Entities in the common law – and trusts

Entities in the common law – and trusts Presentation at LUISS 2-3 November 2010 JoostBlom, Q.C. Faculty of Law, University of British Columbia

What shapes the law of entities • Law makes different entities available for • economic reasons (mobilize capital) • social reasons (encourage resources to be devoted to particular things, enable people to control what happens to their property after they die) • Fiscal rules may drive the use of particular entities • people may reduce tax by having an entity, rather than individuals, carry on an activity Entities in the common law – and trusts

When and why entities must be regulated • Law regulates entities to different degrees • entities for investment need to be transparent to the investor • entities that can be used to separate assets from taxpaying individuals need to be transparent to the fiscal authorities • ownership needs to be transparent for a variety of reasons, including criminal law enforcement Entities in the common law – and trusts

Entities in common law countries • For the most part, common law jurisdictions use entities parallel to those in Italian law • partnerships (not a legal person, very little regulation except by the tax laws) • limited partnerships (general partner has unlimited liability but is usually a corporation) Entities in the common law – and trusts

Entities in common law countries (cont’d) • corporations (legal persons) • public company (shares publicly traded) • private company (shares transferred privately) • In Canada both are called “Ltd.” (compare “plc” and “Ltd.” in UK) • a novelty: unlimited liability company (entity created in some Canadian provinces for benefit of US corporations in response to US tax law) • not-for-profit corporation (usually governed by separate legislation modeled on general corporation) Entities in the common law – and trusts

Entities in common law countries (cont’d) What common law jurisdictions generally do not have is specific legislative recognition of entities like committees, associations, or foundations unincorporated groups of individuals (or companies) are not legal persons, so the individuals simply hold rights and incur obligations jointly but very often the function of associations or foundations is performed by a trust Entities in the common law – and trusts

What a trust is • A trust is not a legal entity • Originated in middle ages in England, as a means of overcoming restrictions associated with feudal land tenure • e.g. you couldn’t direct by will who would receive property after you died • and you couldn’t hand property over to a friend while you went off to the Crusades, and be sure to get it back Entities in the common law – and trusts

What a trust is (cont’d) • What developed was a system in which the Lord Chancellor (a royal official who exercised judicial functions beyond those of the courts of “common law”) would enforce the obligation of a trustee to hold the property for the benefit of the beneficiary • essential idea: trustee must manage property exclusively for beneficiary’s benefit, not the trustee’s own • and the beneficiary can enforce this duty by going to the Lord Chancellor (later the Courts of Chancery, also called Courts of Equity) Entities in the common law – and trusts

What a trust is (cont’d) • Importance of the trust is that it provides a legally effective means of separating • the legal ownership of property (who actually holds title to it and controls it) from • the equitable or beneficial ownership (who has the right to the economic benefits from the property) • Separate court systems long gone, but distinction between legal and beneficial interests continues Entities in the common law – and trusts

Juridical nature of the trust The trust is not a legal entity The trust is the obligations owed by the trustees – the trustees are the legal persons on whom the law operates You (the “settlor”) set up a trust by designating property you own as the trust property, designating one or more trustees, and stipulating the terms on which the trustees must hold the property Entities in the common law – and trusts

When trusts are useful • By so doing, you can put property temporarily or permanently in hands of trustees (during lifetime or by will) so that • the property is taxed in the hands of the trustees, not you (if tax law permits) • the property is safe from the creditors of the trustee because the beneficiaries take priority • you have total flexibility (when you establish the trust) in how the benefit of the property is to be allocated • you can give trustees discretion to allocate benefit Entities in the common law – and trusts

Range of trusts • Trust is enormously flexible institution • Primary means of dealing with inheritance (your estate passes to trustees, not directly to heirs) • Can set up charitable purpose trust (e.g. scholarship fund), including foundation • America’s Cup example of trust for sporting award • Trusts can be huge, e.g. pension trusts Entities in the common law – and trusts

Trusts on the international level Civil law countries have no equivalent concept, although they have entities that do what, in common law countries, trusts do Problem when e.g. an Italian court has to decide on the rights and obligations attaching to a trust (as “represented” by the trustees) created under the law of a common law country Entities in the common law – and trusts

Hague Convention on the Law Applicable to Trusts and their Recognition (1985) • Italy was among the first to become a party • Canada (except for a couple of provinces) also a party • Core is art. 11: A trust created in accordance with the law specified by the preceding Chapter shall be recognised as a trust. Such recognition shall imply, as a minimum, that the trust property constitutes a separate fund, that the trustee may sue and be sued in his capacity as trustee, and that he may appear or act in this capacity before a notary or any person acting in an official capacity. Entities in the common law – and trusts

Hague Convention on the Law Applicable to Trusts and their Recognition (1985) (cont’d) • Art. 11 continues: • In so far as the law applicable to the trust requires or provides, such recognition shall imply, in particular - a) that personal creditors of the trustee shall have no recourse against the trust assets; b) that the trust assets shall not form part of the trustee's estate upon his insolvency or bankruptcy; c) that the trust assets shall not form part of the matrimonial property of the trustee or his spouse nor part of the trustee's estate upon his death; d) that the trust assets may be recovered when the trustee, in breach of trust, has mingled trust assets with his own property or has alienated trust assets. However, the rights and obligations of any third party holder of the assets shall remain subject to the law determined by the choice of law rules of the forum. Entities in the common law – and trusts

Conclusion In an increasingly integrated international financial and commercial system, we can expect to see the national laws on entities become more coordinated Especially in relation to entities that become involved in international transactions Entities in the common law – and trusts

Entities in the common law – and trusts