Spain: Choice Of Law Considerations For Trusts And Other International Estate Planning Institutions

On the Common law side of the Western legal tradition, and especially in the United States, the expression "estate planning" also makes reference to the different methods by which "probate" or administration of the estate by courts following death can be avoided.

First among the estate planning institutions is the Common law trust. The institution of the trust, a legal transaction between two parties, settlor, and trustee, for the benefit of a third party, is so widely used internationally that courts in Civil law jurisdictions have also had to cope with the concept of the Common law trust, but under the limited arsenal of legal concepts within the Civil law tradition.

Some Civil law countries have also made room in their legal order for the recognition of foreign trusts following the ratification of the 1985 Hague Convention on the law applicable to trusts and on their recognition (Netherlands, Luxembourg, Switzerland, Italy, Liechtenstein, Monaco, Malta, Panama, San Marino, etc.).

The Common Law legal systems that have ratified or have acceded to the Hague Trusts Convention 1985 are the following: Australia, Canada (with the exception of Quebec), Cyprus, and the UK (with territorial extension to Akrotiri and Dhekelia, Sovereign Base Areas in the Island of Cyprus, Bermuda, British Antarctic Territory, British Virgin Islands, Falkland Islands, Gibraltar, Guernsey, Isle of Man, Jersey, Montserrat, Saint Helena, South Georgia & South Sandwich Islands, and Turks and Caicos Islands).

Litigation involving foreign trusts in Civil law jurisdictions comes in many instances as a result of attempts to have forced heirship provisions fully observed, including their effect upon gifts and inter vivos trusts. The French reaction to recent notorious cases, such as the succession to the estate of the French rock star Johnny Hallyday, in the form of new legislation in the Code civil does not seem to be a step in the right direction. The new legislation (droit de prélèvement) allows forced heirs to recover their share on the estate's assets located in France. Quite notably, this device is part of the law of August 24, 2021, reinforcing the respect of the principles of the Republic. Of course, also tax national authorities have had to approach the concept of the trust, although their point of view is usually more preoccupied with not losing fiscal revenue than with legal subtleties. On the other side of the issue, the Common law jurisdictions have tried to protect their estate planning industry from forced heirship rules through the enactment of explicit legal rules forbidding the recognition of foreign decisions based on forced heirship rights which might be incompatible with the law of trusts or the rights of the beneficiaries under the trust: firewall legislations in force in Jersey, Guernsey, Gibraltar, etc.

The choice by the settlor of the applicable law to trusts is widely recognized in Common law jurisdictions and also in the Civil law jurisdictions that have ratified the 1985 Hague Convention (with the added bonus that Italian courts have also quite surprisingly recognized the validity of "trusts interni", i.e., trusts for which the legal order a Common law jurisdiction has been chosen by the settlor in the deed of settlement as the governing law, but the assets or even the trustees are exclusively located in Italy; the situation in Switzerland is not exactly the same: although legislation is in preparation, the trust is not yet a legal institution under Swiss laws, of course foreign trusts are recognized in Switzerland, but internal trusts created by means of a choice of law clause choosing a foreign law is not possible).

The choice of jurisdiction for relations between settlor, trustee and beneficiary, through an express agreement of choice of forum incorporated in the trust deed, has been possible since the beginning of European Union private international law in the Brussels Convention 1968, now Regulation (EU) 1215/2012. In the absence of a choice of forum clause, jurisdiction will lie with the courts of the place of the "domicile" of the trust, a concept which only can be alternatively described as the law of the place with the closest connection with the main elements of the trust: trustee, situation of assets, place of administration etc.

Besides trusts, as the main legal institution of the estate planning industry, we can add other last-will substitutes: joint tenancy over real estate and the right of survivorship that it entails, joint bank accounts with right of survivorship," "pay upon death" bank accounts, the designation of beneficiaries under life insurances, different forms of life interests over estate assets created by contract, etc. Where the legal institution belongs to the more general concept of property laws, such as the right of survivorship under the joint tenancy rules, the application of the lex situs rule is the only connecting factor. On the contrary, where a contractual characterization is possible, such as in the case of life insurances, the existing freedom to choose the law applicable to contractual obligations under the Regulation (EC) 593/2008 of 17 June 2008 on the law applicable to contractual obligations (Rome I) will afford greater flexibility.

Another piece of the puzzle within the estate planning industry is the law of private interest foundations. In this case, the legal person –the foundation- is created as a separate legal entity to carry out the wishes of the founder and might be structured entirely for estate planning purposes so that it essentially pays out to beneficiaries and is developed entirely after the death of the founder. In comparative law terms, the so-called French model limiting the existence of foundations to public-benefit purposes is nowadays the minority (France, Spain, Portugal, Poland, etc.). On the contrary, most European legislations provide both for public and private interest (Germany, Italy, Switzerland, etc.), while some jurisdictions are well-known for its adaptation towards private interest foundations, including family foundations (Netherlands, Austria, Panama, Gibraltar, Seychelles, etc.). In the case of foundations, the choice of law is only carried out indirectly by the founder at the stage of creation of the new legal entity by choosing the place where the foundation will be validly created, place that will determine the personal law of the foundation (lex incorporationis). However, full legal recognition can be denied in other jurisdictions which follow the public-interest model, particularly where the family or private interest foundation is carrying out systematic activities and is therefore under the obligation to get registered, a possibility which will be denied under the exclusive public interest model; of course, not being granted registration as secondary establishment at the Foundations registry should not thwart the possibility of legally holding title of property over movable or immovable assets located in that particular jurisdiction, nor should it be an obstacle to get title to the property registered at the Land Registry or other Registries for holders of title over particular categories of assets.