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Trust funds – new legal instrument for the management of family wealth

  • Hungary
  • General

21-05-2019

Trust funds – new legal instrument for the management of family wealth

20 May 2019


From 29 March 2019, Act XIII of 2019 on Trust Funds is effective. Legislation passed by the parliament provides the opportunity to establish trust funds for public interest and family purposes, with several novelties to the rules on foundations and fiduciary management. In the following, we present the most important information about trust funds.
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Outlook


This is a new instrument in the Hungarian legal system but is not unprecedented in Europe. The Privatstiftung of German-speaking countries and the Anglo-Saxon trust have also been created for the same purpose: for the management of high-value private enterprises and assets, as a means of keeping family wealth together, they are also able to simplify inheritance issues and ensure the long-term operation of family businesses.
The creation of a similar legal institution has been demanded foe a long time from families that have started a business and accumulated greater wealth after the political transition in  Hungary, which is why forms of fiduciary management have been created previously and now the rules of the foundations in the Civil Code were supplemented with the new regulations.

Formation, formal requirements, minimum capital

A trust fund may be established for the purpose of managing the assets assigned by the founder and for the achievement of the goals and tasks specified in the founding document. As an economic activity, a trust fund may manage the assets assigned to it or the assets it holds in fiduciary management. Thus, unlike the existing foundation regulations set out in the Civil Code, which prohibits the creation of the foundations for the purpose of economic activity, the new law on trust funds explicitly defines asset management as the purpose and main activity of these foundations.
The fiduciary management activity carried out by the trust funds differs in various aspects from the general rules of fiduciary management defined in the Civil Code: e.g. while fiduciary management contracts can only be set up for a maximum of 50 years, in the case of trust funds have no such limitation. In addition, the fund is an independent legal entity, the founder has limited powers of disposal over it, its assets are not part of the estate of testator, unlike to the fiduciary management. The fiduciary management performed by trust fund is not subject to the provisions of Act XV of 2014 on Fiduciary Managers and on the Regulations Governing Their Activities, thus there is no notification and registration obligation as laid down therein.
The law stipulates that for the establishment of a trust fund, assets worth at least HUF 600 million (as minimum capital, about € 1.85 million) must be allocated for the benefit of the fund. However, the property allocator can do this as a contribution, so it can be not only cash but also movable, real estate or even shares in a business. The value of these assets is decided by the fund's auditor, whose appointment is mandatory. The minimum capital must be made available to the trust fund prior to submission of the registration application.
The founding document must also declare the fundamental goals and principles of managing and utilising foundation assets. The investment policy may be annexed by the founder or shall be approved solely by the possessor of the founder’s rights or jointly by the board of trustees and the supervisory board within 6 months after foundation.
The founding document of the trust fund must be either in a public document or in a private document countersigned by an attorney at law, legal representation is mandatory in the registration procedure. Trust funds are created by the registration of the court.

The beneficiaries

The main function of trust funds is to make financial allowance to the beneficiary or beneficiaries indicated in the founding document. A novelty in the regulation is that, in the case of these funds it has become possible for the founder(s) and the joining member(s) and their relatives to be the beneficiaries of the trust fund, as opposed to other foundations.
Trusts can also be created for public interest purposes. A public interest objective is to finance or support educational, higher education, research, health, charity, social, family, child and youth protection, cultural or sports activities, or to maintain and operate institutions that carry out such activities. In addition to defining these objectives, it is essential that the group of beneficiaries will be open, meaning that the beneficiaries are not personally identified in the founding document. The founder shall explicitly request the qualification of the trust fund as a public interest trust fund. A foundation established for public interest objective is also considered to have public benefit status under the provisions of the Act, provided it requests such status.
The Board of Trustees and the Supervisory Board
The trust fund is managed by a board of trustees of at least 5 natural persons, supplemented with an obligatory supervisory board of at least 3 persons. For these persons, the founding document may set qualification requirements. The founder’s rights may be exercised by the founder, the board of trustees or the trust fund itself in accordance with the founding document.

The Asset Controller and its role

If the founder's rights are not exercised by the founder but by the foundation or the board of trustees, in addition to the supervisory board, an asset controller not involved in the trust fund shall be appointed for the purpose of monitoring the activities of the board of trustees and the supervisory board. Only an appropriately qualified person can be appointed for the position of asset controller of the trust fund.
The asset controller has a monitoring role in the exercise of the founder’s rights and the asset management of the trust fund. The asset controller also exercise also the rights of the supervisory board, and thus may, among others, initiate a legal supervisory  procedure.
Asset controllers are remunerated for their activities, which must be paid out of the assets of the trust fund.

Loss of assets, special cases of termination

The trust fund is obliged to a safeguard its assets to the extent specified in the founding document - the lowest amount is the minimum capital requirement of HUF 600 million mentioned above. Below this amount, the payments completed to the beneficiaries must be reduced proportionally to the amount of the loss of assets, or the payment must be retained until the value of the assets of the trust fund reaches the prescribed minimum capital. Compliance with this obligation may be enforced by the asset controllers to the extent of their authorization.
The trust fund may be terminated upon request and is terminated ex lege if its assets do not reach the capital minimum for three full years.
Detailed rules, taxation
Until the date of preparation of this newsletter, the legislator has not yet created taxation and financial rules on the of trust funds, so the advantages or disadvantages are not yet known. The "tax-neutral" solution known in fiduciary management is likely, i.e. the institution will probably not be popular for the available tax benefits, but because of the legal benefits mentioned above.

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Contact
For more information please contact your usual contact at Sándor Szegedi Szent-Ivány Komáromi Eversheds Sutherland Attorneys at Law.

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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