Wealth planning quick course: the trust foundation, Part 2

In the next four posts, we will discuss the foundation, the private foundation, the trust, and the trust foundation in a few thoughts, summarising the most important facts. We will look at all four institutions from the same perspective, which we will summarise in a table for our readers at the end. The topic of today’s post is the trust foundation.

The trust relationship established by a trust foundation does not need to be registered with the Hungarian National Bank. If the trust foundation is established for a public benefit purpose (three conditions must be fulfilled for public benefit status, which allows the trust foundation to obtain public benefit status); the trust’s activities are directed towards achieving objectives and there are no predetermined beneficiaries.

The position of foundation auditor is intended for cases where the founder’s rights are exercised by the board of trustees; with powers of control and opinion. The investment policy referred to in the table must include the definition of the portfolio of assets of the foundation; the risk management, the decision-making method to be applied in respect of investments.

In accordance with the general rules; the founder (and his successor in title) is not entitled to reclaim or withdraw the assets transferred to the foundation. The assets of the foundation may not be used for purposes other than those indicated by the founder; nor may any benefit be paid out of the assets of the private foundation to persons other than the beneficiaries. In the case of a private foundation; a relative of the founder may also be appointed as a beneficiary if the purpose of the foundation is, for example, to support the relative.

Article 3:387 of Act V of 2013 on the Civil Code provides that “a person nominated as a beneficiary may not assert a claim against the foundation unless the foundation deed specifies the beneficiary person, the services to be provided to him/her and the time of performance in a manner necessary for performance; or the board of trustees has decided on a benefit to the beneficiary, has communicated its decision to the beneficiary and the beneficiary has accepted the terms of the benefit.”

Establishment

Established by registration with the court.

Supervision / Control

Supervision by the court.

Purpose

The trust foundation may be established for the purpose of managing the assets designated by the founder and the income derived therefrom for the purpose of carrying out the tasks specified in the articles of association and for the benefit of the person or persons designated as beneficiaries.

A trust foundation may also be established for a public benefit purpose.

Founder

The provisions of Act V of 2013 on the Civil Code (hereinafter: Civil Code) shall apply to foundations. However, it is important to note that the founder may keep the trust foundation under continuous control.

Managing body

The trust foundation is managed by a board of trustees consisting of at least five natural persons.

Supervisory Board

In the case of a trust foundation, the appointment and functioning of a supervisory board and the appointment of a permanent auditor are mandatory. The supervisory board shall be composed of at least three natural persons; the chairman of the supervisory board being elected by the members from among themselves, unless otherwise provided in the statutes.

Termination by the founder

A non-public benefit trust may be dissolved at the request of the founder exercising his/her right as founder.

Assets transferred / minimum capital

Before the application for registration of the trust foundation is submitted, assets corresponding to the minimum capital must be made available to the foundation, i.e., assets corresponding to HUF 600 million.

Possibility to join

The provisions of Civil Code shall apply to trust foundations.

Auditor

Required.

Transfer of founder’s rights

Where, in the case of a trust foundation; the founder has designated the board of trustees to exercise the founder’s rights or has delegated these rights to the trust foundation; the founder must also designate in the trust foundation deed a person to monitor the exercise of these rights and the management of the trust foundation’s assets in accordance with the objectives set out in the trust foundation deed, independently of the trust foundation’s audit body (hereinafter: foundation auditor).

Economic activity

Trust foundations may carry out the management of the assets entrusted to their benefit or held in trust for their benefit as an economic activity, in accordance with the provisions of the relevant legislation.

Dissolution of a foundation

A trust foundation shall also be dissolved if its assets do not reach the minimum capital amount for three full years; this shall be deemed to mean that it has become impossible to achieve the purpose of the foundation.

Duration

Does not include the reason for dissolution due to passing of time.

Nomination of the beneficiary

A trust foundation may be created where no explicit beneficiary (as the person to whom the payment is made) need be designated, but a permanent purpose need only be specified.

Investment rules

If the investment regulations are not drawn up at the time of creation; the 6 months are allowed for their preparation, which is approved by the founder’s representative on the basis of a proposal from the supervisory board.

Long-term investment contract

A trust foundation may enter into a long-term investment contract if it is established by individuals for the purpose of making a benefit to individual beneficiaries.