Trusts, Foundations, Associations and Other Legal Organisations

1. Introduction to trusts

Malta is traditionally a continental / civil law jurisdiction, whilst the notion of ‘trusts’ and the

legal regime concerning their regulation emanates from the common law legal tradition. This

notwithstanding, the Maltese legal system has evolved into one of a hybrid nature: it retains

its continental/civil law basis, whilst welcoming common law concepts.

Trusts under Maltese law are regulated by the Trusts and Trustees Act (Chapter 331 of the

Laws of Malta) as well as various regulations enacted thereunder. The Act provides for strict

regulations relating to the authorisation and supervision of trustees. Furthermore, Malta is

party to the Hague Convention on the Law Applicable to Trusts and on their Recognition of

1985

A trust exists where a person (known as a trustee) holds, as owner or has vested in him

property under an obligation to deal with that property for the benefit of persons (called the

beneficiaries), whether or not they are yet ascertained or in existence, which is not for the

benefit only of the trustee, or for a charitable purpose, or for both such benefit and purpose

aforesaid.

The person who establishes the trust is referred to as the settlor, which term also includes a

person who ‘provides trust property or makes a disposition on trust or to a trust’. Therefore,

the settlor creates the trust and transfers assets from his patrimony therein. Typical assets

usually held in trust include shares, bonds, immovable property, and bank accounts.

The parties in a trust scenario are typically:

The settlor 

The person who establishes the trust,This term also includes a person who ‘provides trust

property or makes a disposition on trust or to a trust’. Therefore, the settlor creates the trust,

transfers assets from his patrimony therein. Typical assets usually held in trust include shares,

bonds, immovable property, intellectual property, bank accounts, etc… The settlor may also

be a beneficiary under the same trust.

The trustee

The trustee is the person or entity entrusted with administering the property of the trust as a

bonus paterfamilias, acting in utmost good faith and in accordance with the trust deed and

Maltese law on trusts. Although the trustee becomes the legal owner of the property held in

trust, the said property is ringfenced and cannot be attacked by eg. creditors of the trustee.

The beneficiary or beneficiaries 

The individual or group of people who benefit from trust assets and the income they may

generate. They are the persons in whose interest the trustee administers the trust assets – eg.

the family members in a family trust.

Usually, the settlor expressly establishes the trust by means of a written trust deed evidencing

his intention to this effect, whilst also stating who the beneficiaries are or will be (since they

may not yet be ascertained or in existence) and to what extent they will benefit from the trust.

This is known as an ‘express trust’.

Once the trust has been created, the settlor ceases to be the legal owner of the property held in

the trust and thus does not continue to control, nor does he retain an active role in the affairs

of the said trust. 

However, the law provides for some inroads to this general rule:

For example, the settlor may expressly provide in the trust instrument that he may revoke (or

vary the terms of) the trust accordingly. Therefore, he may also reserve for himself any power

to appoint, remove, or add beneficiaries, trustees, or protectors. Moreover, the settlor can

reserve for him or herself a benefit derived from the property of the trust or the power to

appoint or remove trustees without affecting the validity of the trust. Therefore, a settlor can

also be a beneficiary under the same trust.

Although a trust does not enjoy a separate legal personality (as is the case regarding

foundations), trust property is distinct and separate from the personal property of the settlor,

as well as the trustee. Furthermore, the property held in trust is also distinct and separate from

the personal property of the trustee and from other property held by the trustee under any

other trust.

For example – a debt or liability incurred by the settlor after the trust is created cannot be

attacked by creditors. However, trusts under Maltese must be utilised in good faith and

cannot be established, for example, in order to defraud creditors; or to circumvent succession

laws on the reserved portion due to heirs; or to circumvent civil laws in relation to

maintenance due to spouse and children, etc. In this regard, one can refer to the landmark

Maltese judgment in Bettina Vossberg pro et noe v. Equinox International Ltd et (CoA

9/11/2012). The bottom-line is that: the trust be established before the assets at issue become

subject to third-party rights or restrictions arising therefrom.

The terms of a trust may provide for the office of ‘protector of the trust.’

Subject to the terms of the trust, the protector shall have the following powers:

(a) to appoint a new or additional trustee;

(b) to remove a trustee;

(c) to require the trustee to obtain his consent prior to exercising a discretion.

Trusts established for a charitable purpose may nominate an ‘enforcer’. The duty of the

enforcer shall be that of ensuring that the trustee administers the trust in accordance with the

terms of the trust and to promote the purposes of the trust.

What are the advantages of setting up a trust?

