2023 was all about fiduciary asset management (family trusts or family foundations) in the lives of Hungarian business-owning families. Because the legislature abolished an old option to reevaluate businesses and enjoy tax benefits, fear of change prompted many to take immediate action. That could leave many legal questions open, which should be looked at now.
The primary
purpose of fiduciary asset management is to keep family assets together. Thus,
it can counteract the legal system of inheritance, which would fundamentally
lead to fragmentation. The problem is similar to the historical dilemma of the
Hungarian middle classes, when inheritance fragmented the family estate,
turning the Hungarian middle classes into the gentry and making them penniless
in the 19th century.
Fiduciary
asset management is primarily a means of inheritance, not taxation. The
entrepreneurial family can set up its own inheritance system, fine-tune
payments from the family estate to the extended family or critical employees or
fiduciaries, or decide to keep the wealth behind a glass wall from future
generations; by keeping it intact, it can lay the foundations for the
well-being of the third or subsequent generations.
All this needs
strategic thinking. For example, a decision is required regarding whether to
keep the family estate together and why. Or, for example, how much should be
taken out of the jointly-owned wealth on a regular basis? What share should go
to the family member who works or does not work in the business? What share should
be invested in new projects or business lines? Do they support the next generation’s
attempts to try things? And so on.
What we are
seeing is that the fiduciary asset management structures set up hastily in the
summer of 2023 lack these strategic choices. Moreover, because fiduciary asset
management was primarily created by the unilateral decision of the founders,
stakeholders and family members were often not even appropriately consulted.
Review
Retrospectively
This can lead to serious litigation afterward, as the legal heirs have rights
that can prevent the founders’ will from being implemented. It would have been vital,
for example, to consider compulsory portions (so-called force heirship) and the
share of property created as marital community property. Fortunately, the main
inheritance risks can be reviewed retrospectively, and mistakes made in haste
can be corrected. Last but not least, fiduciary asset management deeds should
be reflected in wills.
It is also
often seen that the principles of asset management and beneficiary payments set
out in fiduciary contracts are not in line with the provisions of articles of
associations of family-owned companies. It is also important to include
appropriate restrictions in the corporate documents; for example, making the
sale of the company subject to the approval of the company’s general
meeting/founder or stipulating that no approval can be given for the
acquisition of property by persons outside the family. In the company deeds, property
acquisition by spouses of later generations or certain persons may be
precluded. Of course, it is also worthwhile regulating, for example, redemption
or company valuation rules to avoid subsequent disputes.
Family
trusts can only work as a system. So, let’s now sit back and do the
coordination work if we didn’t do it last summer. And if you are about to set
up a new trust, turn to a team that offers high-quality advice not only in
fiduciary asset management but also in the worlds of succession, company law,
matrimonial property law and taxation.
On Feb. 1,
2024, the law firm LeitnerLaw Szabó & Partners was established, which will
work in close cooperation with the 30-year-old LeitnerLeitner, a tax,
accounting consultancy and audit firm. As a result, LeitnerLeitner and LeitnerLaw
clients will have access to all services related to economic and business
matters in-house in the future.
