I. Introduction & Framework

In terms of legal form, under Common or Civil law jurisdictions an express trust will not be validly created unless each of three essential elements are certain. These classic requirements were set out by Lord Longdale MR as the ‘three certainties’ in his dictum stating that a trust would only come into existence if there was certainty of WORDS, certainty of SUBJECT MATTER, and certainty of OBJECTS. Given Malta’s Romano-Germanic juridical foundation it is particularly interesting to explore the 1988 grafting of trust law into the OFFSHORE TRUSTS ACT 1988, and examine how concepts typically ‘alien’ to civil law, were reconciled with Malta’s legal system.

II. Equating Common Law & Malta’s objectives

The institute of trust was born in England as an administrative mechanism for crusaders to have their property managed in their absence in accordance with their general wishes for their chosen beneficiaries. This ‘confidence’ fell under the jurisdiction of medieval courts of equity and such jurisprudence evolved in time as a separate legal institute in the English legal system and in parallel common law jurisdictions such as USA, Canada, and Australia. Such a common law foundation shared by increasingly powerful nations, within their own right and diverse spheres of influence (language, culture, politics, regional and global trade) has ensured that the theory of trust has been constant, steadied by the hand of precedent enjoying Commonwealth diffusion and consolidating the developments of Anglo Saxon jurisprudence. The crux of the Anglo Saxon – Continental law debate, is that Civil law countries consider ownership in absolute terms, and even though there are institutes such as deposit, usufruct, curatorship and fiduciary mandate (negotium gestor) which contain elements akin to trust mechanisms, nevertheless there is no single comparable equivalent, and yet trusts have been adapted (not always without difficulty) in Quebec Louisiana, Liechtenstein, Panama, Puerto Rico, Mexico, Venezuela, Scotland, Ceylon, Uruguay and Malta.

The challenge of reconciling diverse legal cultures and in particular fundamentally different concepts of ownership rights, was greatly assisted by the Hague Convention on the Law Applicable to Trusts and on Their Recognition which promoted the adoption of trusts as sui generis institutes rather than comparative assimilation. The Convention outlines the main features of the trust and the consequences flowing from the creation of a trust, facilitating their recognition and use in civil law states as long as the following fundamentals ensue:

i. The assets constitute a separate fund and are not part of the trustee’s own estate;

ii. Title to the trust assets stands in the name of the trustee or in the name of another person on behalf of the trustee;

iii. The trustee has the power and the duty, in respect of which he/she is accountable, to manage, employ or dispose of the assets in accordance with the terms of the trust and the special duties imposed upon him/her by law.

iv. The reservation by the settlor of certain rights and powers, and the fact that the trustee may himself/herself have rights as a beneficiary, are not necessarily inconsistent with the existence of a trust.

Malta’s strategic Mediterranean location has secured a history characterised by international trade and inevitably influenced by history’s seafaring powers of the day, culminating in a 164 year sojourn by the British which left a profound influence on our Code Napoleon based legal system. Particularly in the commercial sector, banking, insurance, tax and company law, Maltese lawmakers increasingly relied on UK statute (until overtaken by European Union colonisation through legislative harmonization in the last decade or so), and it was thus logical for Malta (in its drive to establish itself as a reputable centre for international business activities) to maintain this Anglo–Saxon connection albeit as Trust jurisprudence codified by Jersey law in the Trust Jersey Act of 1984. Indeed the Maltese legislator was very clear in explaining the drafting choice as one with the scope of enhancing:

“the use of Malta as a centre for offshore activities by persons resident in [common law] countries would be enhanced if provision was made for the possibility of the creation of local offshore trusts that would be both regulated and enforceable in Malta.

The Maltese approach involved a combination of three processes (1) strategic selection of an appropriate drafting model, (2) balancing ‘competitive’ legislation with appropriate regulatory structures and (3) customising the institute to Malta’s specific political and economic interests and socio-legal constraints. In this way the obvious difficulties (comparative assimilation into domestic law, legitim, prohibition of entails) were neatly sidestepped and postponed (no longer indefinitely in view of current EU pressure on Malta to phase out all discriminatory tax planning structures restricting benefits to non residents) and in fact seamless entry was achieved by ‘restricting’ the operation of trusts to an international context excluding Maltese, as explicitly stated in the White Paper on International Business Activities:

“ it was not felt possible to allow Maltese residents to make use of the trust facilities at this point of our development and [consequently ] beneficiaries at least initially must be non-residents.”

