechanism similar to English common law trusts, something known as a ‘fiducie' does exist in France. A fiducie allows a settlor or ‘constituant' to transfer property to a fiduciaire - a trustee who acts for the beneficiaries. This is done by way of a written contract in which the fiduciaire's powers are fixed and are limited to a maximum of ninety-nine years. Although the fiducie is not mentioned in the French Civil Code, it is employed in a variety of areas.
In a commercial setting, the fiducie is used, especially in banking, in order to facilitate the holding of securities. There are different types of fiducie. A ‘fiducia cum amico' is used for management functions and a ‘fiducia cum creditore' is employed in order to provide security. Sometimes, both types of fiducie can be used together.
There are various kinds of fiducia cum amico including the Undertaking for Collective Investment in Transferable Securities - known as UCITS. There are different types of UCITS, including the mutual fund whereby securities held on a joint tenancy are managed by a specialist company and held by a ‘custodian' drawn from a government list. Open-ended investment companies are another form of UCITS whereby limited companies are created to manage securities portfolios. A custodian is again selected from a government list and is given control of the assets of the company.
Another type of fiducie is the fiducia cum creditore. In this case, property title is transferred to a fiduciaire in order to provide security. Unlike trusts, however, there is no requirement that the transferred property be kept separate from the fiduciaire's personal assets. This type of fiducie is used to transfer the ownership of business receivables to a fiduciaire so that they can be used for security purposes. The passing of the ‘Loi Dailly' or Dailly Act rendered this type of fiducie acceptable. All present or future business receivables can be assigned to a credit institution by way of the delivery of a statement. The credit institution will either create an agency agreement with the assignor or simply order debtors to make payments to them instead. A fiducie is also used in the French system for the common banking practice of ‘pawning' or depositing bills as collateral security.
Of course, aside from business purposes, the trust is commonly used in family matters. Clearly, the same types of situation covered by trusts in England and Wales also occur in France and so the French system has tried to develop ways of achieving a similar end. It has been greatly restricted however, by the shackles of inheritance law.
In France, if a person wants to give a gift to someone which they, in turn, would be obligated to pass on to another, they will be subject to strict inheritance laws. Under French inheritance law, part of an estate will automatically be passed on to certain heirs. This limits the extent to which such gifts can be made. In addition, ‘gifts over' cannot be made even if they are made up of the non-reserved portion of an estate. There is no capacity under French law to make a gift of a life tenancy that passes to another on death. The reasoning behind such strict rules is that they encourage the free movement of property by promoting division of family estates but they serve to defeat the purposes of a trust which is generally to protect family property from being split.
Due to the measures restricting the existence of trust-like mechanisms to make provision for one's family, the French have turned to life insurance to fulfil their needs in this area. The use of life insurance means that many of the restrictions that govern inheritance and marital property are no longer applicable. Such policies are trust-like, in that they can confer rights to earn revenue to one person whilst granting the bare ownership to another.
Trusts are a key way of realising charitable ambitions in the English common law system. Without the existence of trusts, the French achieve their charitable purposes by way of a gift to an association or by granting assets via a foundation to a body whose function it is to pursue the charitable aim. Generally, only bodies that promote public welfare are able to accept gifts and such gifts must be authorised by the relevant authorities.
As the fiducie is a contract, there are key differences between it and a trust. The consituant cannot be the fiduciaire as the law of contract precludes a person from entering into a contract with themselves, although with a trust, a settlor may also be a trustee. Under a trust, a trustee cannot be the sole beneficiary however, in France, if a fiducie is used for security, the fiduciaire can be the sole beneficiary.
There have been suggestions by some that the failed bill on the fiducie may be re-introduced. If so, the effect would be to bring the fiducie and trust closer together. Under the bill, a fiduciaire would be required to separate trust assets from their own and thus protect fiducie assets from creditors of the fiduciaire. Similarly, on the death of the fiduciaire, fiducie assets would not form any part of their estate.
The French system has developed the fiducie but despite some similarities, this is by no means the same as a trust. Remy suggests that the introduction of a fiducie with separate fund would be “a reasonably acceptable way to introduce an institution similar to the voluntary trust into French law.” This was the position put forward by the failed reform bill but even if this were to be re-introduced, further changes would be required before it would truly share the full characteristics of a trust.
