Trusts in Civil Law Systems

Trusts in Civil Law Systemsby Dr Priscilla Mifsud-Parker*1.1.1English Law: Use - A Medieval Property DeviceThe feudal system existing in medieval England led to a system where the ultimate beneficiary was always the King. Between the possessor and the King there existed many intermediaries who acted as lessors and lessees at the same time. Each of these intermediary tenants would pass the benefit derived from the land to the lord immediately above him.The device of use arose as a counter movement to some of the more unfavourable effects of the feudal system. In fact, land could not be left by will, but could only be passed on from the father to the first son of every family. This is identified as the rule of primogeniture. Land could on the other hand be disposed of during the lifetime of the testator i.e. by inter vivos title. The transferor could give property to another person or persons to use the land for the benefit of another person. This was known as the …cestui que‟ use.[1]The beneficiary could either be a third party or else the one who transferred the land himself. Already here we may identify certain key features that will recur in the institute of trusts. The trust was and is still an institution founded upon conscience. If the conscience of the owner is not affected, then there is no benefit for thebeneficiary of the trust.[2]In this way the restrictions of the feudal system were avoided and other persons besides the first sons of a family could acquire property.[3]Eventually a system of second use was adopted whereby a first person would give on use to a person and this person in turn gives again on use to the third person. A middle man in this relationship was therefore the one who was being trusted. The trustee held legal title, and the third person was the beneficiary who enjoyed equitable title. In any way an examination of the development shows clearly that at every stage the basic foundation was that there existed a relationship of trust based upon fiduciary duties. The practical evolution of the legal instrument resulted in the fact that no real written norm exists that regulates its constitution and operation.[4]1.2Roman Law –‘Fiducia’The trust is a product of the Roman Law fiducia. Inevitably therefore there are some similarities in common law and Roman Law on the basic elements of this institute.Fiducia was essentially an agreement that acted as an appendix to a transfer of property, involving a direction or trust as to what was to be done with it.[5]It was a separate agreement to the main contract and need not be in writing. It is indeed debatable whether its nature was that of a contract since it never featured in the list of nominate contracts. Some authors considered it to have been a “pactum”. Lee[6] comments that fiducia does not occur except as an incident of the conveyance of a person or a thing. It was regarded as a parasitic institution since it could only be constituted in relation to a transfer.Indeed one can draw a parallel with the present day trusts where we say that the trust does not come into effect until there is the transfer of property to the trustee.The main applications where the fiducia featured were in the fiducia cum creditore, and the fiducia cum amico. The fiducia cum creditore was the root of the security law of pledges and hypothecs whilst the fiducia cum amico led to the contracts of deposit, loan and mandate. These contracts are “bonae fidei” contracts and as such demand a higher level of care.Since fiducia was not constituted by a written instrument it was difficult to enforce and so the Romans decided that if fiducia is proved then it could be enforced through the actio bonae fidei. In this action the judge would have a lot of discretion. Therefore the exercise of judicial discretion based on the performance of fiduciary obligations was needed. Fiducia in its own right gave rise to the actio fiduciae which gave the right to the recovery or withdrawal of the property.1.3The Origins of the Trusts under Civil Law –ConfidentiaEvidence exists that the testamentary secret and semi-secret trusts were used in Europe in the sixteenth and seventeenth centuries. These were called …confidentia‟immediately connoting the main principle that is of trust being placed in another person. The trust is a relationship of a fiduciary character. Judgments of the Roman Rota, France, Piedmont, and authors from Europe all concur on the notion that the …confidentia‟ existing at the time has the identical core principles of trusts.[7]In this institute one finds rules and characteristics that eventually became rules in English law on trusts. Lupoi interestingly delves deep into the origins of the trusts institute and clearly explains that there is astounding evidence pointing towards trusts as an institute with civillaw origins but concealed by the fact that English Chancellors having a sound knowledge of civil law used these principles without acknowledging their sources.[8]2.General Principles of Trusts2.1Definition“A trust exists where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose, or for both such benefit and purpose aforesaid.”[9]The definition offered by our law incorporates the core principles of the concept of trusts into one comprehensive definition. This definition identifies the trustee and the beneficiary as two of the main constitutive elements of trusts. The third player in this relationship is the settlor, who is the person who settles property in trust.As soon as the settlor puts the property in trusts, then he loses all control over that property and from that moment onwards the ownership thereof vests in the trustee:“a trustee shall, in relation to the trust property, have all the powers of a natural person having the absolute title to such property.”