Trusts & Trustees, Vol. 16, No. 3, April 2010, pp.
177–184
Common law trusts by persons based in
civil law jurisdictions: does New Zealand
offer a solution?
Geoffrey Cone*
Abstract
The fundamental difference between the civil law
and common law treatment of trusts is that full
beneficial title at common law is only established
when the trust is no longer in existence, whereas
under civil law the beneficial owner has the right
of disposition of the property at any time. How
can the civil law and common law treatment of
trusts be reconciled? Oddly perhaps, this may be
done using New Zealand law. This article will con-
sider possible solutions under these heads; the
Hague Convention, forced heirship, control and
sham issues, and the use of a civil law structure,
the limited partnership, to stand between the trust
and the settlors, all in the New Zealand context.
Grandiloquently, FW Maitland called a trust ‘the
most distinctive achievement of English lawyers’,
‘almost essential to civilization’ and claimed, rightly,
there was ‘nothing quite like it in foreign law’.1 Other
than agreeing with the last civil legal systems are less
enthusiastic. The Anglo-Saxon trust is treated with
caution in most civil law jurisdictions, and in some,
*Geoffrey Cone, Cone Marshall, Level 3, 280 Parnell Rd, Parnell, Auckland, New Zealand. Tel: þ64 (0)9 307 3950. Email: gpcone@coneandco.com
1. Equity, A Course of Lectures (CUP 1936) 23.
2. I am grateful to Francisco Müssnich and Henrique Beloch of Barbosa, Müssnich & Aragão, Rio and Sau Paulo for this quote and their assistance on the
Brazilian aspects of this article.
ß The Author (2010). Published by Oxford University Press. All rights reserved.
177
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particularly France, has been distrusted. To the clas-
sical mind of a civil lawyer, a trust seems to be a rag
bag of feudal estates law; an admixture of property
and contractual rights that have not been systema-
tized and clarified by codification. This suspicion
has turned to misunderstanding, demonstrated by a
conceptual gap apparent in civil law legal commen-
taries and, interestingly, OECD/FATF compliance
requirements. In the area of taxation, wealth planning
and succession law, the opportunity for conflict and
confusion is rife. In international trust planning, the
table is being laid for a lawyer’s picnic, as more
international families and their advisers use trusts
for their planning without fully understanding what
the vehicle is supposed to do, and how it works.
At the root of the problem is the civil law principle
of absolute title, which is just what a trust does not
provide. In the words of a Brazilian commentator
‘the constitution of a trust in Brazil is impossible
because . . . the law of Brazil contemplates the indi-
visibility of the right of property’.2 Reference to
apparently similar entities can be unhelpful. The
European fideicomiso cannot be said to be equivalent
to a trust as the beneficiary may use the asset for his
own benefit, generally. In Latin America (apart from
doi:10.1093/tandt/ttq012
178 Articles
Costa Rica which has by historical accident its own
Anglo-Saxon law of trusts) the fideicomiso arose out
of a 1921 US study on the efficiency of the Latin
American banking system.3 This lead to varying
forms being adopted for commercial and banking
purposes by Panama, Argentina, Colombia,
Ecuador, Peru, Mexico and later Venezuela. Even
then the idea of divisibility of ownership was adopted
with reluctance and some civil law commentators
deny that the ‘trustee’ in fact has ownership of any
of the property entrusted to him, which of course is
the essence of a common law trust.
Argentina’s fideicomiso has the closest resemblance
to a trust; for example, any person may be a fiduciary
and it is made clear that the property no longer
belongs to the settlor and may not be attached by
his creditors. Furthermore, Argentine law recognizes
that the beneficiaries may not be identifiable until the
date of distribution. A similar concept of trust was
introduced by Venezuela in 1956, but the office of
fiduciary is limited to banks, insurance companies
and other authorized institutions.
The idea of usufruct does not help. English law
regarded the idea of the plurately of rights in a use
as ