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.
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.
primarily involves two aspects:
the prudent investment of trust funds pursuant to fiduciary standards, and
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.
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.
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.
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
The trust agreement or will must be executed in Monégasque notarial form.
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.
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
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.