Trust in Russian. How to bequeath with the help of a hereditary fund

Soon, wealthy Russians will be able to transfer their property to their heirs with the help of a special fund — an analogue of an English trust. However, is the new tool conven Over the past few years, the Russian authorities have been actively introducing the institutions and principles of the Anglo-Saxon legal system into civil law. So, in 2015, provisions about the option, Escrow accounts, Estoppel, etc. appeared in the property and mandatory parts of the Civil Code of the Russian Federation. Now came the turn of inheritance law.

The Federal Law dated September 29, 2017, No. 259-ФЗ that enters into force on September1, 2018, introduces a new legal institution – a hereditary fund into civil circulation.

As conceived by the legislators, it should become the Russian equivalent of English trusts, that is, an institution that allows wealthy citizens not only to transfer assets (business, real estate, securities, etc.) to the heirs that require operational management, but also to determine their future.

What is a hereditary fund?

From a legal point of view, the hereditary fund is a separate legal entity – a non-profit organization (NPO). However, it has a number of distinctive characteristics.

Despite the fact that the property is transferred to the hereditary fund for the purpose of further distribution among beneficiaries (they can be not only “heirs by law”), during the whole life of the fund it belongs only to him.

At the same time, the fund does not have the right to transfer property to anyone other than the beneficiaries themselves, and has complete independence from their obligations, that is, is not responsible for the debts of beneficiaries (but the founder of the fund may give special instructions in case of their bankruptcy). The rights of the beneficiary are inalienable and cannot be transferred to any third parties, including close relatives. However, the heirs of the beneficiary are entitled to inherit his rights under the charter of the fund.

The Foundation, like any other legal entity, has its own governing bodies. When drawing up a special will to carry out this function, the testator either selects a specific person, or determines the procedure for his election after the creation of the fund. The manager can be any natural or legal person, except the beneficiary. However, for the latter, it is possible to provide powers to remove / appoint a manager, approve his transactions, etc., that is, in fact, manage the fund.

Also for supervision of the activities of the executive body and compliance with the conditions for managing the fund, the testator may provide for the creation of a higher collegial body (which may include beneficiaries) or a board of trustees.

How to create a foundation

A citizen who has decided to create a hereditary fund must draw up a special will, including:

• the decision to establish a fund;
• charter;
• terms of fund management.

When forming a fund, he is entitled to determine the term for which the fund is beingcreated, or to make it indefinite.

In the decision to establish a fund, the testator determines the procedure, amount, methods, and terms for the formation of the property of the estate fund. Property can beformed in three ways: directly when creating a hereditary fund, when the fund carries out its own economic activity, and also at the expense of income from property management. Gratuitous transfer by third parties of property to the fund is not allowed.

The registration and commencement of the foundation’s activities take place only afterthe death of the testator. Within three days from the opening of the hereditary case, the notary must submit an application for the creation of a fund to the registering authority. At the same time, he must obtain the consent of the persons who were chosen by the testator to manage the fund. Without this, the hereditary fund will not be registered.

After obtaining the consent, the notary transfers one copy of the decision on the establishment of a hereditary fund, together with the charter, to the state body for registration of the fund. Another copy of the decision along with the statute and terms of the management of the fund is transferred to the manager. In addition, notary must also transfer copies of documents on the establishment and management of the fund to beneficiaries. When creating a hereditary fund and accepting an inheritance from it, the notary issues a certificate to the fund on the right to the inheritance on the date specified in the creation decision.

Rights of heirs

The beneficiaries are assigned a number of rights protecting them as beneficiaries ofthe fund. First of all, they are entitled to receive the assets of the fund (in accordance with the terms of management of the hereditary fund). In addition, they can request and receive information on its activities from a hereditary fund, as well as require its audit. In case of violation of the fund management conditions, the beneficiary has the right to demand compensation for losses caused by such violation.

He may also give consent for the hereditary fund to complete certain transactions if this is provided for by the charter of the fund.

Beneficiary rights cannot be inherited. In the event of his death, the right to receivethe property passes to the person determined by the documents of the hereditary fund.

Funds vs. trusts

In many ways, by copying the design and principles of the functioning of trusts, hereditary funds have a number of significant differences:

– a trust can be created both during life and after the death of the testator (the

hereditary fund is only after death);

– a trust, by its legal nature, is an agreement (and not an organization, as many

mistakenly believe);

– in the most popular jurisdictions among our compatriots (Jersey, Cyprus, BVI), trustsare exempted from paying most taxes, while inheritance funds are obliged to pay income tax and property tax on a par with other NGOs;

– the trust is not liable for the testator’s debts, whereas claims by the testator’s

creditors may be made to the inheritance fund;

– a trust can be terminated at the request of the heir with the transfer of property tohim, while the fund can be liquidated only by a court decision (at the suit of the state body, due to the expiration of the term or the occurrence of relevant conditions);

– in most jurisdictions, a trust cannot be indefinite (the most frequent maximum term is

100 years).

The above differences are not ultimatum. Depending on the type of trust (regular, fixed, discretionary, etc.), their number may increase or decrease.

Advantages and disadvantages

The main advantage of the hereditary fund is the possibility of establishing the conditions for managing inherited property. In the currently existing methods of inheritance (by law and according to the will), property is transferred to the heirs “unconditionally”, i.e. without imposing any obligations on them for its receipt and use.

Competent fund management can not only preserve, but also increase it, examples ofhigh-yield trusts / funds are known throughout the world. Such a profit may arise from the fund as a result of disposal of the hereditary mass, and from the property acquired by the fund itself (for example, income from participation in companies). Often, when transferring a business inheritance, there are difficulties associated with the need to wait for the date of succession of the heirs to the law. Waiting period can be from six months or more.

When creating a fund, the minimum period between the death of the testator and the beginning of the operation of the fund allows not interrupting the operational management of the business. In addition, it is possible to divide shares in business among several heirs in such a way as to prevent corporate conflicts between them.

There are, however, and disadvantages that do not allow us to consider the fund as an apopular way of transferring inheritance. An obvious disadvantage is the inability to create a foundation during the life of the testator. In Western countries, citizensoften organize trusts in life in order to see how they will work after their death, and if necessary to make adjustments to the conditions of government.

There is also a moment of uncertainty with the property transferred to the fund, which is in foreign jurisdiction. It is not yet known whether, for example, the Cyprus notary will consider the Russian fund as the proper heir to the shares in the authorized capital of a local company, and what difficulties will need to be overcome for such recognition.

You can not ignore taxes – the absence of any benefits in comparison with the same trust will play a significant role in the choice of businessmen between these two methods of inheritance transfer. The disadvantage is that the hereditary fund must be responsible to the creditors of the testator. Property of trust in Anglo-Saxon jurisdictions cannot be seized on the founder’s debts.

Thus, despite the revolutionary nature of the new law, in many respects it remains“raw.” In private conversations, the leadership of the Federal Notary Chamber recognizes that the opinion of their experts from the notaries was not taken into account in the final text of the bill. It seems that, using the form and part of the content of the

English trust, the legislator has not fully thought through how the new institution willstand on the existing legal rails.

The fact that the legislator has refused some significant advantages of trusts (joint testament, tax breaks, anonymity) is also puzzling. So it is possible that the law on tax funds will be amended even before its entry into force.