Pre-2004 – Where do we hail from?
The 11th of February, 1870 brought about the implementation of the Civil Code into Maltese legislature thereby providing a clear demarcation from the common law system adopted by Britain. The Civil Code finds its primary source in the Code Napoleon which in turn is based on Roman law. Prior to 1988, the notion of a trust was uncommon to our legislation or courts. This is especially ironic due to the fact that Roman Law recognised the institute of fiducia, which held a similarity to the characteristics of a trust; however the institute was phased out and the notion behind it withered away with time.
Due to the fact that Malta fell under British rule for a considerably long period of time, notions which surfaced and attached themselves to common law were infiltrating into Maltese judicature, even though Malta’s legislative system is based on continental law. The notion of a trust is based on the principle of equity expounded by common law. Even though this is not applied by our Courts it is nevertheless recognised. This principle encompasses the notion of fairness, impartiality and justice and as a result of this definition it is evident that the underlying theory has infiltrated within our judicature as laid down in the judgement Gouder noe v Sammut noe [1987].
The introduction of trusts to Malta was brought about by way of The Offshore Trusts Act which was based on Jersey Trust law; yet the Act included no reference to equity. Jersey Trust law entered into force in 1984 and is probably the most popular legislation with regard to trusts. The Offshore Trusts Act bears a particular nature due to the fact that its application was directed solely towards those persons which were considered to be non-resident persons under local legislation. This resulted from the belief that the institution of a trust would provide no benefits or advantages to residents of Malta. Consequently, the Act did not bring about the constitution of the institute of a trust but rather the recognition of foreign trusts.
Under the Act a company registered under Maltese law would be able to act as trustee to a non-resident settlor provided that the trustee holds the necessary documents and warrant as required by the appropriate authority. It is for this reason that the act is entitled The Offshore Trusts Act. Owing to the offshore nature of the trust, it would not be required to provide public registration of the trust, even though the trust would have had to be registered for recognition purposes. Recognition was not restricted to one type of trust; the coverage extended to discretionary and charitable trusts with a period of validity for 100 years.
Through the entry into force of the Act, a range of novel concepts were introduced to Malta’s jurisdiction such as the definition of the trust itself, the notion and office of a trustee and beneficiary. In addition, the recognition of the trust brought along with it tax exemptions and benefits in relation to the trust, the applicable or choice of law to particular jurisdictions as well as providing an alternative to testamentary dispositions.
Despite the new concepts which were introduced, the industry never took off mainly due to the restrictions imposed as a result of the unavailability to residence. Amendments were made to the Act, particularly changing the name to The Trusts Act. Its purpose was to remove the reference to offshore in hope of lifting the industry off by attracting wide-ranging potential clients. In addition, it introduced novelty concepts particularly protective trusts, the office of protector as well as the opportunity to trace the property in relation to the trust. Overall, advantages were provided for those foreign trusts which were established in Malta. Despite this, trusts established by non-residents were still considered to be inapplicable.
The Act was once again considered to be insufficient and unsatisfying; consequently 1994 brought about the introduction of The Recognition of Trusts Act which emulated the provisions found under Jersey Law in relation to trusts and their recognition. The amendments were effected as a result of the limitations provided by its predecessor together with a strategy which provides for the phasing out of offshore trusts. Two years subsequent to the introduction of The Recognition of Trusts Act, Malta ratified the Convention on the Law Applicable to Trusts and on their Recognition (The Hague Convention) on the 1st of March, 1996. The object of the Convention is to provide guidelines for those jurisdictions which do not possess the same principles recognised under common law. In fact, the Convention’s preamble recognises the trust as a unique legal institution due to the fact that the principle of equity was developed by common law courts. It regulates the law applicable to trusts and their recognition in civil law jurisdictions due to the disadvantage which civil law is set at. The Convention lays down certain conditions for its application to the recognition of trusts such as that laid down under Article 3 which provides that the scope of the Convention only extends to the those trusts which are voluntary and evidenced in writing; it also gives directions on the effects of foreign law trusts. Fiscal matters as well as matters going against public policy fall out of the scope of the Convention.
There have been a diverse number of initiatives with regard to the institution of trusts in Malta. It may be said that the incentives which were taken up prior to 2004 where necessary to pave the way for the introduction of The Trusts Act (TTA) in 2004.
