Trust in the Hungarian Law 4.
Rights and obligations of the trustee
The trust framework of the Civil Code is very liberal and does not limit the scope of persons who may act as a trustee. The general rule is that every person – legal or natural – having its ability to act may be a trustee. Nevertheless, the Trustees Act provides further rules in this area and distinguishes the licenced and non-licensed trustee activity. The Trustees Act completes the Civil Code’s relatively shortly list of the trustee’s rights and obligation; nevertheless the Code itself contains the most important one, an ancient Roman law rule – bonus et diligens pater familias. This rule has been implemented to the framework extending the trustee’s obligation, as the trustee is obliged to protect the trust assets from the predictable immediate risks in compliance with commercial rationality. Moreover, in accordance with the fiduciary requirements of the trust, the trustee must act primary for the benefit of the beneficiary’s interests.
On the other hand to fulfill this obligation, the trustee has the right to claim the registration of ownership and the possession of the trust asset after the conclusion of the trust deed. The trustee may force this right against anyone, including the settlor, as well.
Requirements towards and duties of the trustee
The framework provides broad rights to the trustee disposing the trust assets, as the trustee has the rights to exercise the trust assets’ ownership to a large extent; however, the trustee is obliged to dispose of the trust assets according to the conditions and restrictions of the trust deed. Balancing between the trustee’s rights and the settlor and beneficiary’s interest, there are rules to protect the former two’s interest against the trustee’s breach of obligations.
The Trustees Act provides further obligations for the activities of the licensed trustees. This act distinguishes licensed (professional) and non-licensed (ad hoc) trustees. If a trustee concludes at least two trust contracts annually or if the trustee’s fee excess of one per cent of the value of the trust asset, the service is classified business-like and such an activity may be carried out only with a licence issued by the National Bank of Hungary, prior to the start of such activity. Licensed trustee may be only a limited liability company or limited company by shares registered in Hungary or the branch – registered in Hungary – of an undertaking based in another contracting state of the Agreement on the European Economic Area.
The trust company may not carry out any other activity than trust asset management and its related services and its name must make reference to trust asset management. The trust company must fulfil strict human resource and infrastructure requirements to receive and maintain the licence of the National Bank of Hungary. The human resource conditions are the followings: the company must employ at least one person having master degree legal qualification and bar exam, one person having master degree economic qualification; moreover it must hire a statutory auditor, as well. The infrastructure requirements of a trust company are the followings: at least HUF seventy million registered capital, financial security which is equal to twenty per cent of the trust assets but minimum HUF seventy million and maximum 1500 million, office, website, internal Rules for accounting policy and accounting software, which fulfils the requirements of the separated trust asset accounting.
The trust company must duly perform its trust contracts in accordance with statutory requirements for the utmost benefit of the beneficiary, in particular. The trust company is obliged to inform the settlor about the risks of the contract defined by law, prior to the conclusion of the trust contract. In addition, the trust company must provide information in writing, on a monthly basis. If no changes are made to the original information, it is sufficient to make reference to such fact in subsequent information. The trust company is required to maintain records of the trust relationships to support the traceability of trust, administrative controls and administrative assessments of assets.
The trust relationship and the activity is essentially built on trust, particularly in relation to the selection of the trustee, that is, beyond their business relationship. The trust relationship between the settlor and the trustee is governed predominantly by aspects of the trust contract and underlining rules of the mandate contract and less by the general contracting rules of the Civil Code.
In important obligation that the trustee must avoid conflicts of interest, therefore it is not allowed to conclude contract for his or her own benefits. Moreover, one of the trustee’s main obligations is to manage the trust assets separately from his own and other trust assets.
If the trustee is authorised to designate the beneficiary under the trust deed, the trustee may have the right to determine the share of the beneficiary as well.
Due to the high degree of professional requirements arising from the fiduciary nature of the trust relationship, the trustee must act for the utmost benefit of the beneficiary. The trustee must protect the trust property against foreseeable risks in a commercially reasonable manner.
