Dr. Kun Péter – Dr. Baráth Zsuzsanna
Abstract
The legal institution of trusts was introduced to the Hungarian legal system in 2014., following the example of the ‘trust’ known in Anglo-Saxon legal systems. The Hungarian regulation of trusts established by a testament which is based on the testamentary trust well known in Anglo-Saxon law, raises a number of questions. The main reason for this is that the application of trusts created by wills must take into consideration both the rules of the law of obligations and the rules of the law of succession. As a result of this regulatory dissonance, the legal interests that the law seeks to protect may come into conflict, such as the priority of the beneficiary’s interests and the primacy of the testator’s presumed will. This can lead to a number of uncertainties in practical application, which we will reflect on in this article.
Introduction and statement of the problem
The legal institution of trusts became part of Hungarian law with the entry into force of the Hungarian Civil Code (hereinafter: Civil Code), modelled on the ‘trust’ and ‘Treuhand’ legal institutions known in Anglo-Saxon and German legal systems respectively. As described by István Sándor, the expectations and rules of the Civil Code regarding the trustee follow international standards, the primary function of the legal institution being the intergenerational management of assets.[1] The basic pillars of trusts are the trustor, the trustee and the beneficiary. A contractual relationship is established between the trustor and the trustee, and a so-called dispositive relationship between the trustor and the beneficiary. The trustee is obliged to pay a fee to the trustor for the management of the property, rights and claims assigned to him by the trustor for the benefit of the beneficiary in his own name.[2]
The legal transaction is not just between living persons but can also be created on death, and in Anglo-Saxon countries the “testamentary trust” is one of the most common forms of trust. It is an excellent estate planning tool, as the testator can exercise full control over his or her estate until death, which is transferred to the trustee then. In civil law jurisdictions, the approach to this issue is quite different: in some, it is explicitly prohibited – e.g. France – while in others, such as Hungary, the regulation raises a number of questions. The main reason for this is that in civil law systems, the application of trusts established by wills must take into account both the rules of law of obligations and the rules of succession law. This can lead to a number of uncertainties in practical application, so that while inter vivos settlements are now widespread, trusts created on death are rare.
Dissonance in regulation – on the border between contract law and succession
In Hungarian law, the substantive and procedural rules of fiduciary trust management relevant to our topic are found in the Civil Code, Act XXXVIII of 2018 (hereinafter referred to as: Act on Probate Proceedings) and Act XV of 2014 (hereinafter referred to as: Trust Act). The legal institution of trust management takes place in the Sixth Book of the Civil Code, which regulates the law of obligations, and is therefore governed by the dispositive nature of the law of obligations. In contrast, the law of succession is characterised by mandatory regulations which pervades Book Seven of the Civil Code. In the case of trusts established by will, the characteristics of the law of obligations and the law of succession are thus combined, leaving room for two different regulatory logics.
This somewhat schizophrenic situation may also give rise to interpretative uncertainty from another point of view: the conceptual element of a fiduciary relationship is the management of assets “for the benefit of the beneficiary”,[3] and the “primary consideration of the beneficiary’s interests” for example, the trustee’s duty of responsibility may be determined on the basis of this criterion as well.[4] This could also imply that, when the trustee has to take a decision on a matter not covered by the trust regulation, such as an investment or financial decision, he must take into account only the interests of the beneficiary, i.e. the financial interests. But what happens if the financial interests of the beneficiary do not coincide with the trustor’s presumed wishes? Since a trust created by a will is not a transaction between living persons and is in the form of a will, should not the favor testamenti, a fundamental principle of succession law, also be taken into consideration in such a case? It is easy to imagine that succession and trust lawyers would give different answers to this question.
A further difference lies in the formal requirements of the two legal transactions: while a will can be made orally[5] -although only in exceptional cases- a fiduciary trust must born in a written form.[6] Another difference is that while a will can only be made in person[7], a fiduciary trust can be concluded by a representative as well. In our view, in the case of a trust created by will, the less permissive -of the rules of succession and the rules of law of obligations- regulation should always be taken into account: both the written form and the personal nature of the trust are mandatory requirements, failure to comply with which may entail the legal consequences of invalidity.
