The Anglo-Saxon “Trust” and its effectiveness in Spain

The historical background of the trust dates back to Roman and Germanic law, although it is a typical figure of English law (“Common Law”), originating from the medieval division of property belonging to the Crown, which granted rights of enjoyment and use to feudal lords. The nobles, in turn, had trustees (“feofee”) who administered their assets and rights, looking after their properties and income.

The “trust” It constitutes a fiduciary relationship in which one person holds the property right, subject to an equitable obligation to maintain or use the property for the benefit of another. A trust can be established either inter vivos or mortis causa.

Strictly speaking, a “trust” is the legal relationship between the “settlor” (owner) and the “trustee” (fiduciary), consisting of the contribution of assets of any kind by the “settlor,” who loses ownership of them, and these assets are then administered by the “trustee,” who will distribute them to third-party beneficiaries, following the owner’s instructions.

The trustee not only holds the administration, but also obtains formal ownership, provided that a third-party beneficiary enjoys the asset as owner.

In Spain, which legal system is based on civil law rather than Anglo-Saxon law, the concept of trust is not recognized. However, as already mentioned, the concept of trust is widely used and relevant in common law countries. Its importance is demonstrated by the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and Their Recognition, which seeks to address the problems arising from the lack of recognition of the institution, or its nonexistence, in many legal systems. The Convention entered into force on 1 January 1992 and has so far received only a few ratifications, and Spain has not signed it.

Article 2 of the Convention regulates the requirements of a trust as follows: “The term ‘trust’ refers to legal relationships created – by acts inter vivos or mortis causa – by a person, the settlor, by placing property under the control of a trustee in the interest of a beneficiary or for a specific purpose.

The “trust” has the following characteristics:

1. The assets of the trust constitute a separate fund and are not part of the trustee’s estate.
2. Title to the assets of the trust is established in the name of the trustee or another person on behalf of the trustee.
3. The trustee has the power and obligation, for which he must be accountable, to administer, manage or dispose of the assets according to the terms of the trust and the specific obligations imposed by law.

In Spanish jurisprudence (Supreme Court ruling of April 30, 2008), the validity and application of the “trust” concept has been denied, as it is an instrument unknown in Spanish law. However, this does not prevent legal relationships similar to the “trust” from being established in daily practice, hidden under other legal forms.

An example of this is found in mutual funds, based on a plural framework of relationships between investors, custodians, and management companies.

Investors are the owners, as holders of the securities in which the fund invests, but they do not manage them. This management and administration work falls to the management company, but it does not own the securities in which the fund invests and which constitute its assets. Finally, it is the custodian who assumes custody of the securities in which the fund invests, overseeing the management company’s activities. The dissociation that characterizes the institution of the trust is evident in mutual funds.

As we explained, investment funds are just one example of the existence of asset dissociation instruments that can resemble trusts. However, given the lack of regulation of this instrument in our country, both the jurisprudence and the General Directorate of Legal Security and Public Faith have had to address legal transactions that are identified with trusts, denying their validity and effectiveness in our country.

Important in this regard is the Resolution of the formerly General Directorate of Registries and Notaries, dated January 24, 2008, on the possibility of registering rights in the name of a form similar to the Anglo-Saxon trust: the private interest foundation.

This was a foundation established under Panamanian law, with the purpose of preserving the assets and administering and managing the estate assigned by the founder, initially for the benefit of the founders’ parents and, upon their death, for the benefit of the founders themselves. This foundation sought to register in the Property Registry of Celanova (Ourense), in 2007, a deed of gift of various real estate properties located in the Community of Galicia, which had been granted in 2004 to the Panamanian Foundation.

Both the Registrar and the DGSJFP (General Directorate of Justice of the Judiciary) denied registration because the beneficiary of the donation is a Foundation established under the laws of another State and has acquired assets in Spain by way of donation. This requires examining the applicability of the Foundation to this case in accordance with Spanish law. Since the Foundation had not complied with the obligation to register in the Spanish Registry of Foundations, its legal personality could not be admitted and, consequently, the legal transaction was invalid, nor was the deed of donation of various real estate properties registrable.

Regarding our case law, the Supreme Court’s ruling of April 30, 2008, raised the issue of the law applicable to the inheritance effects of a mortis causa trust established in the State of Arizona, which included assets located in our country. The Supreme Court did not even assess the legal transaction, considering that foreign law had not been proven, and, due to the nonexistence of the trust in Spain, it categorically rejected the testamentary disposition of the assets located in Spain, as the legal concept of a trust was neither well-known nor compatible with our inheritance law rules.

Consequently, the lack of regulation of trusts in Spain (and transactions related to this concept), as well as the failure to ratify the Hague Convention of July 1, 1985, on the law applicable to trusts and their recognition, gives rise to pronouncements of non-recognition of foreign transactions that have legal and tax effects. While it is true that admitting trusts in our country directly conflicts with anti-money laundering regulations, it is no less true that there are countless legal transactions in our country with foreign ties that must be regulated precisely to avoid legal uncertainty and tax fraud.

For all the above reasons, when working with trusts in Spain, it is important to work with a law firm familiar with this legal institution, such as Ruiz Ballesteros, which has been working with clients of more than 40 different nationalities for many years, studying the relationship between their countries and Spain.