1. Protection and safeguarding of assets - the property that constitutes the trust is independent

from the settlor’s, the trustee’s and the beneficiaries’ assets, thereby guaranteeing greater

protection. One may wish to protect one’s assets as part of a risk management policy or

against political instability (eg. wars, expropriation, etc.)

2. Estate planning - By utilising a trust, the settlor can administer and distribute his assets

during the settlor's lifetime and after his death. He may distribute income and capital to meet

specific expenses i.e. education, medical or in emergency.

3. Succession planning – One can utilise the trust as a vehicle to transfer one’s assets to

successive/future generations. The Act allows the creation of a ‘family trust’ which it defines

as: “a trust created to hold property settled by the settlor or settlors for the present and future

needs of family members or family dependants who are definite and can be ascertained.” In

this respect, one can simplify proceedings, manage more efficient tax planning e and avoid

notarial formalities which would normally arise when one inherits under a will or by

operation of law (in an intestate scenario). Judicial formalities in Maltese courts in order to

prove heirship in the absence of a will can be avoided. In case of cross-border inheritance

cases, one can avoid probate proceedings abroad as well as judicial proceedings which may

arise in relation to succession. That said, however, when a Maltese trust is created, certain

indefeasible succession rights (whether testate or intestate), especially the reserved portion of

the spouses, ascendants and descendants, will prevail over the terms of the trust. It is

noteworthy that by utilizing a trust, the settlor can administer and distribute assets both

during his lifetime and after his death. Furthermore, a settlor can ‘reserve’ assets for his heirs

under a trust without said assets being transferred immediately to the heirs upon the settlor’s

death. For example, in the case where the settlor would like his heir to reach the age of

majority before benefiting from the inheritance assets. Also, trusts allow the creation of

special funds for minors or people with certain infirmities.

4. Tax planning –Trusts may be utilised in order to mitigate tax exposure, through efficient

and transparent tax planning. Trusts are considered to be transparent vehicles for tax

purposes. The trustee is not taxed for income attributable to a trust if such income is

distributed to a beneficiary. Income attributable to a trust which is not distributed to the

beneficiaries is taxed in the hands of the trustees at a rate of 35%. Other laws and regulations

may have an impact on the taxation of trusts and trustees. Malta is also a signatory to a

number of Double Tax Treaties which may apply accordingly.

5. Portability - Under Maltese law, a trust may be converted to a foundation and vice-versa. A

trust may be established for 125 years (which may be terminated sooner), or indefinitely (in

the case of unit trust sand trusts for a charitable purpose)

Thinking of setting up a trust in Malta? LexVirtualis™ can assist you with

advice on:

• Choice of fiduciary entity and related matters

• Recognition of trusts under foreign law.

• Formation of the trust and drafting of all necessary trust documents

• Re-domiciliation of trusts

• Taxation of trusts

• AML and CFT compliance

Furthermore, LexVirtualis™ can appoint an affiliated fully-licensed fiduciary to assist you with:

• Acting as a ‘trustee’ in terms of the Trust and Trustees Act. This entails the holding,management and administration of assets held in trust for the benefit of the beneficiaries. Furthermore, securities over charged assets, or assets on behalf of secured parties, may also be held.

• Other fiduciary services such fiduciary holding of assets, company nominee services, acting as a foundation ‘administrator’ in terms of the Second Schedule to the Civil Code, and escrow services.

2. Introduction to legal organisations - eg. foundations and associations.

Legal organisations are governed by the Second Schedule of the Maltese Civil Code (Chapter

16 of the Laws of Malta). Article 1 of the Second Schedule defines an ‘organisation’ as a

‘universality of persons who associate or a universality of things which are appropriated to

achieve a lawful purpose having a form recognised by law, and which is capable of being a

legal person in terms of law.’ Organisations are classified according to their purpose, ie:

• To exclusively promote a social or public purpose on a non-profit making basis, excluding any private benefit (however it might have a type of beneficiary known as a ‘public interest beneficiary’ such as religious organisations or public organisations) – in which case it is referred to as a ‘public benefit organisation’

• To promote any lawful purpose in terms of the Voluntary Organisations Act (other than those referred to above) - in which case it is referred to as a 'private benefit organisation' or

• To promote any other lawful purpose, in which case it is referred to as a 'private interest organisation'.

Both foundations and associations fall under the term ‘organisations’. In the case of

foundations, the focus of the law is on the patrimonial aspect of the assets that are vested in

the foundation itself. On the other hand, in the case of associations, the law focuses on the

associative element of the organisation - ie. the members who have convened and established

the association in order to fulfil its aims.

If the organisation is a ‘voluntary’ one, then the Voluntary Organisations Act (Chapter 492 of

the Laws of Malta) also applies.