A trust created by a will has a different effect from a trust created inter vivos: while in the case of a trust between living persons, the trust is created upon a bilateral agreement, the trust created by a will is created retroactively to the death of the trustor, provided that the trustee accepts his designation as trustee.[8] Article 18/A. § of the Act on Probate Proceedings at least regarding the creation of a trust, is explicitly strict: within 30 days of the notarial notice, the trustee must make an express declaration with full probative force – and this declaration must be received by the notary within that period – that he accepts the designation as a whole.[9] One can imagine that the more time elapses between the drawing up of the will and the death of the testator, the greater the likelihood that the trustee will not accept the designation. Indeed, the longer the time, the more likely it is that the regulatory or economic environment will change in such a way that it will no longer be in the trustee’s interest to “enter” the trust.
In the case of a testamentary trust, the trustee must make a declaration of acceptance, failing which the legal relationship is not established. In our view, this is one of the main shortcomings of this legal instrument in Hungarian law: it does not provide any guarantee that the testator’s will will be fully carried out if the trustee has not made a declaration of acceptance. This issue will be discussed more detailed below.
In the following, the issues arising in connection with a trust created by a will will be examined in two groups: on one hand, if the trustee makes a declaration of acceptance and the trust is created, and on the other hand, if the trustee does not make a declaration of acceptance and the trust fails to be created.
The trustee accepts the designation – a trust is created
The dilemmas arise, first of all, from the difference between a trust created by a will and a trust created by a bilateral agreement. The dispositive nature of the fiduciary trust is essentially designed to regulate transactions between living persons, whereas a testamentary trust is a death trust which regulates a fiduciary relationship between living persons, and moreover between the persons who survive the testator. Consequently, some of the fundamental rules of the law of obligations of this legal instrument cannot be reconciled with the principles of law of succession, but it is not always easy to determine which are the rules of the law of succession which apply to a trust created by will.
Take, for example, the settlor’s rights of control, recovery, settlement, accounting, information and recall.[10] These rights, which can be exercised inter vivos without serious problems, cannot be interpreted in the case of testamentary trusts, since a testamentary trust takes effect at the time of the death of the trustor who is entitled to exercise the rights. A solution to this problem may be the designation of a protector, also known as an enforcer. As István Sándor points out, in Anglo-Saxon legal systems since the Victorian era, a protector or enforcer has played a major role in trusts, with the right of prior consent or veto and, where appropriate, the right to sue.[11]
The institution of a protector was introduced into the rules of trusts by the 2017 amendment to the Civil Code: „The settlor may, in the event of his death, appoint in the contract a person entitled to exercise the rights of the settlor and bound to fulfil the obligations of the settlor. Upon acceptance of the designation by declaration addressed to the trustee, the person designated shall have and be subject to the rights and obligations of the settlor to the extent that the contract has not limited those rights and obligations.”[12]
The designation of a trustee can therefore help to “pass on” the settlor’s rights. However, the question arises as to whether the protector’s powers are limited in relation to those of the settlor and whether they may exceed the scope of the testator’s will. Some argue that if the protector was entitled to exercise the full powers of the testator, he could override the testator’s will, for example by choosing another trustee to replace the one appointed in the will or by modifying the substance of the transaction, in breach of the principle of favor testamenti. There is also a view that the appointment of a protector can be interpreted as a power of representation in the event of death, which is null under Hungarian law.[13]
We only partially share this view. We agree that the fundamentally permissive rules of trust law cannot provide a legal basis for circumventing the mandatory provisions of succession law. However, in our view, testamentary freedom is not, and cannot be, infringed by the appointment of a new trustee by the protector designated by the testator. The will of the testator is expressly directed to the creation of a trust relationship, within the framework of the rules of Hungarian law. It would be contrary to the favor testamenti principle for the protector appointed by the trustor not to have the power to appoint another trustee in a given case, obviously within the limits provided for by the trust deed. In other words, while the creation of a legal relationship is subject to essentially mandatory norms, such as the written form of trusts, the formality of wills, or the rules of the law of succession, the rules applicable after the creation of the legal relationship are essentially dispositive, so that when a trust is created, the trustor is entitled to determine the content of the trust within this dispositive framework, in accordance with the principle of freedom of concluding a contract.
However, it is questionable whether the protector has a right of action against the trustee. Based on the Anglo-Saxon model, the answer is yes. David Hayton is credited with the ‘enforcer principle’, according to which the trustee must always be faced by a person who enforces the obligations he has undertaken. Clinston Chiock’s article, published on the Cambridge University Law Society website, illustrates the abovementioned common law principle through a precedent, Morice v Bishop, and states that every trust must have a specific object and there must be a person in whose favour the court can rule, so there must be a person to enforce the trust in the event of the trustor’s death. [14] We share this view. We believe that one of the balancing elements of trust management would be upset if the trustor’s rights were terminated upon his death. It could not have been the intention of the legislator that important means of protecting the assets held in trust should cease to exist on the death of the trustor, such as the right to claim back assets disposed of in bad faith or free of charge,[15] to bring a claim for damages against the trustee,[16] to enforce the trustee’s obligation to account . [17]In our opinion, the above-quoted 6:325.§ (4) of the Civil Code creates the legal basis for the protector to act as the contractual successor of the trustor with regard to the right of action, as well as other rights of the trustor, to the extent, of course, that the will establishing the trust allows.
A separate issue that must be examined is the extent to which the obligations of the trustor are transferred to the protector upon accepting the designation, such as the liability towards the creditors of the trust assets that revert upon the death of the trustee.[18] Taking into account the regulatory logic of trust management and the general principles of civil law, we believe that the limitations of liability can only be established in the trust agreement itself, and only to the extent that they do not deprive the creditors of satisfaction—thus not constituting a contractual clause that unlawfully removes collateral. From the perspective of our topic, this is significant when testamentary provisions are used to establish a trust, special attention must be paid to ensuring that the rights of the appointed protector precisely correspond with the obligations that may burden them as the successor of the trustor. Otherwise, there is a risk that the appointed protector may refuse the appointment.
In case the trustee does not make a declaration of acceptance, or makes it with different content, the trust relationship does not come into existence
The second issue arises when the trustee does not accept the appointment; in such a case, the intended testamentary trust cannot be established, and as a result, the testator’s will won’t be fulfilled.
In case the trustee does not accept the appointment—in full accordance with the provisions set out in the will—the trust relationship does not come into existence, and the designated assets will be transferred to the heirs in accordance with the rules of intestate succession. We do not see the possibility for the testator to designate a substitute heir in the event the appointment is not accepted, given the prohibition of the designation of a substitute heir.[19]
The possibility of appointing an alternate heir may arise, as the Civil Code does not prohibit the designation of an alternate heir.[20] However, this would require the fulfilment of two criteria: first, that the trustee qualifies as an heir under the law of succession; second, that the trustee’s failure to accept the appointment is considered a disclaimer of the inheritance, thus constituting a ground for debarment from succession.[21] The first criterion would be fulfilled if the designated trustee qualifies as an heir within the meaning of Article 7:25.§ (2) of the Civil Code. According to this provision, „Heir means a person to whom a testator leaves his estate, or a specific portion or part thereof.”[22] Given that Hungarian law does not recognize the dual ownership structure typical of common law systems, and that, under a testamentary transfer, only the trustee may have a proprietary claim, we do not exclude the validity of the interpretation that a trustee appointed under a testamentary trust may qualify as an heir in terms of the law of succession. However, even if this interpretation were deemed valid, it would not resolve the issue of disclaiming the inheritance: under the rules of the Civil Code regarding the disclaiming of the inheritance, such disclaimer must be made through an express legal declaration—implicit conduct is not sufficient to validly disclaim an inheritance.[23] According to Article 18/A.§ (2) of the Act on Probate Proceedings, the trustee must make an express declaration of acceptance of the appointment within 30 days of the notary’s notice; if this declaration is not made, the trust relationship will not be established. Consequently, if the trustee simply fails to respond to the notary’s notice, the trustor’s attempt to ‘remedy’ the situation by appointing an alternate heir will not succeed, as the trustee’s silence does not constitute a disclaimer of the inheritance, and therefore does not count as debarment from inheritance. Accordingly, the conditions for the appointment of an alternate heir would not be met.
One possibility is to appoint multiple trustees in such a way that if the primary trustee does not accept the appointment, the next trustee would take over. In other words, the appointment of a “secondary” trustee is contingent on the “primary” trustee refusing the appointment. However, this solution cannot be applied without issues. First, it cannot be ruled out that the appointment of a “secondary” trustee might be interpreted as the designation of a substitute heir or an alternate heir. Secondly, Article 18/A.§ (4) of the Act on Probate Proceedings can be interpreted in a way that excludes the appointment of a “secondary” trustee in the will, given that it states: “[i]f the trustee declares that they will not accept the appointment, the trust relationship established by the will does not come into effect.”[24] Even in the case when the above provision governs only the “primary” trustee, we believe that it is unclear whether the notary involved in the procedure has the obligation to send the notice under Article 18/A.§ (1) of the Act on Probate Proceedings to the “secondary” trustee – and possibly to subsequent trustees, should the secondary trustee refuse to accept the appointment. In light of the above, we believe that without appropriate detailed regulations, there is no legal solution that could satisfactorily resolve the situation when the trustee designated in the will refuses to accept the appointment.