The Malta International Business Authority was the single regulator charged with establishing regulating, monitoring and promoting Malta as a reputable international trading centre, whose portfolio of ‘international products’ included offshore companies, trusts, offshore banks, captives insurances, and collective investment schemes. Given Malta’s late entry into the financial services world, the benefits of hindsight enabled the Maltese legislator to carefully observe, pick, choose and improve upon a variety of tax efficient structures and modes of regulation. In most cases regulation was spread between the relevant competent authority and rigorous procedures for licensing in conjunction with a shifting of responsibility onto the client’s local representative be it in the form of an individual or nominee / trustee in the case of trusts.

Indeed the role and function of the nominee company as a trustee is the first of 3 primary distinguishing features of Maltese trusts namely (1) A Maltese trust must have a nominee company as a trustee, be it in a sole or joint capacity (2) A Settlor but not a trustee (in cases where there is a sole trustee) is allowed to be a beneficiary and (3) No Maltese residents can be settlors or beneficiaries nor can a trust fund include Maltese immovable property (with the exception of charitable trusts). Nominee companies are characterised firstly by the express limitation of their objects to acting solely as trustees, and secondly by the strict licensing requisites of ’qualified’ directors (whose professional good standing brings integrity to the process of client monitoring), and lends weight to their commitment to vigilant supervision. In the light of increasing abuse of financial centres, it was wise of the Malta government to ‘share’ the task of monitoring its ‘clients’ by mandating nominee companies to carry out pre-incorporation client due diligence, plus in the case of trusts, an ongoing high level of personal responsibility as to the formalities of establishment and ascertainment of legal origin and destination of any trust income.

Whilst Maltese law recognises the following types of trust: 1) fixed 2) discretionary 3) charitable 4) accumulation and maintenance 5) resulting and 6) constructive trusts, nevertheless each variation must first pass the three certainties test. However the fact that Maltese law requires that every trust shall be registered with the Centre as per s43(1), and that such registration is conditional upon a declaration by the nominee company acting as trustee, that the trust satisfies the conditions of the Act in order that it may be an offshore trust (s43(3)b), provides an excellent filtering mechanism ab initio. However since Maltese law allows for the possibility of registration of foreign trusts, or discretionary changes/variations, and thus of situations where the proper law of the trust is not Maltese, and in view of imminent widening of trusts to include Maltese, it is imperative that one examines trusts from a functional as well as a comparative perspective, hence the continued reference to UK jurisprudence.

III. Certainty of Words (Intention)

The essence of this requirement is that an express trust will only arise if the owner of the property can be shown to have intended to subject it to a trust obligation. Although under English law there is no need for the actual word ‘trust’ to be inserted, one can only register a Maltese trust if this has the word ’trust’ as part of the name. Megarry J in Re Kayford Ltd held that

“… the question is whether in substance a sufficient intention to create a trust has been manifested ….

In this particular case a mail order company was in financial difficulties and used a separate bank account to deposit money received from customers whose goods had not yet been delivered. Megarry J held that a trust had been created stating that:

As for the requisite certainty of words, it is well settled that a trust can be created without using the words trust or confidence or the like…”

It is worth noting that this dictum was followed by the Jersey Court in Re Malabry Investments Ltd .

An intention to create a trust can be deduced from the use of the language which makes it clear that the recipient is not holding property for his/her own benefit, but holds it for the benefit of others. Even if the language used in an agreement is inadequate to create a trust, a trust may be held to have been created if this would fulfil the settlers overriding intention. Thus in Don King Productions v Warren . Lightman J held that such an intention could be deduced ‘as a matter of business common sense’ from the commercial background and the commercial purpose of agreements for the assignment of promotion and management of a number of boxers.

Although it would seem that the Maltese nominee company is an automatic ‘guarantor’ that the appropriate formalities have been observed, special attention must be given to the substance of the arrangement, since a court may well refuse to find that a trust was validly created if such an intention was a ‘sham’ and that at the time it was made the owner had no real intention to subject his property to a trust. Given the absence of Maltese trust case-law one must necessarily look UK jurisprudence. In Clothilde Abdel Rahman v Chase Bank(C.I.) Trust Co Ltd et al., the Court held that Mr. Rahman who upon settlement was told by the trust officer that he could ‘deal with the assets in the trust as if they were still your own’, did in fact continue to exercise dominion and control over the trustee in the management and administration of the settlement and that the settlement was a sham on the facts.

