Prior to and in anticipation of the accession of Malta to the EU, Malta started looking into moving away from being an offshore jurisdiction to being regulated, especially in the Financial Services Industry. One of the notions which was ‘targeted’ (so to say) was that of trusts. However, being historically a Civil law country, our law did not leave room for the concept of Trusts (which is predominantly a Common law concept). Nevertheless, drastic changes needed to take place in our legislation and the drafting of the new trusts law began in the early 2000’s and culminated with the publication of the Trusts (Amendment) Act 2004 on the 16th of November, 2004. This act conducted an extensive amendment to the Trusts Act of 1988, which is when the first notion of Trusts was included in our law. The new law was renamed as the Trusts and Trustees Act, and the amendment act also included changes to the Civil Code as well as to many other relevant laws. The amendments came into force on the 1st of January 2005, and reflected changes and changes which are still in force until today, eleven years later. One of the challenges for the introduction of the notion of trusts to our law, was the fact that it was thought that the whole concept of trusts would be incompatible to our law. However, there are various similarities between the concept of trusts and the underlying notion of fiduciary and this article will provide a summary of what each notion/ arrangement is about. In trust law there is the concept of a fiduciary, which is a well know concept in Roman law, which branches off into two concepts, the fiducia cum amico and the fiducia cum creditore. In fact, article 1124A of the Civil Code, states that “Fiduciary obligations arise in virtue of law, contract, quasi-contract, trusts, assumption of office or behavior 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 or ought, in the circ*mstances, reasonably to have been aware, that the use of such information is intended to be restricted.”
What are fiduciary obligations?
Fiduciary obligations are the type of obligations which impose on a person duties of care and to act in the other persons’ best interest. This is what is referred to in civil law as acting like a bonus paterfamilias. These obligations bind persons who are in control, directly or indirectly, through ownership or possession, of property belonging to another person.
Fiduciary arrangement
The first scenario contemplates the use of fiduciary services, whereby assets, such as shares in a company are registered in the name of licensed fiduciary company. Consequently, in such a scenario, the fiduciary company will hold the said shares for and on behalf of (and therefore as fiduciary /agent/ mandatary of) the beneficial owner of such assets. Whilst this mechanism will effectively ‘hide’ the identity of the beneficial ownership of the assets, meaning that the beneficial owner is ‘invisible’ to third parties conducting searches in the publicly available records held by the Registry of Companies in Malta, the beneficial owner will still retain control as the absolute owner of such assets for all intents and purposes at law. Thus, the beneficial owner would, for example, be required to include such assets in his/her statement of assets and liabilities and also account for such assets in tax and similar declarations as may be required. One should also note that the licensed fiduciary company may/ will be required to disclose and divulge the name and identity of the ultimate and intermediate beneficial owner/s of the company to banks, financial institutions, regulatory authorities and auditors of the licensed fiduciary company as may be necessary in order to comply with such entities’ “Know Your Client” procedures and/ or in accordance with the provisions of Maltese law. Every Maltese company’s audited financial statements must be submitted to the Registry of Companies and the Inland Revenue Department on an annual basis. An audit may not be required for small companies. As a licensed entity, the licensed fiduciary company would be obliged to report the identity of the beneficial owner, which obligation arises from Common Reporting Standards (CRS) requirements. Main Advantages:
- Beneficial owner retains control of asset;
- Identity of beneficial owner/s ‘hidden’ from public domain;
- Implemented within 3 working days from receipt of a signed fiduciary agreement and all supporting due diligence documentation and information; and
- Cost-effective and straight-forward procedure.
Creation of a Trust
The second scenario contemplates the settling of the assets on Trust by a settlor having the full ownership over such assets, for the benefit of identified or identifiable beneficiaries. This will involve the creation of a trust, by means of a private written instrument (a trust deed), by virtue of which the trustee will become the legal owner of the asset. The trust deed does not result in the creation of a legal entity, but represents a contractual obligation between the settlor and the trustees, with benefits granted in favour of the trust beneficiaries. It is also important to mention that to date, the trust deed is not registered in any central register or with any public authority whatsoever, and consequently offers the advantage of complete discretion, remaining outside of the public domain. Unlike the fiduciary arrangement outlined above, the creation of a trust to hold the asset involves an effective segregation of legal ownership of the asset from its beneficial ownership, so that the trustee becomes the owner of the property and not merely a fiduciary as would be the case under a fiduciary arrangement.
Trustee's holding of property obligations
The trustee’s holding of property for the benefit of the beneficiaries of the trust is subject to strict fiduciary obligations requiring the trustee to act in the best interest of the trust. In doing so the trustee must act honestly, with integrity, in the utmost good faith and subject to a specified standard of care. In summary (i) the trustee must comply strictly with the duties and directions as set out in the trust deed; (ii) the interests of the trust and the beneficiaries are paramount; and (iii) powers must be exercised in an informed manner, with due standards of care and in a way which does not exceed that specified by the trust deed. The mechanisms set out in the trust deed are of paramount importance to ensure an effective and workable framework balancing the trustee’s discretions with a degree of formality that will serve to provide the beneficiaries or prospective beneficiaries with the desired levels of comfort and peace of mind. The trust property would be settled by the settlor, effectively by transferring the shares, cash or other property to the licensed trust and fiduciary company. Once settled on trust, the trust property constitutes a body of assets which is separate and distinct from the personal property of the trustee and the property held by the trustee under any other trust or title. This effect is very important as it “protects the trust property from any claims raised against the trustee which are unrelated to the trust in question. By way of example, any funds held by the trustee are held on a client’s account which is kept segregated from the trustee’s proprietary funds, in a sub-account internally identifiable as “the ABC Trust sub-account”. This feature protects the beneficiaries of the trust from any eventual insolvency of the trustee from affecting the trust property. The treatment of CRS vs the trust is a special one, and very much dependent on the type of trust, assets and beneficiaries. Main Advantages:
- Legal ownership is effectively transferred to the trustee;
- Beneficial ownership vests in the beneficiaries; and
- Creditors of the settlor and/or the trustee will have no claim against trust property as it constitutes a separate estate distinct from that of the settlor and/or of the trustee.
Bottom line, both arrangements (trust and fiduciary) are based on the notion of utmost good faith, however they both offer a different solution to different client who have different needs. Trusts are used mostly for estate planning, and are very popular as a ‘fund’ for the future of the settlor’s children. Fiduciaries, on the other hand are used mostly in corporate structures to hide (only prima facie) the identity of the ultimate beneficial owners. CSB Trustees & Fiduciaries Limited, a licensed Trustee company forming part of CSB Group is regulated by the Malta Financial Services Authority (MFSA) in Malta. For more information on trust and fiduciary arrangements, contact us by email on [emailprotected] andwe will contact you within 24 hours to better understand your requirements.
About the Author
Dr.Ann Bugejajoined CSB Group in January 2011 where her areas of interest cover Ship and Yacht Registration, Employment Law, Contract Drafting, Residence and Work Permit applications and applications forSpecial Tax Status.