The voluntary organisation is an organisation which is created or established:

• For any social purpose including that which qualifies as a public purpose or for public

• benefit

• As non-profit making

• Is voluntary

Whether it is registered or registerable as a legal person or not in terms of the Second

Schedule to the Civil Code and whether it is or may be enrolled under the Act or not. The

meaning of ‘voluntary’ is defined by the Act itself (eg. administrators do not receive

remuneration; and/or the organisation is created by the endowment of voluntary and

gratuitous grants, etc…)

Foundations

Foundations are governed by Title III, and more specifically, Sub-Title II of the Second

Schedule of the Maltese Civil Code (Chapter 16 of the Laws of Malta).

A foundation is defined as:

An organisation consisting of a universality of things constituted in writing, including by

means of a will, by a founder or founders whereby assets are destined

(a) for the fulfilment of a specified purpose (purpose foundations); and, or

(b) for the benefit of a named person or class of persons, and which are entrusted to the

administration of a designated person or persons (beneficiary foundations)’

Purpose foundations may be established for a public benefit or for any other lawful purpose

(non-public benefit).

Beneficiary foundations may be established for a private benefit or for a public interest.

Furthermore, a foundation may be classified as a ‘private interest foundation’, defined as a

foundation, which neither qualifies as a public benefit foundation nor is it established for a

public or social purpose and which is not a voluntary or non-profit organisation but which

can be established for a legitimate purpose.

The legal provisions dealing with foundations are numerous and vast. Foundations are often

compared to trusts and although similar (ie. they can serve the same purpose and achieve the

same results), there are some notable and crucial differences between the two. Whilst trusts

originate from common law, foundations are more akin to the continental/civil law tradition.

Unlike trusts, foundations enjoy separate legal personality. Whilst in a trust scenario, the

ownership of the patrimony of assets placed in the said trust scenario is vested in the trustee.

In the case of foundations, the foundation itself is the legal owner of the assets transferred to

it.

A foundation can be established either by a public deed (published by a notary and enrolled

in the Public Registry) or by means of a will. The minimum endowment of funds or value of

property in order to set up the foundation is €1,164.69. However, if the foundation is

established exclusively for a social purpose, the minimum endowment required is €232.94.

As a rule, foundations cannot engage in commercial activities (such as trade) except in the following cases:

•  It may be endowed with commercial property or a shareholding in a profit-making enterprise, a franchise, a trade mark or other intellectual property which gives rise to income, as well as a ship or aircraft, but may only act as the passive owner of such assets.

•  It may, subject to such authorisations as may be necessary under applicable laws, be used as a collective investment vehicle, as a pension or employee benefit scheme, as a retirement scheme or fund, as a securitisation vehicle or for the purpose of supporting or implementing a securitisation transaction,

• A foundation may hold, administer, develop or sell undivided property originating from an inheritance deriving from one or more deceased person or persons common to the beneficiaries.

• A foundation may carry out any trading activity resulting from such foundations owning, administering or otherwise operating an ‘innovative technology arrangement’, as defined in the Malta Digital Innovation Authority Act

What are the advantages of foundations?

• A foundation (unlike a trust) is granted separate and distinct legal personality, and therefore acquires its own patrimony of assets and liabilities, has its own rights and obligations and is separate and distinct from its founders, administrators and beneficiaries. It must therefore register itself as a legal person.

• The founder, administrator and beneficiary respectively can be natural persons (eg. individuals) or legal persons (eg. companies, etc.). A founder may also assume all three roles by also acting as administrator and also being named beneficiary of the same foundation.

• Whilst administrators are subject to fiduciary bligations, a protector and supervisory council may be appointed to supervise the said administrator

• Private foundations may be established for a maximum of 125 years, whilst there is no such time limit on public benefit foundations. Private foundations may engage in trade.

• Foundations (like all organisations) may establish within them segregated cells to achieve particular purpose and to protect the patrimony of the said foundation.

• Confidentiality (which may be waived by the founder).

• Low endowment impositions - €1,164.69 payable upon enrolment of the deed of foundation and in the case of a public benefit foundations in which case the endowment shall be of at least €232.94. Endowment can also be in kind.

• Ideal for tax planning – eg. assets may be transferred out of the patrimony of the founder prior to death and will not be subject to inheritance tax, private interest foundations can either be taxed either as company or as a trust, etc…)

• Foundations may be converted into trusts and vice versa, due to the similar legal rights and obligations at play.