In Midland Bank plc v Wyatt , a husband and wife placed their house in a trust which was not acted upon, nor disclosed to the bank upon pledging the house as collateral for a business loan, but the deed of trust was produced once the business went into receivership. DEM Young QC held that in the circumstances, the purported declaration of trust in favour of the wife and children was a sham and had therefore been ineffective to divest him of the entire beneficial interest in the house:

“I consider the trust deed was executed by him , not to be acted upon but to be put in the safe for a rainy day…"

IV. Certainty of Subject-matter

A trust only exists if a separation of the legal and equitable ownership of property is brought about. Specific property must therefore be identified which is to be subject to the trust obligation hence this second traditional requirement for the creation of a trust as certainty of the subject matter of the trust, that is the property intended to be trust property must be clearly determinable. In theory and in English law, any property may be the subject matter of a trust, whereas Maltese law specifically prohibits the inclusion of any immovable property situated in Malta and although the nature of the property may affect the formalities for setting up or running the trust, the essential elements remain constant whatever the type of property involved. All legal property, be it real or personal, tangible or intellectual can be the subject matter of a trust.

The Maltese meaning of ‘property’ in this context is derived from the interpretation clause of the Trust Act s (2)1 which includes property of any kind or description whether moveable or immovable, personal or real and wherever situated, and in relation to rights vested, contingent, voidable or future. Consistent with its targeted trust application to non-residents Maltese law prohibits the inclusion of shares in Malta registered companies. In practice it does appear to be an oversight not to make an exception for Trust participation in International Trading and Holding Companies which have superseded Malta offshore companies and are likewise specifically designed for use by non residents and are in effect a natural complement to trusts as tax planning tools for non residents.

Maltese law states clearly that property may also be added to the trust property by any person qualified to be a settlor. Where no portion of trust property can be clearly identified, then the trust is void. An imprecise definition of the intended trust property will render the trust invalid for uncertainty of subject matter in the same way that if legal title is not transferred from settler to trust, then intention alone will not warrant sufficient ground for the existence of the trust.

A trust cannot exist in abstract but only in relation to specific assets, and thus failure to identify any specific property as the trust property will prevent the creation of a valid trust. This general principle was enunciated in Hemmens v Wilson Browne(a firm) by Judge Moseley QC where it was held that an agreement allowing a person to call for a fixed payment at any time could not create a trust of such a sum arising over the general assets of the solicitor acting as custodian, because no specific property had been identified as the subject matter of the obligation, that is “there was no identifiable fund to which any trust could attach”. Of special interest to us is the Jersey decision pronounced in Re Malabry Investments Ltd that the property to be held on trust must be ascertainable, and in case of uncertainty of subject matter the trust fails and the settler retains the property or the transferee holds it on resulting trust for the settlor. Predictably Maltese law provides for the same process in similar circumstances.

V. Certainty of Objects

With the exception of charitable trusts, a trust will only be valid if it exists for the benefit of identified legal persons who posses the locus standi to enforce the trust obligations, and for whom the property is held. The third certainty is that the beneficiaries and purposes are clear.

Maltese law demands that the beneficiary is identifiable by name, or ascertainable by reference to a class or a relationship to some person, whether or not living at the time which, under the terms of the trust is the time by reference to which members of a class are to be determined. Under Maltese law if there are no beneficiaries identifiable or ascertainable the trust shall unless the purpose of the trust is a charitable purpose be null. The law clearly specifies an exception where the purpose of the trust is a charitable purpose , and in such a case it would be the Attorney General who is charged with execution theron.

Whilst English law permits identification and ascertainability by any means whatsoever for example appointing as beneficiary the first person to win a particular contest, Maltese law would not accept this unless in the case of a charitable or philanthropic trust.

A distinguishing feature of Maltese trusts is that all beneficiaries must NOT be persons resident in Malta at the time the trust is created and at the time any one or more of them otherwise become entitled to be a beneficiary. This does not mean that a trust will be invalidated if a beneficiary moves to Malta, provided that at the time of creation of the trust the beneficiary was clearly a non-resident. Unsurprisingly an exception is made for charitable trusts and which from the onset are allowed to have Maltese resident beneficiaries.

Maltese law followed the Jersey model of allowing a settler to be a beneficiary, even though this is prohibited under UK law. Ironically Jersey customary law incorporates the rule of donner et retenir ne vaut prohibiting one from retaining control over that which he/she has given, and understandably in Ex parte Viscount Wimborne it was suggested that the rule might apply to invalidate trusts if the power retained equated to power sufficiently great as to be able to say that the settler had ‘retained control over the trust funds either of capital or income”. However this was dispelled by subsequent amendments to the Jersey Trust law in 1984 stating that a settler may also be the beneficiary of a trust, and in 1989 expressly excluding application of the customary law maxim. Maltese law does not have this difficulty and specifies that a settlor can be a beneficiary under the trust, however this must always be viewed in the context of the essential effective separation of ownership from control, and heightens the role of the nominee to make sure this separation is understood, actuated and remains uncompromised.