2004 Act – Background
2004 brought about the implementation of The Trusts (Amendment) Act with the object of eliminating a range of concepts which were introduced as a result of its predecessor, especially the underlying concept of a nominee company, any rules of confidentiality as well as any discriminatory tools which were imposed when referring to a trust. It moreover provided for a departure away from the offshore industry, with the intent of creating a hub for trusts in Malta with the object of making it a more attractive vehicle. Moreover, the Act brought about the introduction of novel frameworks such as the regulation of trustees and fiduciary activities as well as providing for the regulation of the taxation of trusts.
The Act manifests an amendment to the name, changing it to the TTA as well as providing for amendments to other acts of law such as the Civil Code, the Income Tax Act, the Companies Act and the Arbitration Act. The Act’s main effect was the fundamental introduction of the institute of the trust into domestic legislation, with the result of making it available to residents.
A further amendment was made to the Act via Act III of 2007 which provides clarity on the interpretation of rules particularly relating to foundations.
The trust instrument produces an array of benefits making Malta an attractive preference to institute a trust deed. The trust instrument firstly creates a distinct patrimony from that of the trustee in the sense that there exists a separation of the estate of the trust to that of the trustee, especially with regard to any creditors’ claims, matrimonial property or inheritance. Moreover, the trust instrument brings about the creation of a particular contractual arrangement resulting in the creation of fiduciary obligations. The trust instrument also gives rise to a distinct relationship between the trustee and the beneficiary in which the latter has an enforceable obligation against the trustee. It also gives rise to a degree of flexibility as to the beneficiary’s rights. The trustee is under the obligation to administer the property with the due diligence of a bonus paterfamilias.
The concept underlying the institute of a trust may cause a degree of perplexity due to the fact that the trust does not involve two divergent ownerships; but on the other hand the trust attributes to the beneficiary certain rights in the pool of assets as a whole due to the interest the beneficiary derives from the asset. However, the issue arises whether the beneficial interest held by the beneficiary constitutes an interest which is in rem or in personam. In a reference for a preliminary ruling of Webb v Webb the court held that:
‘It follows that an action for a declaration that a person holds immovable property as trustee and for an order requiring that person to execute such documents as should be required to vest the legal ownership in the plaintiff does not constitute an action in rem within the meaning of Article 16(1) of the Convention.’
As a result, it may be concluded that the beneficial interest held in a trust constitutes a personal right. However, it is important to bear in mind that each trust instrument is distinct, resulting in the probability that the beneficiary may not only hold a beneficial interest over the trust estate but they may hold rights over the trust estate.
In its essence the basis of a trust relationship is that of a fiduciary obligation which is found under Article 1124A of the Civil Code:
‘(1) Fiduciary obligations arise in virtue of law, contract, quasi-contract, trusts, assumption of office or behaviour 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 circumstances, reasonably to have been aware, that the use of such information is intended to be restricted.’
Nevertheless according to the general principle of law: lex specialis derogat lex generalis, therefore the provisions found under the Trusts and Trustees Act override those found under the general law; unless the contrary is expressly provided for by law. For the creation of a trust instrument there must be the intent to create the trust present in the mind of the settlor. However, the law establishes a range of ways in which a trust relationship may arise. Under Article 7, the law lays down that a trust may come into existence:
• Unilaterally;
• By oral declaration;
• By an instrument in writing including by will;
• By operation of law; or
• By a judicial decision.
Notwithstanding the criteria laid down under Article 7, the meaning of Article 7 must be interpreted within the generality of Article 3 which states that:
‘A trust exists where a person (called a trustee) holds, as owner or has vested in him property under an obligation to deal with that property for the benefit of persons (called the beneficiaries), whether or not yet ascertained or in existence, which is not for the benefit only of the trustee, or for a charitable purpose, or for both such benefit and purpose aforesaid.’
The creation of a trust may take a variety of forms:
• Discretionary or Fixed Interest Trusts
A discretionary trust consists of a trust which gives rise to a particular discretion which may be applied by trustees in order to have the ability to manage and invest the estate of the trust; to have the power to appoint the beneficiaries, distribute the income and capital derived from the trust; as well as to whom such distributions should be made. In fact in Re Smith [1928], property was held by the trustee under a discretionary trust. The court held that under a discretionary trust the trustee has at his disposal the discretion to apply the whole or part of the fund to or for the benefit of a particular person. Moreover the latter may not avail himself of a remedy before the court in order to take hold of the benefit.
Fixed Interest Trusts on the other hand entail a similar discretion such as those laid down under discretionary trusts; however the remit of the discretion is laid down and provided for in the trust instrument. Therefore the beneficiaries’ entitlement is predetermined in the trust instrument to a specified portion.
