Will Trusts and Foundations
The Interplay between Wills and Alternative Forms of Succession Planning
The typical instrument used for the purposes of regulating how one’s estate is to be divided following one’s demise is a will. In fact, article 586 of the Maltese Civil Code (Chapter 16 of the Laws of Malta) states that: “…it shall not be lawful to dispose of an inheritance, either wholly or in part, or of any sum of money or other particular subject belonging to an inheritance otherwise than by a will. Wills however, are not the only instrument which can be used under Maltese law to regulate what is to happen to one’s estate on one’s demise. Both trusts and foundation are vehicles that can be used in conjunction with a will for the purposes of planning one’s succession.
In fact both the Trusts and Trustees Act (Chapter 331 of the Laws of Malta) and the Second Schedule to the Civil Code, which regulate trusts and foundations respectively, contain specific provisions which provide that article 586 of the Civil Code as quoted above does not affect any provision in the foundation deed or trust instrument which relates to the inheritance of the founder/settlor or which take effect following the death of the founder/settlor. Trusts and Foundations therefore may contain provisions which regulate how particular assets forming part of one’s estate are to be distributed to the beneficiaries following one’s demise, thereby achieving the same result that can be achieved by means of a will. This however, is only one of the uses that can be made of both a trust and a foundation within the context of succession planning. Trusts and foundations can be used to achieve much more than a simple division of one’s estate following one’s demise, and can be considered as more powerful succession planning tools when compared to wills.
To begin with, while both trusts and foundations can be established by means of a will, with the result that the trust/foundation, just like the terms of a will, come into existence following one’s demise, trusts and foundations can also be created and start operating during the course of one’s lifetime. Indeed the majority of trusts and foundations used as vehicles for estate planning take this form. Unlike a will therefore, the terms regulating the assets in a trust or a foundation, will take effect during one’s lifetime, as the trustees/administrators will administer the assets in accordance with the terms thereof for the benefit of the beneficiaries, which may include the settlor/founder himself during his lifetime. A trust instrument or a foundation deed would typically include provisions on how the assets are to continue to be held by the trustee or by the foundation and administered for the benefit of beneficiaries, even following the demise of the founder or the settlor, which may or may not include the distribution of the property itself. Both trusts and foundations therefore, make it possible for estate or part thereof, not to be distributed outright to the heirs following one’s demise, but to continue to be held for their benefit, thereby providing further options on what is to happen to one’s estate on one’s demise.
While in terms of the Civil Code those who at the time of the testator’s death are not yet conceived, are incapable of receiving by will, beneficiaries of both trusts and foundations may include persons who are not yet conceived at the time of the settlement of property on trust or the creation of a foundation, and their rights arise on birth. As a result trusts and foundations provide for greater flexibility in the manner in which one’s estate is to be administered, not only because it is possible to create such trusts and foundations during one’s lifetime but also because they make it possible for one’s estate (or parts thereof) not to devolve directly to one’s heirs but instead to continue to be held on trust or by a foundation for the benefit of future generations.
Furthermore, the benefits granted to the beneficiaries of a trust and a foundation may take various forms. It is possible for some beneficiaries to be entitled only to the income which is generated from the assets under administration, whereas others may be entitled only to capital or to both. Moreover, beneficiaries of both trusts and foundations may be added or excluded, a condition may also be imposed on their entitlement to benefit and they may also be appointed to benefit for a specified time only or up to a specified amount. While the terms of both a trust and a foundation may be as specific as one would like them to with regards to the beneficiaries’ entitlements to the relevant assets, it is also possible to grant discretion to the trustees/administrators as to which beneficiaries are to benefit, the amount of their benefit and when they are to benefit and also to grant them certain powers of advancement, appointment and application of the relevant property. This discretion is then exercised in the course of the administration of the trust/foundation in the best interests of the beneficiaries and in accordance with the terms of the trust. Since it is very difficult to determine the exact needs of beneficiaries at the outset, by giving the trustees/administrators this discretion, provides the settlor/founder peace of mind that the beneficiaries will be duly considered in the light of their particular circumstances at the time, taking into consideration also the assets held in trust and the intentions of the settlor/founder.
It is therefore evident that trusts and foundations may cater for situations which cannot be contemplated by means of a will. Examples – Trusts and foundations may hold estates for future generations and provide for annuities or for the maintenance of particular family members.
In all cases where the property held in trust or by a foundation does not constitute the whole of the estate of the deceased, the rest of the estate which is not held in trust or by a foundation will, following the demise of the founder/settlor, be regulated either by his will, to the extent that one has been drawn up, failing which in accordance with the laws on intestate succession. By using a trust/foundation in conjunction with wills therefore, one has the possibility of dividing one’s estate into two separate strands which may be regulated in completely different ways. One part may be held in trust or by a foundation and administered during one’s lifetime for a maximum period of 125 years for the benefit of beneficiaries in accordance with the terms thereof, whereas another part may be the subject of a will which would typically simply divide the estate amongst the heirs at time of death.
On this point it is also important to note that our law contains provisions known as management of conflict provisions which ensure that a trust or a foundation is not used in a manner which prejudices certain mandatory rules of our Civil Code, e.g. the right to the reserved portion (also known as legitim), which is the right on the estate of the deceased which the law grants in favour of the descendants and the surviving spouse of the deceased. In fact both the Trusts and Trustees Act and the Second Schedule to the Civil Code contain rules which provide for these rights of a reserved portion to be respected even within the context of a trust or a foundation, but ensure that this is done in a way which preserves the trust relationship as much as possible. By way of example, should one leave all of his estate in trust for the benefit of his spouse and only one of his children, the excluded child would have a right to claim the reserved portion from the trustee/foundation. In such cases however, such a claim would not bring about the invalidity of the trust or the foundation, and while the trustee or the foundation would have the power to pay the excluded child a value of money equivalent to his reserved portion from the property held in trust or by the foundation. and the trust/foundation would continue in accordance with the terms thereof in respect of the property which has not been affected by such a claim for the reserved portion.
When compared to wills therefore, both trusts and foundations provide for a more long term and bespoke succession plan which follows less rigid rules and which can commence during one’s lifetime and continue for a period of 125 years. It provides for a means of protecting your assets further, even after your death, by providing for a manner in which your estate is to be managed and administered by professional trustees for the benefit of your heirs, taking into account your intentions and the particular circumstances of each case.