A practical solution may be the appointment of a professional (commercial) trustee in the will, based on the assumption that a professional trustee is more likely to accurately assess the risks associated with trust management. A trust established with their involvement would presumably have a higher likelihood of being accepted after the trustor’s death compared to the appointment of an ad hoc trustee. However, even this does not appear to be a perfect solution. Over time, the regulatory and economic environment may change significantly—as evidenced, for example, by the recent effects of inflation or the increase in labor costs—so that, from a business perspective, it may no longer be reasonable for the professional trustee to accept the appointment.
Inheritance or Asset management: The Anomaly of the Legal Title for the Transfer of Ownership
In the final chapter of our article, we aim to present a question that remains highly debated to this day, thereby illustrating the complexity of the legal issues arising in connection with this legal institution. The divergent legal interpretations concern whether, in the case of a trust established by will, the legal title for the transfer of ownership from the trustor to the trustee qualifies as inheritance or as asset management according to law of obligations. In the following section, we intend to present arguments supporting both possible interpretations, while also addressing the practical significance of this question.
The argument in favor of classifying the transfer of ownership as based on the legal title of succession begins with the provision set out in Article 6:329. § (2) of the Civil Code, which states that the trust is established by will. The will and the legal effects it triggers, can be interpreted—and solely interpreted—within the framework of succession law. Due to the mandatory nature of the rules of succession, it follows directly that, in the event of a transfer of ownership upon death, the legal title for such transfer must derive exclusively from Book Seven of the Civil Code, which governs succession law.
Among legal positions, the one aligned with the above-mentioned arguments is that of Balázs Tőkey, who argues that the will and its legal effects can be interpreted within the framework of succession law. Accordingly, a trust established by testament is considered either as a naming of heirs or as a legacy.[25] András Osztovits holds a similar view, stating that ‘substantively, the trust assets can be seen as part of the estate, and the designation of beneficiaries corresponds to the naming of heirs. These are unquestionably grounds for succession.[26]When examining the provisions of the Act on Probate Proceedings, one can easily conclude that these rules also support the inheritance nature of the legal institution. Right from Article 1. § [27] of the Act, it states that its primary purpose is to ensure the transfer of the estate, and consequently, later provisions should also be interpreted within this framework. Furthermore, Article 6. § (6) specifies that the trustee accepting the appointment must be regarded as someone who has interest as a successor. This is particularly noteworthy because Article 6. § (1) of the same Act distinguishes between interest in inheritance and those with an interest as a successor, defining the later as a narrower category. Therefore, the status of the trustee accepting the appointment as someone with an interest as a successor appears to be a deliberate legislative decision.
Another argument in favor of the inheritance nature as previously mentioned, the trustee’s acceptance of the appointment is required for the establishment of the trust relationship. The rules concerning this declaration, as procedural norms with material legal effects, are also found within the provisions of the Act on Probate Proceedings.[28]
A testamentary gift bears many similarities to a trust established by testament, further supports the inheritance nature of the trust: gifts made in contemplation of death are classified within the inheritance rules. The donee must be regarded either as an heir or as a legatee, and the gift becomes part of the estate.
The arguments against the inheritance nature of the trust primarily come from the institutional classification of the legal construct within the Civil Code, specifically its position within the Sixth Book, which governs obligations, and from the economic purpose of the institution. According to this perspective, the trustee is not an heir and does not inherit, as the will only establishes the manner in which the trust relationship is created. The legal basis for the trustee’s acquisition of assets is the trust itself, since Article 6:329. § (3) of the Civil Code stipulates that the rules of the trust managements also apply to trusts established by testament.[29] Additionally, Article 94. § (1a) of the Act on Probate Proceedings, along with the following Article 94. § (2), can be cited as supporting the contractual nature of the transfer of ownership, considering that the latter provision explicitly refers to the testamentary trust as a legal title distinct from inheritance and legacy.[30]
It is noteworthy that the ‘fiducie testamentaire,’ a legal institution in Quebec, which closely resembles the testamentary trust in continental legal systems, forms part of the inheritance law framework and requires the payment of inheritance tax following the creation of the trust.