• Accumulation of Maintenance
This type of trust is found under Article 26 of the Trusts and Trustees Act. The object of this trust is for when the beneficiary is of minor age, regardless of whether his interest is a vested interest or in the event that the interest will become vested upon the attainment of the age of majority or at any later age or the happening of an event depending on the trust instrument. In these trusts the trustee is awarded the discretion to accumulate the income which is attributable to the interest of the beneficiary pending the attainment of the age of majority or such later age or the happening of such an event. The trustee also has the power to apply such income or part of it to or for the maintenance, education or any other benefit of such beneficiary. Article 26 (2) also grants the power to the trustee to have the ability to advance or appropriate, to or for the benefit of any such beneficiary the whole or part of such interest.
• Oral Trusts
Oral trusts may be constituted under Article 7 however it is essential that the intention to create the trust is shown as otherwise it is assumed that a relationship of mandate arises.
• Constructive Trusts
According to Muschinski v Dodds the court held that:
‘Viewed in its modern context, the constructive trust can properly be described as a remedial institution which equity imposes regardless of actual or presumed agreement or intention (and subsequently protects) to preclude the retention or assertion of beneficial ownership of property to the extent that such retention or assertion would be contrary to equitable principle.’
Maltese general principles follow that a constructive trust bestows a presumed intention on the settlor by means of a judicial decision.
• Resulting Trusts
A resulting trust arises from two different scenarios. The first being where a presumption arises that the property held under the trust is for the benefit of others. The second scenario is where there is failure to wholly dispose of the beneficial trust in the trust instrument.
• Protective Trusts
A protective trust is one which is established for a person who is unable to manage his affairs. A protective trust is catered for the beneficiary under Article 13 of the TTA which provides that the in the case of a protective trust the interest may be:
o Liable to termination;
o Subject to restriction on alienation or dealing;
o Subject to diminution or termination in the event of the beneficiary becoming bankrupt, or insolvent, or any of his property becoming liable to seizure for the benefit of his creditors; or
o Not liable to attachment under a garnishee order issued against the trustee or to termination without the prior consent of the court, when the interest is expressed to be for the maintenance of the beneficiary or as a pension.
• Unilateral Declaration of Trust
Article 7 lays down the definition of the required criteria to constitute a unilateral declaration of trust:
‘(3) A unilateral declaration of trust is a declaration in writing made by a trustee stating that it is the trustee of a trust, containing all the terms of the trust as well as the names or the information enabling the identification of all the beneficiaries.’
In any trust for it to be valid two requisites must subsist: capacity and certainty.
In the event that the settlor is a natural person the settlor must have the title of ownership of the estate which is going to be held under the trust and he would be capable to transfer in his personal capacity according to law. Moreover, the settlor must be of majority age and does not qualify as a bankrupt individual or suffer from any mental illness. In the event that the settlor constitutes a corporation, the creation of the trust instrument must fall within the objects of a company.
Certainty is the second requisite required to create a valid trust deed. Certainty must arise in three areas: Certainty of words; certainty in the subject-matter; certainty in the objects falling under the trust instrument.
Moffat refers to the requisite for certainty of words as that of certainty of intention as the more appropriate term. In the deed of settlement certainty of words must occur in relation to the transfer of the assets to the trustees particularly in the method of transfer. With regard to the declaration of the trust, the instrument must be certain in the fact that it shows that the assets he already holds will fall under the trust deed; this is otherwise known as the declaration method. When a trust comes into existence on the opening of succession, certainty must be provided in the fact that the trust shall take effect upon the settlor’s death.
The trust instrument must be binding in that it is clear and unambiguous.
In Re Adams and the Kensington Vestry [1884] the judge held that that in order to establish the settlor’s intent, one must look at the whole trust instrument and in this case it resulted that the settlor’s intent was not one to create a trust.
Certainty of subject-matter entails certainty in the property which is going to be held under trust as well as certainty with regard to the interest held by the beneficiaries. However such certainty is considered to be a reasonable certainty as in the case of Re Golay’s Will Trusts [1965].
With regard to the element of the certainty of the object of the trust, this criterion not only extends to the fact that the beneficiaries must be mentioned with sufficient clarity however, it now wholly refers to the beneficiary principle with the result that all the beneficiaries must be ascertained or ascertainable except for those trusts which are considered to be charitable trusts.
• Duration
The duration of a trust depends on the rule of perpetuity. This rule resulted from a compromise between the public and private interest of the property. In fact Article 12 maintains that:
‘(1) A trust may continue until the one-hundredth anniversary of the date on which it came into existence and, unless sooner terminated, shall then terminate.
