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Trust Law/Level I · The idea of a trust/1.2 Roots/Lesson 7

The Hague Trusts Convention (1985)

How countries without trust law agree to recognize trusts created elsewhere

Education, not legal advice. Trust law changes from country to country and state to state, and the right structure depends on your situation. Anything you sign should be drafted or reviewed by a qualified lawyer where you live.

The lean path

The cheapest, lowest-tax, simplest and most private route the law allows, best first. Each step names the rule it rests on and the condition that keeps it lawful.

  1. In a contracting state, name the governing law expressly in the trust deed (Article 6); it costs one clause and secures recognition, though local rules on succession, marriage and insolvency still apply (Article 15).
  2. The Convention changes no tax (Article 19), so the leanest structure is usually a trust governed and administered in your own country of residence, avoiding foreign-trust reporting and conflicting tax claims.
  3. For US persons a trust is domestic only if a US court can supervise it and US persons control all substantial decisions (Treas. Reg. §301.7701-7); failing either test makes it foreign, with heavier reporting.
  4. US transferors to and owners of foreign trusts must file Forms 3520 and 3520-A; a missed filing costs the greater of $10,000 or 35% of the gross reportable amount, or 5% for an owner’s annual return failure (IRC §6677).
  5. UK resident express trusts must join HMRC’s Trust Registration Service within 90 days of creation even with no tax due, unless excluded under Schedule 3A of the Money Laundering Regulations 2017; non-UK trusts acquiring UK land must also register.

MaterialsA printed copy of Articles 2 and 3 of the Hague Trusts Convention (free on the HCCH website)The HCCH status table listing the Convention’s contracting states (free online)The text of a written trust instrument (will or deed)

Wonder

  1. What happens if I create a trust in England but live in France?
  2. Why does my country need to ‘recognize’ a trust that already exists?
  3. Does this treaty protect me from taxes or creditors?

Explore

  1. A trust is an arrangement in which a settlor places property with a trustee, who holds it for beneficiaries. The idea grew up in English law, but most civil-law countries, such as France or Italy, built their property law without it. When a trust created under English law owned property in such a country, or a beneficiary lived there, local courts could struggle to fit it into their own categories of ownership. The Hague Trusts Convention was written to give countries common rules for these cross-border cases.
  2. The Hague Conference on Private International Law prepared the Convention, which was concluded on 1 July 1985 and entered into force on 1 January 1992. It does not require any country to create trusts in its own law. Instead it does two things. It sets rules for which country’s law governs a trust, and it requires each contracting state to recognise a trust created under that law. So Italy, a party, recognises a trust governed by English law even though Italian law has no trust of its own.
  3. Article 2 defines a trust as ‘the legal relationships created - inter vivos or on death - by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.’ It adds key features: the assets form a separate fund, not part of the trustee’s own estate, and the trustee must manage them under the trust’s terms. Article 3 limits the Convention to trusts created voluntarily and evidenced in writing, so trusts imposed by law fall outside it, although a state may choose to extend it to trusts declared by courts.
  4. The HCCH status table lists 14 contracting states. Civil-law parties include Italy, the Netherlands, Switzerland, Luxembourg, Liechtenstein, Monaco, San Marino and Panama; common-law and mixed systems include the United Kingdom, Australia, Canada, Malta and Cyprus. Some ratified after signing, while others joined by accession without signing first. Signing alone does not bind a country: France signed in 1991 but has not ratified. The mix matters because the Convention links systems that invented the trust with systems that never had one.
  5. The United States signed the Convention on 13 June 1988 but has not ratified it, so it is not a contracting state and US courts are not bound by it. Questions about which law governs a trust, or whether a foreign trust is recognised, are decided in the US by each state’s own law, including its conflict-of-laws rules. Someone with property or family in both the US and a contracting state may therefore face two different sets of rules.
  6. The Convention’s choice-of-law rules are simple. A trust is governed by the law the settlor chose, expressly or by clear implication in the trust document (Article 6). If no law was chosen, it is governed by the law it is most closely connected with (Article 7). Recognition has limits. A court may still apply its own rules on inheritance, marriage, protecting minors and creditors in insolvency (Article 15), and may refuse a result that is manifestly against public policy (Article 18). The Convention does not affect tax (Article 19).

Key facts

  • The Hague Trust Convention concluded on 1 July 1985 and entered into force on 1 January 1992.
  • The HCCH status table lists 14 contracting states, including the United Kingdom, Italy, the Netherlands, Switzerland, Australia and Canada.
  • Article 2 defines a trust as the legal relationships created when a settlor places assets under a trustee’s control for a beneficiary or a specified purpose.
  • Under Article 3, the Convention applies only to trusts created voluntarily and evidenced in writing; a state may extend it to trusts declared by courts (Article 20).
  • Contracting states recognise trusts created under the law the Convention points to, but local rules on inheritance, marriage and insolvency can still apply (Article 15), and tax powers are untouched (Article 19).
  • The United States signed the Convention on 13 June 1988 but has not ratified it.

Exercise nine, six, three, one

9CollectGather 9 examples of cross-border asset situations you or someone you know might face, such as holding a bank account in one country while living in another, or leaving property to relatives abroad.
6ClusterSort the 9 situations into 6 categories: the country where the question arises is a party and the trust is voluntary and in writing; it is a party but the trust is not in writing; it is a party but local inheritance, marriage or creditor rules may apply; it is not a party but has its own trust law; it is not a party and has no trust law; not sure yet.
3DistillReduce the 6 categories to 3 core scenarios: where the Convention clearly applies, where it does not apply, and where the outcome depends on local rules or further checking.
1CrystallizeWrite 1 sentence explaining why recognition under the Convention depends on the country where the question arises, not only on the country where the trust was made.

Fact check

Dates, figures and claims checked against the published sources listed below.

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