Malta: Trusts And Foundations: A Reflection Of The Versatility Of The Maltese Juridical System

In the past few years the Maltese legislature has been active in the sector of fiduciary obligations, particularly those resulting from the creation of trusts and foundations. Trusts were initially introduced into Maltese legislation in 1989 in a 'ring-fenced' manner, essentially allowing for such structures in the context of non-resident persons only.  However, with the passing of the Trusts and Trustees Act in 2005,the trust concept has been fully integrated into domestic law. On the other hand, foundations have always been regulated by customary law, as no legislation on foundations existed until April 1 2008. The Second Schedule to the Civil Code now dedicates an entire sub-title to foundations.

The Trustee in a Trust and the Board of Administrators in a Foundation both owe fiduciary duties to beneficiaries. Therefore, in order to understand the concept of a Trust and Foundation one must understand what fiduciary obligations are and when they arise. Fiduciary obligations arise in a number of circumstances, including circumstances where a person:

  • Owes a duty to protect the interests of a third party;
  • Controls property for the benefit of a third party, "including when vested with ownership for such purpose";

A fiduciary owes duties of utmost good faith and honesty in all cases. A fiduciary also owes other duties such as:

  • diligence of a bonus pater familias;
  • not receiving unauthorized/undisclosed profit;
  • avoiding conflicts of interest;
  • Impartiality;

Characteristics of Trusts and Foundations

Malta as a jurisdiction offers the concept of the trust as well as foundations, among other concepts and strategies which can be utilized and resorted to in various scenarios and circumstances, including the structuring of investments and estate planning, trade and commerce. Although the law on foundations adopts principles from the Maltese Companies Act, it is largely based on Italian and French civil code provisions. It is possible to set up a private or a public foundation in Malta. A private foundation is set up by the founder for the private benefit of one or more persons, or a defined class of persons in which the beneficiaries must be certain. On the other hand, a public foundation may be set up for a particular purpose, provided that it is a lawful purpose.

The law provides that the foundation must be constituted in writing, via public deed inter vivos or a public or secret will. The deed of foundation must also be registered with the Office of the Registrar of Legal Persons, which is an ad hoc office set up for the specific purpose of undertaking the registration of legal persons in general. The foundation deed must include detailed provisions containing the powers, form of resolutions and signing authority of the foundation. Clearly this feature is more akin to companies than to trusts.

Once a foundation is established, a new legal person is created. Therefore, the foundation itself becomes the owner of the foundation property. This is a significant variation from the trust concept as a trust does not constitute a separate legal person. The trust is constituted by settling, donating or transferring the property concerned to the trustee, who is to hold the same in ownership, but for the benefit of the beneficiaries. The beneficiaries are protected inter alia because the law provides for the separation of the trustee's own personal estate, from any estate held in trust.

In a trust, it is the trustee who controls and administers the trust assets, and the settlor plays no part in the day-to-day administration of the trust assets. In a foundation, the relevant board of administrators has broadly similar powers of administration, representation and disposition as the trustee. In both trusts as well as foundations, the law provides for the figure of the "protector", usually nominated by the settlor/founder, that can qualify or in some cases limit the discretions exercised by the trustee or board of administrators. However, in the case of a trust, one must be careful that any such limitation does not render the trust a sham. In the case of a foundation, no such concerns would seem to apply. The board of administrators is accountable for the management of the foundation, but the founder may have a considerable say, through various means.

Although there are a number of differing characteristics between trusts and foundations, it is clear that in drafting the law on foundations the legislature kept in mind the law on trusts. The foundation envisages a founder which sets up the foundation with administrators which manage the foundation with the possibility of setting up a supervisory council to monitor the acts of the administrators. Likewise, on setting up a trust, the settlor entrusts the trust property to a trustee, whose actions may, to a certain extent, be monitored by a protector.

Foundations and Trusts Operating in Parallel

The proximity between trusts and foundations emerges in various provisions of the law, including the provision which allows the conversion of a trust into a foundation and vice versa. By allowing this conversion, the law enables the professional advisor to utilize the diverse characteristics of the entities in order to best address the varying needs of individuals or organizations.

Although there are various points at which trusts and foundations meet, it must not be assumed that either entity will take the place of the other. The two rather can operate in parallel under Maltese law, as one may perform better than the other depending on the circumstances and objectives to be achieved.

Perception

Malta has all the characteristics to grow as a prominent trust jurisdiction. Even though Malta is slowly becoming recognized as a trust jurisdiction there is still work to be done in order for Malta to gain the status of a major international trust jurisdiction.

On the other hand, even though the law on foundations has only just come into force, the courts have had various opportunities to deal with the matter in the past. Judicially, there was already a general acceptance of the concept in local civil society, although this is mostly true only in the case of foundations for public purposes. The way private foundations will be looked upon by the courts and the public remains to be seen. It is expected that there will be a greater acceptance of fiduciary structures in general in Malta in general in the near future, together with a clearer reference to rules on fiduciary obligations in judicial pronouncements.

Outlook

Trusts and foundations provide a useful device for individuals and organizations in various structures and transactions. A case in point is the use of foundations and trusts by high-net worth individuals worldwide to plan their financial affairs and provide for future generations in an efficient and practical manner. With the Maltese legal system now offering these two multifaceted tools, Maltese law firms and financial service providers can compete better with their foreign counterparts. In doing so, they are in a better position to service their clients' needs in addressing their diverse requests and dealing with increasingly sophisticated transactions.

* Dr. Tonio Fenech is also a lecturer in the Faculty of Law, University of Malta, teaching the law of Trusts, among other subjects.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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