VI. Administrability & Validity

It is a pre-condition that the settler is a person of sound mind and legal age, and deemed to have capacity to transfer, as is also the assumption that the property is capable of legal transfer into the trust. Equally universal is the invalidating nature of any vitiating factor such as fraud, duress, misrepresentation, or breach of fiduciary duty. In view of the serious nature of the fiduciary relationship, and to achieve as much clarity as possible, the legislator sought to set down additional formalities such as the requisite that a trust must be created in writing via a trust deed, will or unilateral declaration of trust. Naturally if circumstances change to the extent that the purpose of the trust is no longer capable of being carried out this would render it un-administrable and therefore incapable of maintaining its validity. The maximum duration of a trust is 99 years, but the deed can provide for termination after a shorter period or upon the occurrence of a specific event. Another formality of registration is the payment of fees, and one should point out that failure to pay the annual tax could result in the loss of tax exemptions and other privileges.

One of the most striking features in the Trust act 1994 is section 50 stating that the registration of a trust under the Act shall constitute a contract between the Government and the trust guaranteeing for a period of 10 years, the rights, exemptions and privileges (subject of course to due observance of all provisions of the Act). This undertaking is a reflection of the importance given to the legislator’s objective of developing an international reputation for Maltese trusts. It is therefore understandable that special attention is given to ensure any use of the trust for illegal purposes, instantly renders the trust invalid. Thus a trust is invalid ‘if it requires purports or encourages the doing of any act which is a criminal offence under the laws of Malta or if done in Malta’. Maltese law places much on emphasis on the ‘nature’ of trust property, providing that a trust shall be invalid of it has income accruing to or derived by it which originates from an operation transaction or other activity which is a criminal offence under the laws of Malta or would be such an offence if done in Malta.

Maltese law will hold each director of the nominee company personally liable if they do not exercise the appropriate standard of care in carrying out their responsibilities as trustees and towards the Malta Financial Services Centre as regulator. Moreover nominees also have the ongoing duty to inform the regulator of any changes or variations in the settlement which shall not have effect until so registered. Section 42 actually specifies that any person being a director, officer or member of a nominee company acting as a trustee, who has reason to believe that the said trust has property or income accruing to it, (originating from a criminal offence under the laws of Malta, or would have been so if committed in Malta), has the duty to bring the matter to the notice of the Malta Financial Services Centre. In such a case an investigation may be held in which all matters shall be treated as confidential unless actual wrongdoing is proven

Conclusions

The three certainties of objects, words and subject matter should not be interpreted as a three tiered guarantee of form and essence of a valid trust, be it in UK Jersey or Malta, undoubtedly each constitutes an indispensable element however the validity of a trust goes beyond the satisfaction of establishment formalities and rests upon the factual enactment of a few distinct principles and/or codified parameters that must be respected at all times.

From a practitioners’ perspective, trusts have proved themselves as versatile solid structures, and continue to do so in fields as diverse as international environmental law to new investment and equity fiduciary splitting and third party management. Although new to Maltese law, their introduction in 1988 served as a gradual phasing into Maltese legal culture, and the restrictive application to non-residents, has given the legislator the space to observe and plan accordingly. Although untested, in so far as we have no public record of a Maltese trust being the subject of litigation locally or overseas, there is no disputing the quality of the law. Indeed as tax authorities all over the world are increasing regulation and co-ordination in an attempt to maximise tax collection, trusts emerge as unrivalled vehicles whereby one can plan the development of their estate and beneficiaries thereof, in a legal tax efficient manner that provides safety in a fast changing world.

In Malta’s case, thanks to the nominee shouldering of responsibility, and consistent monitoring by an independent and customer focused regulator, the legislator has achieved a manageable balance between functionality and regulation, that so far has weighed in favour of safe practices and maintaining of a good reputation rather than an unmanageable volume. This intelligent spreading of client monitoring and supervisory duties is an excellent deterrent to potential abusers, who would instead focus on less strict jurisdictions. The codified clarity of Maltese trust law augurs well, and it is relevant to note that in parallel with Malta’s entry into the European Union, the updating of Maltese Trust law has been drafted in a manner that is faithful to the English and Jersey sources that have provided such a solid versatile and comprehensive foundation to date.

Dr. Robert D’Alessandro
LL.D., LL.M., MSt.(Oxon)

Tax & Trusts Partner
Cefai & Associates