The Hungarian Trust: A Transparent Solution for the Legal Protection of Assets and Succession Planning in Family Businesses.
The most general reason for setting up a trust is to ensure the effective and professional legal protection of assets. Contrary to a private foundation, there is no legal requirement to set forth a specific objective for the trust. However, the most common objectives of a trust include, among others, i) safeguarding the integrity of the assets, ii) protecting the assets against potential creditors, iii) succession planning, deviating from inheritance rules, iv) providing professional asset management, iv) providing secrecy and confidentiality, and v) tax planning.
Although the new Hungarian Civil Code already introduced the concept of a „trust” in2014, during the ongoing pandemic this unique legal solution has experienced particular demand due to the fact that families were “reminded” by the circumstances that they should think more about their succession planning. The legal institution of a trust enables diversification of the asset portfolio of the Settlor and a more professional and effective protection of the assets vested into a Trust. A Hungarian Trust (compared to most of the Civil Law fiduciary concepts) results in a real transfer of the ownership title over the assets. It is a transparent vehicle, i.e. the distribution of assets and profits out of the Trust are deemed to be derived directly from the Settlor, which has as a taxation relevance (allowance) if the Beneficiaries are straight-line relatives of the Settlor. Neither the assets, nor the Settlor, the Trustee or the Beneficiaries have to be located or reside in Hungary.
General structure of the trust
The legal institution of the trust is a contractual legal relationship between the Settlor and the Trustee, by virtue of which certain assets vested in trust by the Settlor become legally owned by the Trustee. Thus, the Settlor as the original owner of the assets transfers ownership title of his assets, under certain circumstances, to the Trustee. The Settlor specifies in the contract concluded with the Trustee who the Beneficiary/Beneficiaries will be, or he may appoint a specific group of beneficiaries as well. The Settlor may also be appointed to be a Beneficiary. It is also possible that the Settlor does not designate a Beneficiary but authorises the Trustee to decide on the identity of the beneficiary. The Trustee, based on the provisions of the trust deed, must hold and manage the trust assets upon trust in the Trustees’ absolute discretion, in the Trustees' own name and on the Beneficiaries' behalf, taking into account and serving the Beneficiaries' best interests. The Trustee holds and manages the trust assets separate and diversified from the Trustee's own assets; thus the trust assets are safeguarded from the Settlor’s potential creditors. The Trustee must safeguard the value of the trust assets, but he may also dispose over such assets, under the limitations of the contract, and has to notify the Settlor and the Beneficiaries concerning the changes in the trust assets.
In the trust deed, the Settlor may specify certain conditions in respect of the Beneficiaries, which means that the Settlor may provide i. for the (pre-)conditions which must be satisfied for being appointed as a Beneficiary, ii. how someone may be eligible to receive the assets or a part of them and iii. the conditions for becoming entitled to the proceeds from the trust assets.
Trusts can be set up by professional trustee companies (subject to licensing by the Hungarian National Bank) or by non-professional trustees. In the latter case, the trust has to be registered by the Hungarian National Bank. This registry is not public.
Creation and term of the trust
The trust can be set up for a fixed term maximum of 50 years, or for an indefinite term, in which latter case the trust, if not terminated earlier, terminates automatically upon the expiration of the 50-year period.
If the trust is going to be set up for the eventuality of the Settlors death, this can be implemented either by way of a will or a contract between the Settlor and the Trustee.
The trust terminates if:
- the trust assets are fully consumed;
- there is no trustee of the trust for a period of over three months, at the time of the termination of the trustee mandate;
- the Settlor was the sole Beneficiary, at the time of his death; or
- the Settlor decided to terminate the contract concluded for an indefinite duration, unless the contract contains any provision to the contrary.
Registration of a non-professional trust
Trusts established with a non-professional trustee must be registered with the Hungarian National Bank. The registration by the Hungarian National Bank is a declarative action, meaning that it does not affect the existence and the validity of the Trust; however, if the trust assets contain asset elements the ownership title of which are subject to a registration into a public registry, such registration is subject to the availability of the certificate on the registration issued by the Hungarian National Bank.
Trusts established with a professional trustee do not have to be registered, as in this case the trustee is licenced and registered with the Hungarian National Bank and such professional trustee must keep its own records on the trusts managed by itself.
Tax and accounting aspects
It is also worth mentioning that Hungary has not merely created the concept of the trust, but it has also enacted the related laws (procedural, regulatory, tax, accounting rules) necessary for law practitioners to effectively operate such a legal vehicle in practice. Thus, a properly structured trust may not only be a perfect tool for maintaining the integrity of the assets of high worth settlors, but may also give them an opportunity to diversify their portfolios, under very favourable taxation rules and with an increased level of confidentiality. The settlement of trust assets is free of any transfer tax or duty and, in the event of companies, it is tax deductible.
In addition, the trust itself is a separate tax subject and the income therefrom is subject to corporate income tax (the rate of which is very favourable in Hungary, currently 9%). Due to the fact that the trust is a tax transparent vehicle, the distribution of the trust assets is considered to be a transfer from the Settlor to the Beneficiaries which, depending on their relationship, can also be exempt from taxation.
First of all, there is no entry tax on the asset being put into trust. Second, the taxation of the income of the trust is very transparent since the trust itself – which has its own tax registration number – is subject to corporate income taxation (the current Hungarian corporate tax rate is 9 %). Finally, the taxation of the distributed asset varies depending on the feature of the asset (i.e. capital or income) and the person of the beneficiary and his/her link to the settlor. In a properly designed trust, the assets received by the beneficiary will only be taxed at distribution. However, since there is no gift or inheritance tax in Hungary in relation to the directly ascending or descending family line or with regards to marital spouses, the trust can be a perfect tool for tax-free estate planning too.
Should you have any questions concerning the above, please send your enquiry to Sándor Németh.