The management of the trust asset includes the exercise of rights arising from ownership, other rights and claims transferred to the trustee and the fulfilment of obligations arising therefrom. The trustee may dispose of the assets belonging to the trust assets under the conditions and within the limits sets out in the trust deed. If the trustee breaches his obligations and illicitly alienates trust asset to a third party, the settlor and beneficiary have the right to reclaim the alienated asset for the benefit of the trust assets, if the third party did not purchase the asset in good faith or for consideration. This rule is applicable as well, in the case of illicit encumbrance of the trust asset.
The trustee must keep confidential all facts, information and other data he or she becomes aware of during his or her office as trustee or in relation thereto. Such obligation is without prejudice to the establishment of the trusteeship and remains in effect after the termination of the trust. The settlor and his or her successors may grant exemption from the confidentiality obligation.
One of the basic obligations of the trustee is that the trustee must inform the settlor or the beneficiary about the actual situation of the trust assets upon their request. This obligation is independent whether the trustee is licenced professional or non-licensed trustee; nevertheless in the case of licensed trustee the information providing obligation is more regulated. Such information must cover in particular, the actual and foreseeable increase in the trust assets, the particular assets of the trust, their value and commitments charged to the trust assets. Upon request, the trustee must account for the trust assets and settle accounts with the settlor and beneficiary. Expenses incurred in connection with the provision of information and the payments of invoices are borne by the settlor and beneficiary.
The rights of the trustee are governed by the Civil Code and rules specified in the trust deed. The rights of use and disposition are also conferred on the trustee in the case of trust, that is, the trustee has the right to
- use and operate the trust asset,
- possess the managed asset, resort to protection of possession under the appropriate title,
- enjoy, that is, utilise the trust asset either by himself, or with the collaboration of a subcontractor or agent, if he is authorised to employ such third parties under the trust deed. This right in practice is limited in the trust deed.
- right of alienation (e.g. in the case of portfolio-type trust asset),
- right of encumbrance (establishment of e.g. lien on assets belonging to the asset),
- right of destruction, or rather, right of processing and use (e.g. en entire plant is entrusted, together with its raw materials, and these are processed in the regular manufacturing process)
- right to exercise membership or shareholder rights.
The due care and diligence trust management is generally applicable to trust relationship. If during the process of utilising the trust relationship, the parties do not specify yield rate but only the due care and diligence fulfilment of the trustee, the trustee is required to manage the trust asset with due care to ensure the satisfactory performance of the trust. If however, the trust deed specifies annual yield rate and profit, the trustee must fulfil them; therefore it is a higher risk for the trustee. In both cases the trustee’s remuneration may be linked to the annual yield performance of the trust. Due to the general prohibition of the instruction, the trustee may not be instructed how to fulfil its obligations. Nevertheless, the trust deed may provide guideline for the asset management or general prohibition of alienation of the trust assets or certain trust asset. In this case currently it is difficult to determine how the trustee can fulfil its obligation to ensure that the trust asset preserves its value in the case of changing circumstances. The authors believe that the general rule of the due care and diligence trust management is applicable in changing circumstances as well, even though there is a prohibition of alienation in the trust deed. In this case the trustee must measure the different consequences and make a decision keeping in mind the utmost benefit of the beneficiary. In complex cases an investment advisory board, having its part the beneficiary or some of them, may help this decision making process.
Last but not least, there are rules securing the trustees’ remuneration, providing that first of all the settlor must pay the contracted remuneration to the trustee; nevertheless, the trustee is entitled to satisfy the claims for remuneration or justified costs directly from the trust assets, if neither the settlor nor the beneficiary settle the trustee’s remuneration. The trustee may claim reasonable remuneration and costs as well, if the trustee carries out its activity free of charge. The remuneration of the trustee may be implemented under different scheme; therefore the contracting parties are free to determine the remuneration for the service.