[10]The settlor may himself be the beneficiary or the trustee. If he declares himself to be holding property on trust, he automatically becomes a trustee through the coming into effect of a unilateral declaration of trust. He continues to hold the same property but in a different capacity – as trustee with fiduciary duties instead of as owner with full ownership rights and powers.This last point is subject to significant debate. What kind of ownership does the trustee have? Under Common law, the settlor transfers legal title to the trustee, and equitable title to the beneficiary.[11]Until an equitable interest is created, and legal and equitable ownership are separated, the owner is considered to own, at law, the whole undivided property.[12]This situation is not found under Maltese law, since the Trusts and Trustees Act[13] clearly states that ownership by the settlor is transferred exclusively to the trustee, and that the trustee‟s absolute ownership is then in turn controlled rigorously through the imposition of fiduciary obligations. Some examples of these obligations are the duties of the trustee to keep and render accounts, to preserve, invest prudently and enhance the trust property. The article of the law worth reproducing here is Article 1124A (1):“Fiduciary obligati ons arise in virtue of law, contract, quasi-contract, trusts, assumption of office or behaviour whenever a person (the ''fiduciary'') -(a) owes a duty to protect the interests of another person; or(b) holds, exercises control or powers of disposition over property for the benefit of other persons, including when he is vested with ownership of such property for such purpose; or(c) receives information from another person subject to a duty of confidentiality and such person is aware orought, in the circumstances, reasonably to have been aware, that the use of such information is intended to be restricted.”Subarticle (b) specifically mentions the instance where a person is vested with ownership of assets for a specific purpose. This is the case of the trustee, who holds property on trust for a specific purpose, which is the destination of the trust. The trustee‟s role in the trust scenario is one that must be necessarily governed by fiduciary duties since all the powers given to the trustee must be in some way or another limited in the sense that there is some form of supervision.A trust is only completely constituted when there is the actual transfer of the assets to be held on trust. Before creating a trust the settlor has absolute ownership in the property. If the settlor does not have this absolute title over the property then he is unable to set up this trust. Nemo dat quod non habet is a maxim that epitomises the very notion of ownership. One cannot give what one does not have. Therefore, in order for the trustee to gain legal interest according to Common Law and absolute ownership according to Maltese Law, the settlor must have transferred a good title.In this regard the settlor must be able to set up a valid trust by transferring a good title. Hudson says that it is not possible for a person who does not have rights in property to transfer good title in that property to another person.[14]The settlor must therefore have proprietary rights over the property which he intends to put in a trust, because he cannot declare trusts over property in which he has no interest. A mere intention to transfer property into trust, which will be the settlor‟s at a future time, is not sufficient to create a valid trust.[15]Therefore ownership of the property must exist at the time when the trust is sought to be created.2.2Transfer of Title or a Unilateral Declaration of TrustsThe legal title to the trust property must be vested in the trustee either through a trust deed between the settlor and the trustee or else in a unilateral declaration of trust by the trustee, where he declares that he is holding a particular estate or specific assets on trust. These are the two modes of creating express trusts.When the settlor settles the trust property in trust he must constitute the trust in two stages. In the first stage the actual ownership of the assets is transferred from the settlor who is the initial owner to the trustee who gains ownership by virtue of trust. The second stage would be the creation of the terms of the trust. Since the trust can be constituted in any form, whether written or verbal, the ultimate aim is to delineate the powers of the trustee. In testamentary trusts, the settlor would be transferring his estate to the trustee upon his death and instituting the persons he intends to benefit as the trust‟s beneficiaries.A declaration of trusts without the actual transfer of the assets is not effective. On the other hand, if there is a transfer of the assets but not a declaration that the transferee is holding on trust, then this would be an outright gift.[16]2.3The Trustee’s Title – Separation between legal and equitable ownershipUpon transfer of the trust assets the trustee becomes the outright owner of the assets and therefore he is the legal owner and not an agent or a representative of the beneficiaries or of the trust.[17]Upon a transfer of title or a unilateral declaration of trust, the actual management of the trust property vests in the trustee. The powers of the trustee with regards to the trust assets and the counter-balance to these powers are the fiduciaryduties which the trustee is bound to fulfil. These fiduciary duties imply that the trustee must prefer the interests of the beneficiaries to his own interests.