Foreign trusts have both benefits and risks, which vary from jurisdiction to jurisdiction. Jack Millhouse and Charles F. Schultz IV of FGMK look at examples from civil law jurisdictions in Europe, so-called “tax havens” in the Caribbean, no-longer popular New Zealand, and the unique situation in Malta.
In the process of forming a trust, the choice of jurisdiction, and its associated tax or legal regime may play a significant role in impacting the decision. The purpose of this piece is to provide a high-level snapshot of several noteworthy regimes and jurisdictions. Each of these regimes requires a different approach to planning and structuring the resulting trusts. Practitioners should always keep in mind that there is no “one size fits all” method when it comes to establishing foreign trusts. Depending upon the unique circumstances and goals of both the trust instrument and the affected trust individuals, certain items below may play a role in guiding the ultimate decision.
Civil Law Jurisdictions (e.g., Germany, France, Liechtenstein)
Civil law jurisdictions differ from their common-law counterparts in that they rely primarily on written statutes to govern, as opposed to common law nations that utilize precedential case law. This reliance on the codified statute by civil law entities creates uncertainty due to the evolution of trust planning. Oftentimes, no statutes exist to govern complex trust planning. Accordingly, civil law jurisdictions are forced to wrestle with novel trust concepts without statutory precedent upon which to rely. This causes significant unpredictability in dispute resolution outcomes, which can often run counter to the wishes of the trust creator. Such variability has led to the somewhat deserved perception that civil law jurisdictions are hostile to trusts.
One major issue, to highlight this point specifically, is recognition by civil law jurisdictions of the trust itself. Because, as mentioned, trusts may not be grounded in statutes in certain civil law countries, courts there may not regard the trust instruments and will instead look exclusively to local law to govern factual disputes. When trust terms conflict with the local statute, they may be invalidated. For example, in Germany, if assets in dispute are deemed to be the property of a trust, the court must apply mandatory provisions of German property law to apply to the factual issue, rather than the trust terms themselves.
The Hague Convention of 1992 was introduced as an attempt to eliminate such inconsistencies by forcing civil law jurisdictions to recognize trusts and setting up a universal set of guidelines under which to govern disputes. However, to this day, it has only been ratified by 14 nations and its overall effectiveness is open to debate. The view that civil law jurisdictions pose additional legal challenges for trust remains valid.
Nevertheless, trust-like results can be obtained in civil law jurisdictions through the formation of a different kind of entity, such as a family foundation. Entities like family foundations are typically better supported by the existing statutes of civil law regimes, avoiding the stability issues inherent to trusts under civil law. Although different from trusts in the legal personality they are invested with and the broader powers their governing boards may be invested with in comparison to a trustee, family foundations are well-equipped to meet much the same ends as trusts in civil law jurisdictions.
