Notary Marco Farrugia (The Sunday Times, April 29) expressed concern about the circumvention of the reserved portion granted by law to children and spouses through the use of trust accounts. He was concerned that the banks may be participating, as accomplices, in this possibility. He suggested that these accounts could be used to go against "basic principles of our Civil Code".

These are all very valid points. Now that trusts have hit our society in the form of a mass product designed by the banks, it is important to analyse the situation carefully to make sure that people properly understand the features of the trust and how it works. Notary Farrugia raised specific concerns which can be addressed as well.

A trust is a relationship between a person called the "settlor" and another person called the "trustee", whereby the settlor, with intent to create a trust, transfers property to the trustee for the benefit of another person or persons called "beneficiaries". In the context of the bank account, the property is cash/credit in the bank account which is to be held by the trustee under the terms of the trust.

The trust is created for the beneficiaries, as a gift, but because of its structure and features it opens up multiple possibilities which do not arise in a simple donation, mandate or any other institute in our Civil Code. It is these flexibilities which the banks are aggressively marketing. I think we can agree that the banks do market anything they offer aggressively.

Maltese law introduced trusts into the general domestic law in 2005 and as far as I can see there is nothing in the institute which allows it to be used against the basic principles of the Civil Code. Indeed there are numerous articles in the law which establish the basic principle that in case of conflict between a mandatory provision of the Civil Code and a trust, the Civil Code will prevail (see Article 6 of the Trusts and Trustee Act).

This is the dominant principle for persons who are domiciled in Malta as it does not apply when persons are not domiciled in Malta, but I do not think this is a concern. The effect of this principle is that a trust cannot be used to defraud creditors; it cannot be used to bring about transfers of property which are not permitted, including between spouses; it cannot be used to avoid maintenance obligations to family members and so on.

There is a rule in our Civil Code, which is mandatory, stating that when a person dies a portion of his estate is reserved for his spouse and children. This cannot be undermined by donating one's property away or by placing it under trusts during one's lifetime.

Having said that, as a legal institute, a trust can result in a conflict between rules and this is not unprecedented and can happen with a donation or a mandate prestanome where a person opens an account in his name and places in it monies belonging to a friend. These are two institutes we have had in our law and practice for centuries.

So if a father or mother of a family privately donates a sum of money to a friend and does not record it anywhere, this would reduce his or her estate, and when he or she dies no one will have any way of learning about it. If one gets to know about it, and it is that donation which breaches the legitim right, then one has legal remedies.

The same with trusts. It is true that a trust can be created privately and no one will know about it, but if the heirs manage to confirm its existence then there are legal remedies. The standard advice in this area is that a copy of the trust deed should always be given to someone in the family, but it is possible that a settlor would not do so for privacy reasons.

Do trusts create more opportunities to "hide" assets than do donations or undisclosed mandates? In my view they do not. They do, however, have the benefit of being highly regulated by a very detailed law both as to the institute and as to the trustee, a parallel which we do not find in donations or undisclosed mandates.

Could banks be accomplices in hiding assets to breach the mandatory rules of law in our legal system? Again, I submit that as regulated trustees banks are bound by rules of conduct issued by the MFSA as well as their heavy duties as fiduciaries and are bound to act honestly and in good faith at all times.

If someone had to approach a bank to open a trust account to deny his family members of their rights to legitim, the bank should refuse to act as a trustee for such a person. Fraud of the law is as dishonest as cheating or stealing in this sector. In practice it is never so obvious because legitim is a right relative to an estate which has to be calculated at a time in the future, maybe the distant future.

If a trustee finds itself in a position of trustee of assets which have been placed in trust and this results to be in breach of the legitim rights of children or a spouse, and is faced with a claim by such persons, the Trusts and Trustees Act actually gives the trustee the power to reduce the trust assets and pay them out to the legitimaries to meet their claim. There are many ancillary powers in this regard.

Consider this: who is in a better position? Family members who make a legitim claim against a bank/trustee over assets placed in trust, with all their regulatory and fiduciary duties, or the same members of a family who find out that the deceased had given a sum of money to a person (they possibly never heard of, or a close family member) whom they will have to pursue to claim their entitlement?

Dr Farrugia no doubt has far more experience than I on reserved portion issues, but our law has provisions which state that before you make any claims for legitim against a donee or trustee, you must first make claims against the heirs, on what everyone knows exists in the estate. So a claim for legitim against a third party donee and/or trustee is the exception not the rule; it is the second line of attack.

