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Applicable law to trusts

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The Hague Convention defining the law applicable to trusts and regulating their recognition was ratified by the Republic of Cyprus last month. The new law recognises the unique legal institution of trust as developed in the Courts of equity in common law.

The term “trust” refers to the legal relationships created during the lifetime or on death by a certain person who is the settlor, when his assets as a whole or partly have been placed under the control of a trustee for the benefit of a beneficiary or for a specific purpose. According to the convention, a trust has the following characteristics:

(a) the assets constitute a separate fund and they are not part of the trustee’s own estate

(b) the title to the trust assets is in the name of the trustee or in the name of another person on behalf of the trustee

(c) the trustee has the power and the duty, in respect of which he is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him by law.

The reservation by the settlor of certain rights and powers and the fact that the trustee may have rights himself as a beneficiary are not considered inconsistent with the existence of a trust. The convention applies only to trusts created voluntarily and evidenced in writing.

A trust is governed by the law chosen by the settlor and the choice must be expressed or implied in the terms of the instrument creating or evidencing the trust in writing. Where no applicable law has been chosen, a trust shall be governed by the law with which it is most closely connected. The new law governs the validity of the trust, its meaning, its effects and the its administration.

In particular, it governs the appointment, resignation and removal of the trustee, the capacity to act as a trustee, the rights and duties of trusties among themselves, the rights of trusties to delegate in whole or in part the discharge of their duties or the exercise of their powers, their power to administer or dispose of the trust assets, to secure the interest of the assets and/or to acquire new assets.

Furthermore, it governs the powers of the trusties to invest the assets, the restriction regarding the duration of the trust and upon the power to accumulate the income of the trust, the relationships between the trustees and the beneficiaries, including the personal liability of the trustees to the beneficiaries, the variation or termination of the trust, the distribution of the assets of the trust and the duty of the trustees to account for their administration.

The convention, which establishes common provisions on signatory states, recognises a trust which is created in accordance with the law, providing that the property of the trust constitutes a separate fund, that the trustee may sue and be sued in his capacity and that he may appear or act in this capacity before any person acting in an official capacity.

Within the aforesaid meaning and in accordance with the applicable law, the recognition implies that the personal creditors of the trustee shall have no recourse against the assets of the trust, that the said assets shall not form part of the trustee’s estate upon his insolvency or bankruptcy, that the trust assets shall not form of the matrimonial property of the trustee or his spouse nor part of the trustee’s estate upon his death and that the trust assets may be recovered when the trustee, in breach of trust, has mingled the trust assets with his own property or he has alienated the trust assets.

However, the rights and obligations of any third party holder of the assets shall remain in force. The Convention applies to trusts regardless of the date on which they were created. Nevertheless, a contracting state may reserve the right not to apply the Convention to trusts created before the date on which the Convention enters into force in relation to that state.

 

George Coucounis is a lawyer specialising in the Immovable Property Law, based in Larnaca, Tel: 24 818288, [email protected]www.coucounislaw.com



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