[18]In fact even though ownership and possession of the trust assets vest in the trustee, yet one of the consequences of ownership does not persist in this case: the trustee cannot benefit from the trust property. These benefits are vested in turn in the beneficiaries who, although unable to deal directly with the trust property, yet they can enforce the terms in the trusts instrument, agreement or declaration against the trustee.This indirectly implies that the trustee does not have absolute title over the trust property, because although he is the legal owner, yet he cannot enjoy the property for his own benefit. But indeed the trustee is not a partial owner and that is why civil lawyers tend to say that the trustee is still the absolute owner despite the fact that he does not benefit from the trust. The word “absolute” is not incorrect because the trustee has all the property rights that the beneficiary can enjoy. This derives from the fact that the beneficiary can only enforce his beneficial rights against the trustee.[19]The obligation with regards to performance of the trust rests with the trustee who must act in the best interests of the beneficiary. This is why the trustee is said to have a fiduciary power i.e. a power that belongs to a person, but which cannot be exercised in his own interest, but only in the interest of others.[20]This protection due to the beneficiary extends also to the trustee having to enforce rights against third parties. If the trustee fails to enforce such rights, then the beneficiaries have the legal right to act of their own initiative against third parties and force the trustee to join them in this legal action.[21]On the other hand, it is the trustee who must be sued for claims against the trust property, since trusts do not have a separate legal personality. It therefore cannot enter into contracts in its own name.These observations are in line with the modern and authoritative line of thought, according to which the so called absoluteness of the right of the trustee, seen as …erga omnes‟ efficacy, is a general prerogative of all the advantageous juridical situations, in as much as this safeguard intervenes following any unjust violation of the interests protected through these rights.[22]2.4Segregation of Assets“Il nucleo dei trust è la segregazione.”[23]“The trust property shall constitute a separate fund owned by the trustee, distinct and separate from the personal property of the trustee and from other property held by the trustee under any other trust.”[24]Once the trust does not have separate legal personality, it is essential that trust property is kept separate and distinct from other property pertaining to the trustee since, as opposed to absolute ownership, fiduciary ownership is limited in a number of ways. This means that there must be a separate …identifiable trust property‟.[25] A binding link is created between the patrimony and its aim, in force of which the patrimony cannot any longer literally and functionally be separated from the latter.[26]This means that the ring-fenced patrimony exists from the moment of constitution of the trust onwards for one sole purpose.In the same Act we find another article which deals with the same subject-matter:“Trustees shall keep trust property distinc t and separate from their own property as well as from any other property held by them under any other trust or title, and separately identifiable therefrom:Provided that trustees may, if expressly permitted by the terms of the trust, or in any case where the trust property consists of fungible things, place and keep trust property in a common pool of identical assets or in a clients‟ or common account.”[27]The legal effects inherent upon this segregation of property are mainly three: firstly personal creditors shall have no claim against the trust property; secondly, in the eventual insolvency or bankruptcy of the trustee the trust property does not form part of the trustee‟s estate, and lastly the trust property shall not form part of the matrimonial property of the trustee or his spouse nor part of the trustee‟s estate upon his death.[28] In this sense, every trust carries out a protective function because the segregation of assets settled in favour of the trustee, unaffected by any personal happening, ensures that the assets in trust are destined according to the intention of the settlor when he instituted the trust.[29]“L‟elemento più strutturalmente più significativo è senza dubbio rapp resentato dal fatto che i beni del trust costituiscono –come detto –un patrimonio separato rispetto a quelli del trustee e come tali non possono essere aggrediti dai suoi creditori neppure in caso di fallimento, sono esclusi dalla sua successione e dal r egime patrimoniale proprio del matrimonio.”[30]The first two instances out of these three are specifically dealt with in Article 40A (2) of the Act. In the event that the trustee becomes bankrupt, or insolvent, or upon his property being liable to seizure or a similar process, his creditors do not have any right or claim against the trust property. Nevertheless in this instance we find an exception because the law lays down that the creditors shall have a claim against the trust property but only to the extent that the trustee himself has a claim against the trust.The holding of the trust assets in a separate patrimony and therefore in a separate fund is also listed as a separate duty of the trustee under fiduciary obligations in the Civil Code. One may compare this situation with the regime of the community of acquests, where there are also two separate patrimonies vested in the same person. In this regime, paraphernal property is kept separate from community property and can be administered freely by the owner.The administration of community property contrasts with that of paraphernal