(2) Subarticle (1) shall not apply to a trust for a charitable purpose, to a unit trust or to a retirement scheme registered in terms of the Special Funds (Regulation) Act and set up as a trust.’
• Letter of Wishes
A letter of wishes is a document which is made by the settlor with the purpose of controlling the assets held under the trust. It is not a formality which is required for the validity of the trust instrument due to its non-binding character as established in Bank of Nova Scotia Trust Company (Bahamas) Limited v Nelia Ricart de Barletta. However, the letter of wishes may be made binding if it is included in the trust deed. Moreover beneficiaries are not entitled to access the letter of wishes of the settlor.
• Charitable Trusts
Instituting a charitable trust derived a range of fiscal benefits such as exemptions from income tax or trading profits. In a charitable trust there is no interest of beneficiaries due to the fact that there are no beneficiaries and it is not subject to the rule of inalienability. Moreover, rules in relation to charitable trusts are not as stringent with the relaxation of the rules on certainty as well as the fact that perpetual charitable trusts are considered to be valid.
For the constitution of the charitable trust, four criteria need to be satisfied:
• The trust must be charitable in nature
• The trust must entail a public benefit requirement
• The purpose of the trust must be exclusively charitable
There must be the application of The Cy Pres Doctrine which saves the property held under the trust in the event that the original trust would have failed or there would be the initial or subsequent failure of the general charitable intention.
Main Players
A settlor is defined as ‘the person who makes the trust and includes a person who provides trust property or makes a disposition on trust or to a trust.’ On the other hand, a trustee is defined in relation to property as ‘the person or persons holding or in whom the property is vested on terms of trust in accordance with the provisions of this Act or is otherwise deemed to be a trustee under this Act.’ The persons to act as trustees may be either legal or natural persons. In the event that the trustee consists of a legal person, there must be adherence to the following criteria:
• The objects of the company must include acting as trustee and carrying on activities ancillary or incidental thereto, and does not include objects which are not compatible with the services of the trustee;
• The company’s actual activities are compatible and connected with the services of a trustee;
• The directors of the company must not be less than three in number and must be individuals who are approved persons as established by law;
• The company has established adequate systems for maintaining proper records of the identity and residence of beneficiaries, the dealings and the assets in connection with trusts and compliance with the applicable law;
• Every person who has a direct or indirect interest in the company must be an approved person;
• The name of the company must not be inconsistent with the trustee activity; and
• Where the company is not registered in Malta, that company must be constituted or incorporated in an approved jurisdiction.
If the trustee is an individual who is considered to be a natural person, the law lays down the following qualifications:
• The individual must be a resident in Malta or operating in Malta;
• The individual is an approved person; and
• The individual has established adequate systems for maintain proper records of the identity and residence of beneficiaries, and of the dealings and the assets of trusts and compliance with applicable law.
Nevertheless, a person shall not be considered to hold the appropriate qualification or to hold office as trustee if he is an interdicted or incapacitated person or is an undischarged bankrupt. A person shall neither qualify if he has been convicted of any of the crimes affecting public interest or of theft or of fraud or of knowingly receiving property obtained by theft or fraud; neither will he have the ability to hold office as trustee if he is of minor age or if he was subject to a disqualification order ordered by the Court.
Generally, the trustees are first appointed by the settlor in the trust instrument. However, where there is no trustee or where a vacancy arises, the duty to apply to the court for the appointment of a new trustee on the part of the last former trustee or any other trustee, the beneficiaries or the Attorney General. If the appointment of the trustee is made by any other means than by the settlor in the trust instrument, the trustee shall be subject to the same powers, discretion and duties as if he had originally been appointed in the trust instrument.
The acceptance of the trust to act as trustee is not obligatory; however if any person who is appointed as a trustee in the trust deed acts in such a way a trustee would act then that person shall be deemed to have accepted the appointment as trustee. The refusal of his office as trustee should be made within a reasonable period of time after becoming aware of his proposed appointment.
It is possible for the trustee to resign from the office of trustee, provided that this is done by a notice in writing to his co-trustees or in their absence to at least one beneficiary. In the event that there are no beneficiaries to the trust notice in writing shall be made to the settlor or in his absence to any successor of the trustee. His resignation shall take effect upon such notification. Removal of the trustee on the other hand shall occur in any of the following cases:
• Removal by the court;
• The occurrence of a provision in the trust declaring so; or
• In the event of the winding up of or declaration of bankruptcy of the person acting as trustee.