In view of the above, foundations may prove useful for the following practical purposes:

• Succession planning – disposing of one’s estate via a foundation may afford a greater degree of confidentiality, privacy and flexibility than doing so under a will or in the absence of the latter, by operation of law. 

• Charitable / Philanthropic Purposes – Foundations are enforceable without having any nominated beneficiaries (unlike trusts which must have beneficiaries). This renders it ideal for a founder to dispose of his estate in furtherance of an altruistic objective of his or her choosing,

• Asset protection and ringfencing – One can carry out asset structuring and estate planning in view of the fact that certain assets may be segregated and thus not continue to form part of the estate/patrimony of the founder. In this regard, one can protect his estate against future events which may entail debts and/or liabilities. Conversely, debts and liabilities incurred by the foundation can only be satisfied by assets forming part of the patrimony of the said foundation.

• Confidentiality – Save in cases involving money-laundering and terrorist financing, and certain due diligence requirements, the general rule is that the confidentiality of a foundation’s beneficiaries is respect and safeguarded, even by the Maltese Courts. The identity of the founder may be also be kept confidential, for example, by utilising fiduciaries (nominees) in the establishment of the foundation. The public deed creating a foundation must be enrolled in the public registry. However, only a minimum of information is available to the public and confidentiality is retained.

One can also, by means of a foundation, cater more specifically to the needs of the:

• Founder – The founder is the person wishing to transfer assets from their estate into a foundation (and is akin to the settlor in relation to a trust. However, unlike trusts, in the case of foundations – the founder may continue to exercise control over the foundation during his/her lifetime, depending on the constitutive instrument – he may monitor the administrators’ activities or may be an administrator himself. Unlike in the case of a will, the founder can decide what is to happen in certain cases while he still alive. For example, should he or she become unable to administer their estate due to ill health, disability or age – in which case he can also finance his medical care and assisted living or nursing home.

• Beneficiary or beneficiaries – in case of succession planning, it is the potential heirs who would fill in this role, should the founder wish to do so. The founder can pre-empt future situations where there is a high risk of his heirs squandering the estate – for example, in view of any potential habits or lifestyles they might be engaged in. There is a much lesser degree of control and flexibility in the case of a testator disposing of his estate under a will or in an intestate scenario by operation of law.

Associations

An association, which is not bound to register itself as a legal person, but may nonetheless do

so, is defined as:

an agreement between three or more persons to establish an organisation with defined aims or

purposes to be achieved through the dedication of efforts and resources by such persons and

others who may join voluntarily, the patrimony, namely assets and liabilities, if any, of the

association being distinct from that of the members, its administrators or any beneficiaries:

Provided that an association which is not established as a public benefit organisation may be

established between two persons.

An association can established for various purposes, such as:

• the fulfilment of private interests;

• the promotion of trade or a profession;

• the obtainment of a social purpose,

• the carrying on of any lawful activity on a non-profit making basis

Depending on the purpose of the association, different legal rules may apply. Associations

are regulated, as a rule, by Sub-Title III of Schedule II of the Civil Code entitled ‘Of

Associations’.

They may be established for a:

• private benefit – for example – those that promote a private interest or a particular profession or trade. These associations are subject to special laws and specific provisions enlisted in Article 48 (1) of the Schedule (eg. those on civil and/or commercial partnerships, unions and employer associations, etc.) However, the rules of Sub-Title III 'Of Associations' (other than those governing public benefit organisations) continue to apply as a lex generalis. 

• public benefit – these associations are governed by the provisions of this Sub-Title III 'Of Associations' and the applicable provisions of this Schedule, with the exception of provisions of article 48.

Legal Personality

Legal persons are organisations which are endowed with legal personality. Legal personality

is acquired through the formal recognition of the State. Recognition by the State requires a

specific act of recognition and no other administrative act of the State in relation to an

organisation or activity shall constitute recognition.

Except where legal personality is recognised or established by a law or an international treaty

or agreement or is granted in virtue of registration pursuant to any special law, legal

personality shall only be acquired by an organisation on its registration with the Registrar for

Legal Persons.

LexVirtualis™ can assist with the following advice in relation to legal organisations such as foundations and associations:

• Establishing and registering foundations, associations and other organisations in accordance with Maltese law

• Appointing a fully licensed administrator for holding of assets as mandatary or depositary

• Drafting of the statute or other constitutive instrument.

• Drafting of public deeds where necessary

• Assistance and advice related to obtaining legal personality

• Assistance and advice relating to the establishment of segregated cells within organisations

• Advice on taxation in relation to any organisation.

• Protection of assets

• Responsibility and liability

• Conversion, Amalgamation, Division

• Revocation of the organisation

• Termination and winding up

• ADR and litigation