Insights

Foundations and trusts under Maltese law

Foundations and trusts are two legal institutes under Maltese law that have now been long established and the benefits of which are largely recognized. Whilst the trust law has been introduced into the Maltese legislation more recently, foundations have long been recognized by Maltese law, even though codification of the laws only happened just over a decade ago. No doubt the most popular feature of these two legal institutes is the possibility of being able to create a distinct patrimony, and their use is most notably associated with estate planning, consolidation of ownership, separation of economic interests from other types of benefit, protection of minors or disabled persons and the protection of family wealth.

Barring some fundamental differences between the two institutes (such as, most notably, foundations being legal entities by contrast with trusts which are not, foundations not being allowed to trade and foundations being able to be set up for any purpose whether charitable or for any other lawful purpose, contrary to trusts that can only be set up for a charitable purpose), foundations, otherwise, particularly in so far as beneficiaries rights are considered, function very similarly to trusts.

Indeed Malta, while being a civil law jurisdiction, has the added benefit of having integrated its trust law (based on the Jersey trust law model) firmly into its legislation. Therefore, while being ‘close to home’ for settlors or founders hailing from civil law jurisdictions, the fact that Malta has its own domestic trust law (also regulated by provisions in the Civil Code, Chapter 16 of the Laws of Malta) gives a sense of predictability as to the manner in which matters will be interpreted before a court of law.

One common feature of the two legal institutes is that they both act through trustees (in the case of trusts) or administrators (in the case of foundations), who are fiduciaries, generally regulated by the Malta Financial Services Authority (MFSA) (unless exempt), and who are responsible for the management and oversight of the assets held under trust or owned by the foundation, as the case may be. Both trustees as well as administrators can be natural or legal persons, whether acting in a professional capacity or otherwise. There is no restriction on the nationality of trustees or administrators, who can be either Maltese nationals or foreign.

Choice of trustee or administrator

One of the considerations to be made when setting up a trust or establishing a foundation is the choice of trustee or administrator. In the case of a trust, the settlor can generally choose between appointing a professional trustee or a family member or longtime friend to act as a private trustee. Indeed, in Malta there is a wide array of very competent professional trustees to choose from, both local and international and a number of top tier professional trustees have, in order to take advantage of Malta’s financial services offering, opted to set up a new (or even re-domicile their existing) operation in Malta.

As at the time of writing there are no less than 134 companies authorized to act as trustee or co-trustee and provide fiduciary services in terms of the Trusts and Trustees Act (TTA), and no less than 82 companies and individuals authorized to act as administrators of private foundations in terms of Article 43(12)(b) of the TTA—all of these are authorized by the MFSA.

Trustees, operating in or from Malta, when acting habitually as trustees, holding themselves out as trustees and receiving remuneration for the services provided are required to be authorized by the MFSA. Act XI of 2014 introduced various regulatory provisions imposing additional requirements for trustees to be granted authorization, including the requirement to hold a minimum of EUR15,000 as share capital, on an ongoing basis and the maintenance of a suitable professional indemnity insurance cover. In the case of a foundation that is set up for a private benefit or for a purpose which is not social, where the administrators are operating in or from Malta, they too need to be authorized by the MFSA. The authorization process is a relatively detailed process which is intended to enable the MFSA to ensure itself, in the interests of the general public, that the highest standards are met.

Attributes of the Maltese PTC

As of 2014,5 Malta introduced Private Trust Company—or PTC—provisions into its trusts legislation through the introduction of the concept of a trustee acting for a family trust as the corporate equivalent of the private individual trustee. In this way the Maltese legislator created an alternative to the more traditional and widespread professional trustee/administrator or individual private trustee role. The trustee of a family trust or Private Trust Company (PTC, as it is more commonly known) is not required to undergo a full authorization process with the MFSA that professional trustees and administrators of foundations (other than those set up for a social purpose) are required to undergo, but, if all conditions are satisfied, a PTC is merely required to apply for registration with the MFSA. A ‘light touch’ regulatory process gives PTCs a huge regulatory advantage over professional trustees or administrators, not least because the time they can ‘go to market’, so to speak, will be relatively sooner.

