The proposed trusts law

I refer to the letter by Joe Borg (November 2).

I can throw some light on the issues he raised, though he has really raised many important issues on a very broad range of fronts. The trusts amendments are not confined to financial services in any way. They are of general application. Financial services will be a major beneficiary of the new law as it will breathe flexibilities into the system where they do not currently exist, leading to efficiencies all round.

As the law will be of general application, the court will of course take cognisance of all trust law principles, however there are some limitations which emerge from the fact that we are introducing trusts within an already developed and sophisticated legal system which already provides clear rules and remedies for given situations. The trusts law is not meant to substitute what already exists but to supplement it.

The correspondent mentions the sector of married couples and the effects of the patrimonial rules in that area. The short answer to his question as to whether trust remedies will apply in such cases is that the trusts law will have very little or no impact in that regard. The reason for this is that the Civil Code is already very detailed and reflects clear social policy positions. We may not agree with them but it is not for the trusts amendments (which are very general in nature) to provide solutions in the realm of marriage contracts (which are very specific).

The correct approach would be to address the Civil Code provisions on marriage contracts and modify or develop the law according to the priorities considered appropriate. Addressing the very serious problems in the marriage property regimes which Mr Borg highlighted was not part of the agenda when the trusts law was proposed and, because of the restrictions provided for in the amendments, it is unlikely that the court will be able to use trusts law to develop matrimonial property rights as they have done in the UK.

In England they do not have a community of acquests regime generally applicable and so extending UK concepts to Malta would be inconsistent, even if the remedies English courts are providing appear more fair. That has more to do with a social outlook resulting from the absence of a community regime than specific legal provisions.

Having said that, it must be noted that there are several new articles in the Trusts Bill which ensure that trusts can be beneficially used in the context of married persons and their families in a manner which is consistent with our Civil Code. These trusts, however, must be in writing and cannot be created by operation of law. Only express trusts will be recognised between spouses, so to the specific question asked by Mr Borg as to whether "constructive, resulting or implied trusts" will be recognised in the context of married persons as between themselves, the short answer is "no".

This is consistent with existing articles of the Civil Code which allow spouses to enter into specific agreements regarding their patrimonial rights but seek to ensure that the law itself never "deems" there to be partnerships or other arrangements, absent express agreement. I hasten to add that I agree completely with Mr Borg's suggestion that the law in Malta, as it stands, allows much abuse of patrimonial rights of married persons, especially wives. However there is hope in the courts because when our judges see abuse taking place, they have the tools to deal with the issue effectively, and actually do so.

In recent months there have been several excellent judgments where our courts have looked into the apparent situation to declare that assets were really owned by one person when they appear to be acquired by another. Our law of mandate has been very effectively used, thus protecting the patrimonial rights of the real owner. Likewise when agreements are violated with the knowledge and participation of third parties, our courts have struck them down and ordered property to be transferred back. With these kinds of effective judicial approaches we do not need to apply the trusts law in areas already well catered for. I support judicial creativity in the cause of justice anytime and anywhere.

In the matrimonial context, therefore, the new law limits itself to stating the following: that trusts of community property can only be settled with the consent of both spouses, such trusts can be revoked or varied only with the consent of both spouses, that when a spouse is a beneficiary under a trust that benefit is paraphernal property unless it was settled in relation to community property in the first place, that income from a trust is community property unless excluded in the trust instrument and that if the matrimonial home is subject to trusts the rights of the spouses are unaffected and they have the same rights at law as in all other cases.

There are then a couple of articles which disallow the circumvention by spouses of the restrictions in succession law by using trusts and a provision to protect spouses from nullity of such trusts by allowing that they be modified to come in line with the provisions of the Civil Code.

Mr Borg understood from the parliamentary debates that corporate trustees would not be allowed. That is not correct. Trustees can be companies or individuals. When individuals are not authorised by the Malta Financial Services Authority to act as trustees, they can only act in very limited circumstances and subject to particular supervisory procedures. One of the conditions provided for in the Trusts Bill is that such a trustee is not remunerated.

Insurance cover for trustees is an issue which may have to be addressed in the future but the remedies to beneficiaries under the proposed trusts law are very effective as they allow for tracing property into the hands of a third party in bad faith and also ensure that misappropriated funds, even when substituted into different assets by a dishonest trustee, remain subject to the same trusts. This means that the direct action to retake property will be available.

The tax provisions in the law are very detailed and ensure that income derived by beneficiaries through trusts are fully taxed on the basis of the ordinary rules in the Income Tax Act.

When a trust fails the assets revert to the settlor. That is the ordinary rule of trusts law and has been retained. A typical case of the failure of a trust is when there are no more beneficiaries or a class of beneficiaries has been exhausted. In such cases our law states that the assets revert to the settlor's estate and if he is dead, to his heirs at law. A beneficial interest in a trust is personal to the beneficiary and is not inherited as it dies with the beneficiary, unless of course the entitlement is an unconditional fixed interest benefit which means that the beneficiary can take it out of a trust at any time on demand.

As correctly pointed out by Mr Borg, a trustee is subject to very onerous duties. However, no one is forced to be a trustee and one can refuse an appointment or one can resign. Naturally on resignation there are strict duties to transfer all trust property to the new trustee and to give full account for one's actions. Resignation does not eliminate liability for acts done while one was a trustee.

Many of these rules already form part of our law as enacted in 1988 which has operated appropriately for the last 16 years or so. The problem with the old law was that it was available only to non-residents and so the special remedies which exist in the trust law to address cases of breach of fiduciary duties are not available to us.

As I have stated already, our law already provides many remedies against dishonesty and unjust enrichment in most cases. Trust law will enhance the tools of the court in this context and I am confident, based on empirical evidence in our courts, that the new tools will be used effectively when needed. Our society will be the better for it.