Germany
In the “National Report for Germany,” Kotz states, “nowhere in German law can one find any single institution which by itself performs all those functions for which the common lawyer deploys the trust.” Despite this, situations do arise in Germany when assets are controlled by one party for the benefit of another. Kotz cites the example of existing German inheritance law under which a testator is almost able to replicate the effects of a trust by combining various instruments of succession, namely the ‘Nacherbfolge,' the ‘gemeinschaftliches Testament' and the ‘Testamentvollstreckung.'
In terms of charitable law, trusts enable trustees to hold assets on trust for a charitable purpose, for example the relief of poverty. Such trusts enjoy various benefits including tax exemptions. Under German law, a ‘Stiftung' or charitable foundation with its own legal identity may be created.
The role of the trust in Germany, however, is usually fulfilled by a legal mechanism known as the ‘fiduziarische Treuhand.' Under this mechanism, assets are transferred to a ‘Treuhander' meaning that a beneficial third party right will arise. However, beneficiaries will have only the ordinary rights in personam of parties to a contract.
The Treuhander will have to perform certain fiduciary duties found within the Treuhand agreement itself or determined by the court. Parallels can be drawn with the law of trusts as the Treuhander must keep Treuhand assets separate from his own and cannot place Treuhand money in an account with his own. Clear accounts must be maintained and made available to the beneficiaries and any profit made must be accounted for. Additionally, the Treuhander must not undertake any action that adversely affects the interests of the beneficiaries and cannot use their position to their own advantage.
At common law, action may be taken against a trustee for breach of an equitable duty. Under a Treuhand agreement, however, if the Treuhander is in breach of his obligations, the beneficiaries may sue for damages under breach of contract. Any damages awarded in this instance can be claimed against the Treuhander's personal assets.
Unlike UK courts, German courts are not vested with the same supervisory and administrative powers with regard to a fiduziarische Treuhand. This means that problems may arise if the Treuhand instrument is not sufficiently clear or if courts need to remove a Treuhander or appoint another. Kotz states “the failure of German law to establish such judicial procedures has not yet been regarded as a serious gap in the system so that no proposals have been made to remedy the situation.”
A fiduziarische Treuhand can be used in a variety of ways. It might be employed by investment companies who invest money on behalf of others. Such companies are heavily regulated. Any assets acquired by investment companies are required to be held in a separate fund which must be adequately managed. The assets are protected from the investment company's creditors and cannot be taken in the event of their bankruptcy.
In terms of bankruptcy, a Treuhand may also be used as a means of avoiding such. Assets will be transferred to a Treuhander who will administer the debtor's financial affairs. Further uses of the Treuhand in Germany involve the opening of special bank accounts - Treuhandkonto - where money paid into the account is held for the benefit of a third party. Treuhands are also used to allow financial institutions to hold bonds on behalf of investors and to allow companies to separate matters pertaining to the operation of the business from its beneficiary shareholders.
In terms of creation of a fiduziarische Treuhand, a Treuhander will acquire the title to the Treuhand assets and the third party beneficiary will gain rights in personam as a party to the contract. The rights of beneficiaries seem to be extended beyond those that are merely contractual as the courts recognise that creditors of a Treuhander cannot generally take Treuhand assets and should the Treuhand be the subject of a bankruptcy order, the beneficiaries still can retrieve their property.
A problem exists in terms of cases in which land is one of the assets of the Treuhand as it is only the details of the Treuhander that are entered on the register and there is no ability under German law to denote that the land is held for the benefit of a third party. This means that a purchaser of the land may be unaware that this is the case whereas in England and Wales, the land registry will detail the fact that there are restrictions on the right to sell a property if it is held on trust.
It can be seen that there are both differences and similarities between trusts under the English Common law system and the fiduziarische Treuhand. The results achieved by both appear, at times, to be strikingly similar although the means by which they are achieved may be somewhat different. In addition, there is much more regulation surrounding the duties of trustees at common law than there is of their equivalent Treuhanders in the German system.
In conclusion, trusts have long been employed to enable one party to hold rights on behalf of one or a number of others. Their history can be traced back in England to the Court of Chancery but many suggest that a similar concept has been in existence for far longer. Trusts can exist in various forms. They arise for a variety of reasons and operate in a number of different spheres. As a general rule, trusts do not exist in the same way in civil law jurisdictions. Some argue that this is because the concept was unknown under Roman law - which underpins much of modern civil law. Others have argued that this is not the case and offered a variety of reasons for the non-existence of trusts. Today, many civil law countries, including France and Germany, have developed trust-like mechanisms which are employed in similar situations to that of a trust and which, to a greater or lesser degree, replicate its effects.
