A trust is a legal agreement between the individual creating the trust (the settlor) and the trustee (the person/institution named to manage the trust assets). The trustee holds legal title to the trust assets for the benefit of one or more trust beneficiaries. The trust may be established and become operative either during one’s lifetime (inter vivos trust) or on one’s death (testamentary trust) thus lying dormant until one’s demise. The establishment of a Malta trust ought to be given due consideration when deciding on one’s optimal wealth planning strategy. To this end Malta trusts can be employed for a wide variety of purposes, including: asset protection, estate or tax planning, as a commercial tool or for testamentary usage. A trust therefore constitutes a flexible tool that one can tailor to his/her needs. It affords management, control and certainty.
The establishment and administration of trusts in or from Malta is regulated by the Trusts and Trustees Act. Under Malta trust law, a trust may be created in any manner – by unilateral declaration, by an instrument in writing including a will, by operation of the law or by a judicial decision. A trust may address a number of issues including:
- the efficient management of assets in the event that one passes away and the beneficiaries are minor children or otherwise not up to the responsibility of handling their estate;
- the protection an individual’s privacy; and
- in the case of an inter vivos trust, the trustee can manage the property for the settlor while he/she is alive, providing a way to care for the settlor, should he /she become disabled. The same result cannot be achieved via a will, given that such instrument becomes operative only upon one’s death.
Our law provides for spendthrift trusts which can be employed as a way of avoiding the spendthrift getting through his inheritance by spending it recklessly and leaving his beneficiaries with nothing. Likewise our law also provides for accumulation and maintenance trusts whereby a wealthy parent may wish to make provision for his children and grandchildren with a view to achieving particular goals, such as the acquisition of property or a proper education of their choice. Outright donations or gifts offer no means of ensuring that the assets are used for their intended purpose. Consequently by settling assets into trust, specific provision can be made by which the settlor’s objectives can, if possible, be guaranteed.
Trusts afford an administrative bridge from one generation to another that cannot be provided by other means. Within this remit, a trust could help in this case to ensure continuity of ownership and asset management in complex situations. Looking at the assets themselves, they are afforded protection from external attacks. Trusts could also hold the collective ownership and management of family assets, thus generating liquidity without putting other assets at risk. Trusts can be very simple, intended for limited purposes, or can be quite complex, spanning two or more generations, providing protection from creditors of the beneficiary, and displacing a will as the primary estate planning vehicle.
Malta trust law can be applicable to a number of commercial scenarios within which the use of trusts would attract more favourable treatment. These include security trusts, unit trusts or collective investment schemes and securitisation, amongst others. One of the great attractions of the trust for the transaction planner designing a business deal, is the convenience of being able to absorb into the ground rules for the business deal those fundamental principles of fiduciary law that protect trust beneficiaries. These attractions have made the trust a viable alternative to other devices, such as contract arrangements and incorporation, whenever the relationship to be established is too delicate or too novel.
Trusts can also be validly used in an aircraft ownership structures, given that the pertinent legislation provides for partial, fractional, joint and trustee ownership.
Different Types of Trusts and their Uses
Express Trusts An express trust is one actually declared or set out by the settlor if the trust is to take effect in his own lifetime, or testator if the trust is in his will. In an express trust, the intention to set up the trust is clearly and openly expressed. Generally, the obligation is indicated by the words “on trust.” In many cases, (and unlike implied, resulting or constructive trusts below) the trust must be created with specified formalities in order to be valid. Express trusts can be further sub-divided as being private or public and fixed or discretionary. Express private trusts are trusts for the benefit of a specified person or persons (the beneficiaries); it is these beneficiaries who will enforce the trust. If all the specified beneficiaries will obtain a share of the trust assets, this is a fixed trust; if the trustees have to make a choice as to which beneficiaries get something, this is a discretionary trust. Express public trusts, sometimes referred to as charitable trusts, are trusts for certain purposes which the law recognises as being beneficial to society.
Implied or Resulting Trust Implied trusts are trusts where the intention to set up a trust is not clearly expressed by the settlor or testator. In this scenario, the intention is implied or presumed from his words or actions. Virtually all implied trusts are also resulting trusts. That is, the property is going to “result” i.e. return, to the person setting up the trust. These trusts are not subject to the formal requirements present in an express trust. The most common situation where this type of trust occurs is when the settlor fails effectively to dispose of the trust property.
Constructive Trust These are trusts which are in no way dependent upon the intention of the settlor. They are imposed by operation of law in situations where not to do so would mean one party’s unjust enrichment.
Discretionary and Fixed Interest Trust The most widespread type of trust is the discretionary trust where the trustees are normally afforded the discretion as to how to manage and invest trust property, who to appoint as beneficiaries, when to distribute trust income and capital, and to whom such distributions are to be made. On the other hand, in a fixed interest trust, the trust deed itself would generally provide for the income and capital to be distributed on specific dates to the beneficiaries identified in the trust deed and according to the ratios specified therein.
Accumulation and Maintenance Trusts This type of trust allows the trustee to accumulate income of the trust for the benefit of minors irrespective of whether or not the minor’s interest is already a vested one or an interest which will become vested at a later stage (e.g. by attaining age of majority). The accumulated income can then be utilised by the trustee either to apply all or part of it for the maintenance, education or other benefit of the beneficiary or to advance or appropriate the interest to any such beneficiary.
Oral Trusts Maltese law provides for the possibility of oral trusts. However, in view of the strong civil law tradition in Maltese law, it was felt appropriate that any oral arrangements should result in a presumption of mandate unless it can be shown that the intention was to create an oral trust.
Constructive Trusts These trusts arise on the basis of the “presumed intention of the settlor” as imposed by means of a judicial decision. A court would typically read through this presumed intention in order to impose trusteeship obligations on a person who holds property in circumstances which warrant such an obligation for the benefit of third party beneficiaries.
Private Client Trusts In the domestic or non-commercial context, trusts are particularly useful to prevent the property of a deceased person vesting absolutely in his adult children who would then be perfectly free to dissipate the property as they wish. The settlor is able to set up a trust which can instead preserve and generate family wealth in a tax-efficient manner, avoiding division of the assets into smaller and less effective shares in each generation and a large pool of assets to benefit from economy of scale in its management. They are also particularly common as a means of providing for the management of the affairs of beneficiaries who are mentally or physically handicapped.
Commercial Trusts The major area of growth of the trust in the last hundred years has been its development as an instrument of commerce, particularly in relation to money- raising. Among the key features which have made it attractive are protection against insolvency, and the flexibility of the provisions which can be inserted into the trust instrument. Common uses of the trust today include the following: Pensions for Employees, Collective Investment Schemes, Collective Security trusts for the Holders of Bonds or Debenture Stock, or Securitisation Trusts of Special Purpose Vehicles (SPVs)