property – it is limited in a number of ways, mainly tied with the consent of the other spouse. This consent is a requisite for the validity of transactions relating to this property when the spouse is performing an act of extraordinary administration. In the trust scenario, the limitations are found in the fact that although the trustee enjoys full ownership, he is not free to make any use of the property, since he must have the beneficiaries‟ interests in mind at a ll times.Therefore the trust assets are not part of the trustee‟s patrimony and consequently the trust property is best kept separate from the other assets that appertain to the personal estate of the trustee. The title of ownership that the trustee holds over the trust property is not complete and therefore the trust assets cannot be incorporated into the whole of the trustee‟s estate, i.e. with the other assets he holds under full ownership.In this way the trust assets are protected from the creditors of the trustee or the claimants upon the property of the trustee, except those claims in respect of trust obligations.[31]The notion of the unity of the patrimony is a recent development dating from the French Civil Code and indeed was never meant to encompass all that one was to own. There was always the intention that it would exclude such assets that were meant to be handed over or meant only to be kept for safety or managementpurposes. Fiduciary ownership finds its place also in the civil law concept of the testamentary trust of the …ius commune‟. In Liechtenstein law, this nature of ownership is considered to be a real right and consequently can be enforced against anyone.[32]2.5The Exercise of the Rights granted to the TrusteeAs has already been discussed the trustee can exercise his right only in furtherance of the interest of the beneficiaries. Indeed the beneficiaries may enforce obligations on the trustee. These obligations can in no way be enforced by the settlor since at the exact moment that he settles assets in trust he loses all title, control or claim over these. The settlor therefore has no further interest in the assets and only the beneficiaries may enforce the trust.[33]This right given to the beneficiary effects directly the rights and powers given to the trustee and the way in which the trustee can use the same. Inherent in a power is a duty. The trust ee‟s powers are extensive when considering that property is being transferred from the original owner to another person in full ownership without any consideration, but they are limited when considering that the trustee is the absolute owner and yet he does not have rights of enjoyment. Fiduciary duties in this scenario are the abstract limit to these powers.The judgment in Morice vs. Bishop of Durham highlights the necessity of someone with legal standing to take the trustees to court to enforce the trust with all its inherent rights and obligations pertaining to all parties. The parties having the legal standing are the objects of the trusts because it is they who are intended to benefit qua beneficiaries.[34]3.Introducing a Common Law concept in a Civil Law system3.1IntroductionThe application of a Common Law concept based entirely upon the system of equity, to a Civil Law jurisdiction, will inevitably cause great concern in as much as it causes evident incongruencies with various aspects of a legal system. Core principals may be challenged or even undermined in this respect if no adequate measures are taken to ensure respect for the basic concepts of a system whilst moving towards the implementation of new institutes that offer alternative modes of dealing with estates. This notion was eloquently expressed in an Italian judgement of the Tribunale di Oristano:“Se si volessero attribuire al trust tutti gli effetti che esso produce nell‟ordinamento giuridico inglese indubbiamente si violerebbero fondamentali princìpi di ordine pu bblico dell‟ordinamento giuridico italiano”[35]In fact, since the trust has matured in a juridical environment completely different from that of continental law, the attempt at reconstruction of the trust by the use of typical institutes of the civil law system would be destined to failure.[36]Problems may occur if the implementation of a new institute is undertaken with the assumptions that are valid in a common law system. Some of the assumptions inherent in this system are totally invalid in a civil law scenario. The adoption of an alien institute into a civil law system presents an extraneous notion to the legal system. It is perceived as offering the answer to questions that the legal system leaves unanswered or unsatisfied.[37]In order to carry out a structured discussion to this effect, one must first consider what is meant by trusts[38] and secondly one must examine the main principles of the basic notions and principles in a civil lawsystem. Only after this analysis is concluded can one then look at the incongruencies of the institute of trusts with a civil law system.[39]When commenting on the implications of this analysis, Lupoi submits that there is a common core with Anglo-American trusts (laws of United States, England, Australia, Canada, New Zealand, the laws of offshore jurisdictions, and others)[40]and that indeed this common core is not unique to the common law systems. This can surely be seen in the implementation of the institute of trusts into our domestic system. The legislator has retained the common law core principles of the trusts whilst subjecting them to civil law system principles primarily to be found in mandatory rules.