The fact that PTCs do not need to undergo a full- blown authorization process does not mean that PTCs are ‘off the radar’, however. Malta has for many years invested in its financial services industry and pledged its commitment to make sure that only the highest of standards are maintained locally, and PTCs are no exception. In fact, not only are PTCs still subject to the law in their capacity as trustees (and, therefore, bound by fiduciary obligations towards the beneficiaries of the trust or trusts the PTC is administering) but they remain within the MFSA’s reach in terms of its power to issue regulations as well as its power to impose sanctions. Regulations entitled ‘Rules on Trustees of Family Trusts, Trusts and Trustees Act’ (Chapter 331 of the Laws of Malta)6 (the ‘Rules’) have, in fact, been issued by the MFSA, listing therein additional requirements in relation to the registration process as well as laying down obligations in relation to the activities, responsibilities and adherence to a code of conduct for PTCs. The Directors of the PTC too are, in their capacity as directors, bound by fiduciary obligations in terms of Maltese company law.

For a company to qualify to register as a PTC the company must be set up for the limited purpose of acting as a trustee of a family trust and must not act for more than five settlors at any time. A PTC cannot hold itself out to the public as a trustee and will there- fore not provide trustee services to the public at large.

PTCs acting as trustees of family trusts

Another requirement of Maltese law is that the trusts administered by the PTC must fall within the definition of ‘a family trust’. This is defined as a trust set up for the benefit of the present and future needs of family members and family dependants, being individuals related to the settlor (or to any one of the settlors) by consanguinity, adoption or affinity in the direct line up to any degree, whether ascendant or descendant, or in the collateral line up to the fifth degree inclusively.8 This means, therefore, that one can provide for anyone up to the children of one’s cousin, which provides a reasonable degree of flexibility for succession planning purposes and, from our experience to date, has not proven to be an unnecessary restriction in the structures that we have been involved in. While the Rules require family members to be definite and ascertained, they also clarify that it is possible for family trusts to be set up as discretionary family trusts, where family members or family dependants are identifiable or ascertainable but not yet definite or named—nor do the beneficiaries need to be born at the time of set up or at the time of passing of the settlor (as would be the case with a traditional will, in the latter instance), and besides the familial requirement, all the other principles applicable to trusts would apply to trusts administered by a Maltese PTC. The trust instrument may also provide for a charitable purpose or an institution set up for a charitable purpose to benefit upon termination of the trust, as a residual beneficiary.

Ownership structure

When it comes to the ownership structure of the PTC, the very same estate planning considerations that prompted the setting up of the main structure will understandably need to be addressed. While having the settlor or some family member as the shareholder of the PTC may be the obvious choice, this may not necessarily be the best option in all cases for various reasons, not least fiscal considerations, actual succession to the shares in the PTC as well as the inherent desirability of the remoteness of the settlor to the trust being set up and, more so, the trustee administering it. Thankfully other options are available, and Malta can truly be considered to be at the forefront in this sector with the use of foundations in such structures.

Directors

The Rules also require the PTC to have at least three (3) directors, one of whom is required to have know- ledge and experience in the area of trusts, in order to safeguard the integrity of the industry and ensure that at all times there is someone with adequate knowledge and experience involved in taking the necessary decisions as trustee. However, the Maltese Rules do not require that a professional trustee sit on the board of directors, nor that the directors be resident in Malta. Having said this, PTCs themselves offer an opportunity to professional trustees to actually lend their expertise to a PTC set up so that rather than being seen as an alternative to a professional trustee, the two options can be seen as complimentary and there is a lot of scope for the two to work hand-in-hand.

Indemnity insurance

The Rules require the PTC to take out a suitable professional indemnity insurance policy, which requirement in itself may offer reassurance in terms of security over the assets. Having said this, not all settlors will necessarily appreciate the cost versus benefit ratio of the professional indemnity insurance requirement and submissions have been made by the industry, led by the STEP Malta branch, on the possibility of introducing an exception to this so far mandatory requirement.

Benefits that are undeniably noticeable

All the requirements summed up make a Maltese PTC, located in the EU, a veritable alternative both to professional trustees when the settlor is unable to home in on a suitable choice (oftentimes because of the physical distance between the settlor and the professional trustee that makes it difficult for a suitable rapport to be set up) and also to foundations where the relevant person may prefer the trust institute to the foundation institute. Aside from the case of relevant persons hailing from a civil law jurisdiction and therefore being less familiar with trusts and, usually, more ready to endow assets to a private foundation (a legal institute that is available under Maltese law), sometimes one of the compelling reasons that founders decide to use a foundation, as opposed to a trust, for their estate planning or other purposes, is because the assets are owned by the foundation (in view of the fact that it has a separate legal personality, unlike a trust) and therefore, on an eventual change of administrators (if ever this is required) the process becomes simpler than a change of trustee. The latter process, in fact, can be notoriously quite laborious, especially if complex assets are involved, or if there is immovable property that re- quires a public notarial deed in order to be transferred, seeing that these trust assets, under Maltese law, need to be assigned from the outgoing to the incoming trustee who is required at law to ensure that all trust assets are under the trustee’s control. The issue of the indemnities that incoming and outgoing trustees in- variably negotiate adds to the complexity of managing the process of a change of trustees and can add to the length of the process. If one also were to add any allegations of breach of trust against the outgoing trustee, the process can become really challenging.