A power is defined as an authority conferred upon a person to determine the legal relations relating to him or others. The powers of the trustee may consist either of administrative power (e.g. the power to remove trustees) or dispositive powers (e.g. the power to appoint beneficiaries). In fact, Article 24 maintains:
‘(1) Subject to the terms of the trust and to the provision of this Act, a trustee shall, in relation to the trust property, have all the powers of a natural person having the absolute title to such property.
(2) A trustee shall exercise his powers in the interest of the beneficiaries and in accordance with the terms of the trust.’
The trustee is not permitted to delegate his powers to any other person unless it is established by law, ordered by the Court or falls within the parameters of the trust.
A trustee is not entitled to any remuneration unless it is provided for under the terms of the trust; however he may be reimbursed for any of the expenses he incurred in connection with the trust.
Article 21 lays down the trustee’s duties in that he will act with the prudence, diligence and attention of a bonus paterfamilias and observe the utmost good faith in the exercise of his duties, powers and discretions. It is the duty of the trustee to carry out and administer the trust according to its terms together with the obligation to ensure that the trust property is vested in him or is under his control and shall in so far as is reasonable to the terms of the trust safeguard the property held under the trust from any loss or damage. The duties of the trustee generally cover the Due Diligence principle and the KYC (Know Your Client) principle this would result in obtaining all possible information about the settlor, analysing the creation of the trust together with its funds or asset throughout the existence of the trust. The trustee has the additional duty to maintain the accounts in relation to the trust as well as having the duty to keep the property held under the trust separate and distinct from the trustee’s personal property as established under Article 21 (5). Moreover the trustee has the duty to provide information as laid down in Article 29:
‘29. (1) A trustee shall, so far as is reasonable and within a reasonable time of receiving a request in writing to that effect, provide full and accurate information as to the state and amount of the trust property, including the accounts of the trust, and subject to subarticle (2), the conduct of the trust administration to:
(a) the Court;
(b) subject to the terms of the trust, the settlor;
(c) the protector of the trust;
(d) subject to the terms of the trust, any beneficiary of the trust who is of full age and capacity, or if a minor, to his lawful guardian or representative;
(e) subject to the terms of the trust, any charity referred to by name for the benefit of which the trust was established; and
(f) in case of a trust established for a charitable purpose, the Attorney General or the relevant authority under applicable law.’
A trustee shall be liable for breach of trust where there occurs loss of depreciation in the value of the trust property resulting from the breach or if the profit would have accrued to the trust if there would have been no such breach. The trustee may neither apply a set off to any gain from a breach of trust against a loss from the same or other breach of trust. However, the trustee is not liable for any breach which occurred prior to his appointment as trustee when the said breach was committed by another person; in such event, on becoming aware of the breach he has the duty of to take all reasonable steps in order to rectify the breach. Nevertheless when the breach of trust arises from the trustees own fraud, wilful misconduct or gross negligence there shall be nothing in the terms of the trust which shall relieve, release or exonerate a trustee from the repercussions of the breach of trust.
The validity of the trust depends on the presence of the beneficiaries in the trust deed unless the trust is a charitable trust. In fact, Article 9 (4) maintains that:
'(4) A person shall not be entitled to benefit under a trust unless he is -
(a) identifiable by name; or
(b) ascertainable by reference to a class or to a relationship to some person, whether or not living at the time which under the terms of the trust is the time by reference to which members of a class are to be determined;
and if there are no beneficiaries identifiable or ascertainable as aforesaid the trust shall, unless the purpose of the trust is a charitable purpose, fail.'
Gardner expands on this by stating that ‘It is in the interest of a beneficiary in the trust property, rather than the trustee’s duties that lies at the heart of the trust concept.’
In the case of Saunders v Vautier, the Court held that beneficiaries are entitled to terminate the trust provided that the trust instrument does not state otherwise. The beneficiary must also obtain the consent of all the other beneficiaries as long as each individual beneficiary is of sound mind and would have attained the age of majority. Moreover, as provided for in Article 9 (4), the beneficiaries must be ascertainable.
According to the law, a beneficiary has an entitlement in or to the trust. Such entitlement is known as the beneficial interest of the trust. The beneficial interest is to the enjoyment of the beneficiary provided that such enjoyment is within the parameters of the trust, the Act and any provisions relating to the trust. The rights of the beneficiary are personal in nature and are subject to any applicable laws. Relations to the beneficiary such as his creditors, heirs and spouse may have a right to the interest only as specified in the terms of the trust provided that such rights only to the extent of the beneficiary’s entitlement to the interest. Moreover, the beneficiary’s relations have no other right neither