[41]Indeed there is a distinction between three types of trusts: the English-model trusts, the international-model trusts and the civil law model trusts. Nevertheless they have core principles which are common to all notably: the transfer to the trustee, the obligation of the trustee, and the reference to purposes.[42]3.2Transfer of TitleAt the outset one must point out that any legal title may be the subject of trusts and therefore not only ownership. The most important implication to this transfer of title is not that it must necessarily be a title in full ownership, but that it is wholly transferred whatever is the nature of the title – be it possession, detention, or even factual control.[43]What cannot be done on the other hand is that the settlor transfers more than he has a legal right to. …Nemo dat quod non habet‟, finds a very appropriate application in this context.If therefore on the one hand the settlor divests himself of the title of ownership over the property settled in trust, then the trustee becomes the sole proprietor of the assets with unique powers to administer and dispose of the assets. These powers are always inevitably qualified[44]by the fiduciary duties inherent in the office of trusteeship.The notion of the divided ownership i.e. that of legal ownership being vested in the trustee and equitable ownership being vested in the beneficiary is sometimes used by civil lawyers to support the argument that trusts are incompatible with a civil legal system. By means of the amendments to Maltese law in order to incorporate trusts as one of the institutes in the domestic legal infrastructure, this transfer of ownership from the settlor to the trustee has been envisaged in a new clear dimension. It mainly encompasses the following acts which by no means are found to be incompatible within the Maltese civil law system.First of all, the Civil Code was amended in order that the law of things was made to recognise the various transactions inherent in the operation of trusts. The various transactions which are mostly evident in this scenario are the settlement of property in trust, a transfer between trustees, and a distribution to a beneficiary. These are all valid modes of transfer of ownership. These transfers create enforceable interests and are valid …erga omnes‟. [45]3.3CompatibilityThe mere fact that the Chancellors used civil law notions in order to construct a basic working system of trusts implies that in reality when one goes beyond the superficial incompatibilities of form, one finds a common ground of understanding.[46]So the fulcrum of the discussion should be centred not only around identifying this notion of lack of incompatibility of trusts with a civil law system but also of stressing the fact that the incompatibilities do not exist with respect to the origin of the legal system but with respect to the inherent rules of a domestic system which vary with each jurisdiction. Proposing that there are incongruencies and showingthem at face value is not enough. A comparative law exercise from both civil lawyers and common lawyers of the others‟ systems of basic tenets and trusts as based on these tenets would probably show the clearest picture that one can achieve.Lupoi[47] confirms that there is no basic incompatibility since trusts do not centre around the beneficiaries, but around trustees and that trusts centre around ownership rather than management. Paul Matthews[48] on the other hand submits that the apparent incompatibility between trusts and the civil law system stems only from an incomplete and superficial analysis. Matthews, like many others, claims that the mere fact that many legal systems based on the civilian tradition inherited from Roman law now provide for the institution of trusts shows indeed that express legislation to this effect did not cause an upheaval in the existing civilian framework. These legal systems are mainly the following: Québec, Japan, Liechtenstein, Jersey, Malta, Louisiana, Taiwan and China.3.4Mandatory Rules Prevail3.4.1Fundamental Rules of a Legal SystemSome civil lawyers and researchers object to the introduction of trusts into a civil law system because it may be used to try to disregard or indeed breach rules of a legal system which are so important to the fundamentals of the same that they are termed as being mandatory.[49] In this sense inheritance rules are one such main area. As already discussed legitim rules exist in order to safeguard complex but deeply socially embedded issues of loyalty, protection and maintenance of familial relationships.These mandatory rules need not prohibit the introduction of trusts into a civil law system. There are ways and means by which mandatory rules can still be respected. Attempts at subversion of fundamental rules through the use of the trust do not only take place in civil law systems but also in the English and USA systems. A simple solution is envisaged in this respect in these two systems: where a trust infringes rules of public policy derived from mandatory rules of law, then it is void.[50]In the Maltese Trusts and Trustees Act such a situation is remedied by Articles 6A (based on Article 15 of the Hague Convention) and Article 6 B. Article 6A reads as follows:(1) Subject to the provisions of subarticle (2), in the case of a trust governed by Maltese law, where the law of Malta contains provisions with regard to the following matters -(i) the protection of minors or incapable parties;(ii) the personal and proprietary effects of marriage;(iii) succession rights, testate and intestate, especially the indefeasible shares of spouses, ascendants and descendants;[51](iv) the transfer of title to property and security interests in property;(v) the protection of creditors in matters of insolvency;(vi) the protection, in other respects, of third parties acting in good faith, which cannot be derogated from by。