Furthermore there is always the problem of calculating the reserved portion because this depends on knowing the extent of the estate and the value of all assets which have been donated or placed in trust in the past. This is where Dr Farrugia raises a valid point. If we cannot get to know what has been donated or placed in trust, how can we calculate the value of the estate?

Our law establishes the principle that all assets donated and placed in trust must be notionally imputed to the estate of the deceased and then the calculation takes place on the total value. Knowledge is critical and cash transactions are the most difficult to trace. In the worst of all worlds allow me to suggest that a trust account with a bank provides the best possible record short of a public deed. Although a public deed is required for donations of more than moderate sums, is not something we can easily enforce in case of cash - as cash is easily handed over to the donee or spent of his or her behalf.

An example will help. Let us say a parent wishes to prefer one child rather than the other. The parent goes about making cash transfers to the preferred child, paying for costs in furnishing the child's house, paying other bills and so on up during his lifetime. All these are donations done without a public deed and most do not need a public deed either. When the parent dies, the spouse and the other child find the estate consists of a house and a small balance at a bank. They may wonder what happened to the cash savings but it will be difficult to prove anything. Although the donations may have breached the right to a reserved portion there is little one can do.

Take the trust scenario in a similar case. The father settles a sum of money in a trust account for the benefit of himself and his spouse, and for all his other descendants with an indication to the trustee to apply the funds mainly for that child. The trustee has a full record of the settlement and every payment thereafter. Let us assume that the trustee was told not to inform the spouse and the other child who are not beneficiaries. We have an identical situation.

The family are not aware of the trust, but if they become aware then we have a far more manageable situation: the bank has all the records of all benefits received, these can be imputed, the bank can then calculate the legitim rights. If the trustee still has assets in hand it can pay them over to the legitimaries if they do not get satisfaction from the remaining part of the estate.

The law goes as far as providing that if the distributions had been made to the preferred son in the meantime, then the reserved portion claim follows through the trust on to the beneficiary. The records of the trustee will, if necessary, show exactly who received what and when.

We can speculate on many possibilities but my point is that I agree with Dr Farrugia that trusts can be used like other legal institutes within our system to render dispositions private. This is a general situation and is not a result of trusts. For centuries people have been finding ways of avoiding the application of a will but because the law is not focused on such a possibility it results in a very dangerous situation, opening up the opportunities for fraud. This should happen less with trusts because most trustees are regulated and so have rules disallowing this knowing participation in this kind of violation. Trusts are based on fiducja, which implies honesty, good faith, observance of the law, accountability, competence and other positive values and it would be contradictory for a trustee to participate in dishonest aims.

Of course you can have a dishonest trustee and then we all expect our regulators and the courts to come down on them with the extensive powers they have. Private trustees have to work through public deeds and notaries where full record-keeping duties arise by law and who will advise settlors of the reserved portion rules. Acting as a trustee without authorisation or notarial support is a criminal offence and the public should not use trustees who are not authorised unless there is a notary involved.

If this "hiding" does happen, it is better if it happens within the context of a trust with regulated trustee or trustees assisted by notaries as there will be full records. There are also solutions to the problem in the law. These are very much along the lines of how our Civil Code deals with donations when they violate the reserved portion but with the additional benefit of having an in-built "conflict manager" to deal with the situation. Hiding assets is always dangerous as there are many dishonest people around. Trusts are a better way of dealing with such a situation.

Privacy is not necessarily a bad thing as it not automatically dishonest. There are too many judgments of our courts on situations of this type before trusts even came onto the scene to convince me of the need for a regulated and detailed institute of this type. I would refer readers to a collection of judgments published by the Institute of Financial Services Practitioners on trusts and related topics. This is available from the MFSA. It makes a really good read of about our levels of honesty! Another volume is in the making.

As to trust accounts, I think we need to put this in perspective. These accounts would not normally reflect large proportions of an estate and so it is very unlikely that the rest of the estate would not be enough to meet a legitim claim. Furthermore it is very likely that the beneficiaries of the trust account would be the spouses and children of the deceased, the very same people who have a legitim claim. They would thus receive their share through the trust anyway and be entitled to full information if they do not.

Finally, although the statement is being made that the trust can operate as a will, I think it is fairly obvious that this operates in such a way only for the monies deposited in the account and that a will is still advisable for the rest of the estate. Few people have an estate wholly consisting of cash which can be deposited in a bank account.

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