Civil Vs Common Law
Civil law jurisdictions, otherwise known as continental or Roman-Germanic legal systems, form the foundation of legal systems in many countries around the world, including many in Europe, Asia, and Latin America. One of the most intriguing differences between civil law and other legal systems, such as the common law system prevalent in English-speaking countries, is the way each system treats the concept of trust.
In essence, a trust is a legal arrangement whereby one party, the trustee, holds and manages assets on behalf of another party, the beneficiary. This structure is a central element of common law jurisdictions and has been utilized for a range of purposes, from estate planning to commercial transactions. Despite its flexibility and popularity in common law jurisdictions, the concept of a trust as understood in common law does not exist in the same form in civil law jurisdictions.
The reason for this fundamental difference lies in the historical evolution and philosophical underpinnings of the two legal systems. Civil law, with its roots in Roman law, is based on a comprehensive, codified set of laws, where legal principles are derived from these codes rather than case law. In contrast, common law is built around the doctrine of precedent, where past court decisions serve as the source of law.
In civil law jurisdictions, the lack of recognition of trust structures is a result of the legal principle of “numerus clausus,” which is Latin for “closed number.” This principle means that the law only recognises a limited, pre-defined number of property rights. Consequently, civil law jurisdictions generally have a more restrictive understanding of property rights compared to common law jurisdictions. In civil law jurisdictions, the right to property is usually direct and absolute, with no room for the divided ownership that a trust structure inherently provides.
However, just because civil law jurisdictions do not recognise trust structures does not mean they lack mechanisms for managing and protecting assets. Several alternatives are available, some of which are unique to civil law jurisdictions, while others are universal but implemented in different ways.
One such alternative is the insurance contract. While not a direct substitute for a trust, an insurance contract can provide similar benefits, particularly in terms of asset protection and estate planning. In civil law jurisdictions, life insurance contracts are often used as an estate planning tool. The policyholder pays regular premiums to the insurance company, and upon the policyholder’s death, the insurer pays a sum to the beneficiaries. This arrangement can provide financial security for the beneficiaries, similar to a trust.
Moreover, life insurance contracts in civil law jurisdictions often include a clause that prevents the policy’s proceeds from being included in the policyholder’s estate. This means that the proceeds are not subject to inheritance tax and cannot be claimed by creditors, offering a degree of asset protection. In this sense, life insurance contracts can perform some of the same functions as a trust in common law jurisdictions, although the mechanisms are different.
Another alternative is the foundation, a legal entity common in many civil law jurisdictions. A foundation is a self-owned legal entity that holds and manages assets for a specific purpose, often philanthropic. Like a trust, a foundation can provide a means of separating assets from the personal estate of the founder, offering some degree of asset protection. However, unlike trusts, foundations are subject to more stringent regulations, and their use is often limited to specific purposes.
In some civil law jurisdictions, certain trust-like structures have been developed. For example, in Germany, the “Treuhand” is a legal arrangement whereby one party holds legal title to assets on behalf of another. This structure is used primarily in commercial transactions and is somewhat similar to a trust. However, the Treuhand does not offer the same level of flexibility and asset protection as a trust in common law jurisdictions.
The Fiducie in France
The fiducie in French law is another example of a trust-like structure in a civil law juisdiction.
A fiducie is similar to a trust in that it involves a company (the settlor) transferring ownership of assets to a trustee, who holds these in a segregated estate created for the purpose of that fiducie until the discharge of obligations under the underlying financing agreement. The trustee acts on behalf of one or more beneficiaries, which usually are, until a default, the company and, after a default, the security agent on behalf of the lenders/bondholders. One of the main advantages of a fiducie is that it operates a transfer of ownership of and title to the shares so transferred, and that by being segregated from the estate of the company, the fiducie creates an insolvency-remote structure1.
Other Exceptions
Despite the general lack of trust law in Civil Law jurisdictions, there are some notable exceptions. For example, the Civil Codes of Liechtenstein, Curaçao, and the Czech Republic have implemented a trust-like structure. The Liechtenstein and Curaçao/Sint Maarten trusts require a written agreement and registration on a trusts registry. The Liechtenstein trust becomes public if not registered within 12 months. The Czech Republic trust, enacted in 2014, is based on the Quebec Civil Code regulation2.
It’s important to note that while trusts and insurance contracts can serve similar purposes in certain situations, they are fundamentally different financial and legal tools with different rules, benefits, and drawbacks. The best choice would depend on the specifics of the situation, including the legal jurisdiction, the types and amounts of assets involved, the needs and goals of the parties involved, and other factors.