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Trust Law/Level VIII · Trusts of the world/8.2 Civil-law and religious systems/Lesson 7

Recognising a foreign trust

How states applying the Hague Trusts Convention recognise a foreign trust, where forced heirship and other mandatory rules can override it, and what the Convention leaves to each state.

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. Hold or administer trust assets in a Hague Convention state: recognition there at least treats the property as a separate fund and lets the trustee act as trustee (Article 11). Catch: only voluntary trusts evidenced in writing are covered (Article 3).
  2. Register land in the trustee’s capacity where local law allows (Article 12), keeping it visibly outside the trustee’s personal estate. Catch: this fails where the registering state prohibits it or finds it inconsistent with its law, so check the land registry first.
  3. Under the EU Succession Regulation, a person can choose the law of their nationality for succession (Article 22), which can avoid forced heirship. Catch: it covers deaths from 17 August 2015, Ireland and Denmark are not bound, and public policy can override (Article 35).
  4. Article 15 preserves forced heirship and other mandatory rules, so the lean lawful course is to give reserved heirs their share and settle only the free portion. Catch: if recognition is refused, the court still tries to give effect to the trust’s objects otherwise.
  5. Recognition does not change tax: Article 19 leaves each state’s tax powers intact, so beneficiaries’ states tax under their own rules. Catch: non-party states, including the United States, use their own conflict rules, and Article 13 lets states refuse trusts tied mainly to non-trust states.

MaterialsThe Hague Trusts Convention, especially Articles 3, 4 and 11 to 21, free on the HCCH websiteThe HCCH status table for the Convention, which lists the contracting states and their reservationsLesson 1.2.7, on the Hague Trusts Convention, and lesson 1.2.6, on civil-law devices, for background

Wonder

  1. What does it mean, in practice, for a court to ‘recognise’ a trust?
  2. What happens when a trust conflicts with an heir’s fixed share of an estate?
  3. How does a court in a country without trusts decide what a foreign trust is?

Explore

  1. Many civil-law countries have no trust in their own law (lesson 1.2.6), yet foreign trusts may hold property there or have beneficiaries living there. Countries that are parties to the Hague Trusts Convention, concluded on 1 July 1985 and in force since 1 January 1992, apply its rules; the HCCH lists 14 contracting states (lesson 1.2.7). The Convention covers only trusts created voluntarily and evidenced in writing (Article 3). Other countries, including the United States, which signed in 1988 but has not ratified, use their own conflict-of-laws rules. This lesson explains these rules and does not recommend any structure.
  2. Under Article 11, a trust created under the law the Convention points to must be recognised as a trust. At a minimum, this means the trust property is a separate fund and the trustee may sue and be sued, and act before a notary or official, in the capacity of trustee. In so far as the trust’s governing law provides, it also means the trustee’s personal creditors cannot reach the trust assets, which stay out of the trustee’s insolvency, matrimonial property and estate on death, and that assets the trustee mingles or wrongly transfers may be recovered, subject to the forum’s rules on third-party holders.
  3. Article 12 lets a trustee register assets, such as land, in the capacity of trustee or in a way that discloses the trust, so far as this is not prohibited by or inconsistent with the law of the state where registration is sought. Article 13 lets a state refuse to recognise a trust whose significant elements, apart from the chosen law, the place of administration and the trustee’s residence, are more closely connected with states that do not have trusts. Under Article 21, a state may reserve the right to recognise under the Convention only trusts governed by the law of a contracting state.
  4. Recognition does not displace mandatory rules. Article 15 preserves provisions of the law chosen by the forum’s conflict rules that cannot be set aside by voluntary act, in particular on minors and incapable parties, the effects of marriage, succession rights, ‘especially the indefeasible shares of spouses and relatives’, transfer of title and security interests, creditors in insolvency, and third parties acting in good faith. This is where forced heirship, which reserves a fixed share of an estate to close family, can clash with a trust. If such rules prevent recognition, the court must try to give effect to the trust’s objects by other means.
  5. Article 16 preserves the forum’s rules that must apply even to international situations and, in exceptional cases, similar rules of another closely connected state, although a state may reserve against that second part. Under Article 18, the Convention’s provisions may be disregarded where applying them would be manifestly incompatible with public policy. The Convention also does not decide preliminary questions, such as whether a will or other act transferring assets to the trustee is valid (Article 4), and it does not affect states’ powers in tax matters (Article 19), so each state taxes trusts under its own rules.
  6. A court in a state that has not joined the Convention, or dealing with a trust outside its scope, applies its own conflict-of-laws rules. Because its law may not divide ownership between a trustee and beneficiaries, the court has to fit the trust into its own legal categories, and the results differ between countries and over time. Even in contracting states, questions about land, succession, creditors and tax still depend partly on local law. The Convention reduces the uncertainty of cross-border trusts but does not remove it, which is why the same trust can be treated differently in different countries.

Key facts

  • The Hague Trusts Convention applies only to trusts created voluntarily and evidenced in writing (Article 3).
  • Under Article 11, recognition means at least that trust property is a separate fund and that the trustee can sue, be sued and act before officials as trustee.
  • Article 12 lets a trustee register assets as trustee unless this is prohibited by or inconsistent with the law of the registering state.
  • Article 13 lets a state refuse recognition when a trust’s significant elements are more closely connected with states that do not have trusts.
  • Article 15 preserves mandatory rules, including succession rules on the indefeasible shares of spouses and relatives, which is where forced heirship can clash with a trust.
  • Article 18 allows the Convention’s provisions to be disregarded if manifestly incompatible with public policy, and Article 19 leaves states’ tax powers untouched.

Exercise nine, six, three, one

9CollectList up to 9 points where a foreign trust meets a local legal system, from this lesson or the Convention text you are reading (some sources give fewer), such as recognition, registration of land, an heir’s fixed share, a creditor’s claim or a tax rule.
6ClusterSort them into 6 categories: scope of the Convention, effects of recognition, registration, mandatory rules such as forced heirship, public policy, and tax.
3DistillReduce the 6 categories to 3 groups: what recognition gives a trust, what can limit or override recognition, and what the Convention leaves to each state.
1CrystallizeWrite 1 sentence explaining, in your own words, why a trust recognised under the Convention can still be affected by a country’s forced heirship rules.

Fact check

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

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