In this regard, one could say, PTCs offer an interesting opportunity of increasing the relative ease with which the administrators of a foundation can be replaced, to trusts, since when a PTC is used, the settlor is able to take an active role in designing and effectively ‘building’ the trustee company with per- sons of his complete trust with the result that all it takes to bring about a change within the PTC as trustee, is a change of directors. Needless to say, great care should be taken to ensure that the persons entrusted with the power to change the directors of the PTC are carefully chosen, aligned to the settlor’s vision for the trust and its administration and also fully briefed on the settlor’s intentions. Even in the event of illness, death or resignation of a director of the PTC, replacements will be easier to be made when compared to the formal change of a trustee.

Of course, PTCs in themselves do have a number of compelling qualities that go beyond the ‘light touch’ regulatory approach available in Malta and the ease with which a ‘change of trustees’ can be brought about. The setting up of a PTC can rid families, in the process of consolidating their wealth, of the arduous task of choosing a suitable trustee or administrator for the management of their wealth. A Maltese trust, for instance, can exist for as long as one hundred and twenty five (125) years and thus the wrong choice of trustee (or trustee type) can make the difference between a successful arrangement for one’s estate and a total failure. PTCs are a viable alternative to professional or private individual trustees or administrators of foundations.

PTCs also present a bespoke solution. PTCs offer families, particularly High Net Worth Individuals and their families, the possibility of tailor-making their estate-planning to suit their needs. They allow families to manage their own estate through a tailor-made estate plan to suit their specific needs. So, for instance, while a professional trustee or administrator may refuse to manage certain types of assets generally perceived as riskier, such as yachts, aircraft, works of art and shares in trading companies, because these may not fall within their risk-appetite, PTCs (as limited liability companies themselves) can be more easily ready to assume such risks.

Indeed, one of the advantages of a PTC is that it actually allows a degree of family involvement in the administration of the trust. Family members (or branches of family members to ensure equal involvement) may be appointed to the board of directors of the PTC (besides also having one’s personal or professional advisors or persons specifically chosen for their deemed qualities and possible contribution to the structure being set up). This means that the persons actually involved in the management of the assets will have better knowledge of the assets involved as well as first-hand knowledge of the matters that matter most to the family. This could also translate into more effective management of the assets because PTCs are generally less likely to take a cautious or risk averse approach to trust administration in view of the risk of litigation and the reputational risk that is at stake. Also, a PTC does not operate within the confines of a professional structure (including liability concerns) and can therefore do away with excessive formalities.

Communication should also be easier because it remains within the family and will not need to go through the various lines of communication that would be typical of a professional structure before actually reaching the family. This comes with the added benefit that information remains within the family, thus ensuring a greater degree of privacy.

Overall, therefore, PTCs could offer greater managerial flexibility and responsiveness than that offered by professional trustees or administrators. Control over the PTC does not only take the form of directorship of the PTC but could also take the form of shareholder voting over the board of directors and, therefore, indirectly (and to some extent) over the administration of the trust.

The management of costs also proves to be another benefit of PTCs. PTCs can typically integrate well within a family business and can share a common board of directors and administrative facilities as the family business, which in turn reduces costs. While the law technically does not impose any restriction on remuneration of directors of a PTC, the remuneration would tend to work out less than the payment of remuneration of a professional trustee or an administrator. Registration fees with the MFSA are contained and help keep overall costs down.

Considering the above, the qualities of a PTC are undeniably noticeable. In the context of estate or succession planning or structuring of one’s wealth, the choice of who is to administer the assets is definitely a major concern. Considering also that Malta has a well respected legal and regulatory framework, a Malta PTC measures up as a plausible option.

This article was first published in Trusts & Trustees, Vol. 24, No. 6, July 2018, pp. 595–600