The issue of the legal title for the transfer of ownership may also lead to uncertainty in the context of inheritance tax regulation. The specific provisions on trust management in the 1991 Act XCIII on Fees and Charges (hereinafter referred to as: Act on Fees and Charges) exclude the trustee’s acquisition of assets from the scope of gift tax, but not from inheritance tax.[31] The subject of inheritance tax does not include testamentary trusts. While testamentary gifts, which bear many similarities to testamentary trusts, are subject to inheritance tax, we believe it is unlikely that the legislator intended to differentiate between the inter vivos and testamentary forms of trust managements within inheritance tax regulation. This can also be inferred from Article 17/D. § (2) of the abovementioned Act, which exclusively taxes the ‘actual’ transfer of property, the conveyance of the trust property from the settlor to the beneficiary. The essence of Article 17. § (1) and (2)[32] of the Act is to ensure that the beneficiary of a trust does not face a less favorable tax position than if the assets had been directly acquired from the settlor.
It should be noted, however, that if the judicial practice resolves the debate concerning the legal title for the transfer of ownership to the trustee in a testamentary trust by determining that the title is inheritance, the current provisions of the Act on Fees and Charges may pose significant risks. This is because the Act only exempts the trustee’s acquisition of ownership from gift tax, not from inheritance tax. We believe that it is necessary to address this regulatory uncertainty, which has practical significance, through legislative action.
Summary
In our view, the trust relationship created by a testamentary disposition is a complex legal relationship, which requires consideration of both the mandatory provisions of inheritance law and the fundamentally dispositive rules of service contracts. The introduction of the trust as a “civil law trust” into Hungarian law had economic rationality. In order for this Anglo-Saxon-rooted legal institution to fulfil its true economic role within a civil law system, it is essential that the legislator is able to resolve the conflicts arising from the clash between the flexible regulatory logic of Anglo-Saxon law and the constraints of civil law systems—such as the mandatory nature of inheritance law provisions or the collision of titles regarding the transfer of ownership.
[1] Prof. Dr. Sándor István, ’A bizalmi vagyonkezelési szerződés szabályozásának értékelése a külföldi minták alapján’ in: Jogtudományi Közlöny (2015) LXX/1
[2] Article 6:310. § (1) of the Civil Code
[3] Article 6:310. § of the Civil Code
[4] Article 6:317. § (1) of the Civil Code
[5] Article 7:20. §-7:22. § of the Civil Code
[6] Article 6:310. § (2) of the Civil Code
[7]Article 7:11. § of the Civil Code
[8] Article 6:329. § (2) of the Civil Code
[9] Article 18/A. § of the Act on Probate Proceedings
[10]Article 6:315. §; 6:320. §; 6:325. §; 6:327. § of the Civil Code
[11] Prof. Dr. Sándor István, ’MTA doktori értekezése: A vagyonvédelem jogi eszközeinek legújabb nemzetközi tendenciái’(2017) 23-24; https://real-d.mtak.hu/1085/7/dc_1475_17_doktori_mu.pdf Downloaded: 2025. 02. 25.
[12] Article 6:325. § (4) of the Civil Code
[13] Miczán Péter, ’Az örökhagyó, mint bizalmi vagyonrendelő’ in: Gazdaság és Jog (2014/9.), 15-21 p.
[14] Clinston Chiok – Do proponents of the human beneficiary principle misunderstand the fundamental principles of the trust concept? https://www.culs.org.uk/per-incuriam/do-proponents-of-the-human-beneficiary-principle-misunderstand-the-fundamental-principles-of-the-trust-concept Downloaded: 2025. 02. 25.
[15] Article 6:318. § (3) of the Civil Code
[16] Article 6:321. § (1) of the Civil Code
[17] Article 6:320. § (2) of the Civil Code
[18] Article 6:328. § (3)-(4) of the Civil Code
[19] Article 7:28. § (1) of the Civil Code
[20] Article 7:27. § (1) of the Civil Code.
[21] Article 7:4. § (2) d) of the Civil Code
[22] Article 7:25. § of the Civil Code
[23] Article 7:89. § of the Civil Code
[24] Article 18/A. § (4) of the Act on Probate Proceedings
[25] Tőkey Balázs, ’Ptk. bizalmi vagyonkezelési szabályainak 2017-es módosításáról’ in: Polgári Jog (2018) 2018. 1.
[26] Az új Ptk. magyarázata (HVG Orac), Kötelmi jog, Drafted by: Wellmann György, VI/VI, 168. p.,
[27] Article 1. § of the Act on Probate Proceedings
[28] Article 18/A. § ont he Act of Probate Proceedings
[29] Article 6:329. § (3) of the Civil Code
[30]Article 94.§ (2) of the Act on Probate Proceedings
[31] Article 17/D of the Act on Fees and Charges
[32] Article 17. § (1)-(2) of the Act on Fees and Charges