Potential Uses of Monégasque Law 214
Permitting the Formation of Certain Trusts

     The following is a brief explanation of how Monaco Law 214 can be used. It is based on a presentation given by James P. Duffy, III, to the Second International Economic Forum held in Monaco on March 28-30, 1996.

     The concept of a trust is generally not known in civil law, nor is it well understood in civil law countries, such as France. However, the trust is a very important vehicle in those parts of the world whose law depends on what is usually called common law.

     Trusts are usually formed by a grantor or settlor who transfers property to a trustee or trustees who agree to hold that property and invest it for the benefit of other persons, the beneficiaries. The trustee's agreement is usually reflected in a document called a trust agreement or trust deed. The common law imposes very strict fiduciary duties on trustees. Normally, trusts must be of a finite duration. In most United States jurisdictions, such as New York, for example, the duration of a trust may only be for the duration of the lives of those living at the creation of the trust plus twenty-one years.

     In its simplest terms a trust is the legal ownership of property by one person for the benefit of another. However, in practice, the modern trust is a very carefully conceived and executed plan of asset management and asset deposition that is developed by a team of advisors who typically include lawyers, investment advisors, and professional trustees. For example, a trust could provide that income be accumulated until the settlor reached a certain age. The income could then be paid to the settlor and his wife for their lives. Following that, the income could be paid to their children for their lives, and, on the children's' death to grandchildren, and, on the grandchildren's' death, the principal then distributed to great-grandchildren.

     It is also possible to provide for discretionary payments of income and/or principal, either to specific individuals, such as a spouse, or to classes of individuals, such as descendants. The discretionary standards can be carefully spelled out in the trust agreement, such as for "education", "medical emergencies", or the like. The standards can be very broad, such as "to start a business", or "to buy a home".

     Where a trust is expected to exist for several generations, a corporate trustee is usually essential to ensure continuity, particularly of asset management. To make sure trust administration reflects the needs and interests of the family in so far as distributions are concerned, one or more co-trustees who are familiar with the family can be added.

     Managing trusts primarily involves two aspects:

          (1) the prudent investment of trust funds pursuant to fiduciary standards, and

          (2) the paying of trust funds, and the income thereon -- that is, the results of investment -- to the beneficiaries of the trust as specified in the trust agreement, again according to fiduciary standards.

     Monaco is particularly suited to both these tasks. Monaco has well developed financial center resources that make it easy to manage funds and to invest them virtually anywhere in the world. Monaco also has a number of highly professional organizations that are capable and competent to serve as trustees. These organizations -- many of which are represented at this Forum -- can efficiently perform their fiduciary duties to the beneficiaries of the trusts they manage, usually at costs that compare very favorably with those of other jurisdictions.

     As noted, trusts are not generally recognized in civil law countries. Thus, many of the trusts that are administered in Monaco are trusts that are created under the laws of other countries and have no direct contact with Monaco, except that the trust and its funds may be administered here. However, there is the possibility of creating a trust in Monaco that, in addition to being administered here, will also be recognized here as well.

     Monaco has enacted a special trust law, Law 214 of 1936. This law enables anyone to establish a trust in Monaco if he or she may create trusts under his or her own national law. A Law 214 trust avoids the provisions of Monégasque Estate Law and the payment of estate duties. At least one of the trustees must be chosen from a list established by the President of the Monégasque Cour d'Appel. However, one or more co-trustees can be freely chosen provided that the appointment is in conformity with Law governing the trust. The trust may be created either inter-vivos -- that is, by agreement -- or by will.

     By the terms of Law 214, the trust purposes and, the governing law of the trust, override any contrary provisions of Monégasque law or public policy, such as, forced heirship. Thus, the Law 214 trust can be a useful instrument for overcoming restrictions on freedom of testamentary disposition in local succession law. This is particularly important for people who are domiciled in a forced heirship jurisdiction if their national law has a conflicts of law provision that refers to the law of domicile. This would be the case in most of the States of the United States and also, I believe, in England. For example, Monaco law looks to the law of nationality regarding the distribution of non-real property assets at death. Thus, according to Monaco law, a person from New York who is domiciled in Monaco would have the disposition of his non-real property assets governed by New York law. However, New York law says the disposition of these assets is governed by the law of the domicile. Thus, New York would refer back to Monaco law with its forced heirship provisions. The Law 214 trust avoids this result for the assets in the trust.

     As a practical matter, under Law 214, almost anyone of a common law nationality -- for example, the English, Americans, Australians, Canadians -- can establish a trust in Monaco. It does not necessarily follow that that grantor's particular national law need be the governing law of the trust so long the national law permits some other trust law to be adopted. Thus, an American from New York might select Massachusetts law, rather than New York law as the governing law of the trust. However, it is generally wise for there to be some reasonable relationship between the law adopted and the grantor, and/or the trustee or trustees.

     Theoretically, under Law 214, only the person who creates the trust needs to be a national of a common law country. The trust instrument can provide that, once the trust is in existence, any other person, such as the grantor's wife of a different nationality, can add assets to it, provided those assets are acceptable to the trustee. The trust agreement could even require the trustee to accept assets from the grantor's wife, from a parent, from a parent's estate, and so on. Thus, subsequent grantors to the trust might well include someone whose national law would not have permitted him or her to create a trust in Monaco. Thus, theoretically, for example, a trust can be established by a Canadian for the intended beneficiaries of his German spouse and thereafter substantial transfers can be made to that trust by the spouse and the spouse's family.

     Once the Law 214 trust has been established in Monaco, the trust funds can be invested as appropriate with no tax liability in Monaco. The trust can also, if appropriate, establish a holding company in almost any jurisdiction. In other words, the trust fund can be managed substantially the same way as a trust is operated in jurisdictions like the Bahamas, Bermuda, Jersey, or other popular trust administration jurisdictions. The nature of the trust investments may, of course, give rise to withholding taxes at the source but investments that pay dividends or interest free of withholding tax would accrue to the trust completely free of tax anywhere.

     The creation of a Law 214 trust is subject to registration tax in Monaco. The rate varies according to the number of beneficiaries. At present, the rate is 1.3% for one beneficiary, 1.5% for two, and 1.7% for more than two (with lower rates applicable to certain Monégasque securities). For inter-vivos trusts, the tax is due at the time the trust instrument is registered. For trusts created in wills, the tax is payable on completion of the administration of the estate. It is calculated on the net assets paid into the trust. However, if the trust instrument so states, in lieu of a single payment at the above rates, the tax can be yearly payments equal to 0.2% of the current value of the trust. The single tax payment or the smaller indefinite annual payments are in place of all death and/or gift taxes on the trust assets.

     To form a Law 214 trust:

          1. The trust agreement or will must be executed in Monégasque notarial form.

          2. At least one of the trustees must be selected from a list of corporations with trust powers approved and maintained by the Court in Monaco. This list includes a large number of major banks and trust companies in Monaco, many of which as already noted are represented here today. There may be one or more individual co-trustees. If an individual serves as trustee of only one Law 214 trust, no government approval is required.

          3. There must be annexed to the trust agreement or will an opinion from an approved lawyer of the settlor's country certifying that the trust is valid under that country's law.

     This is, of course, a very brief overview of the picture. It is clear, however, that anyone seriously considering setting up a trust should also give very careful consideration to Monaco as a jurisdiction for administering a trust. I think they will be very pleasantly surprised with what they find.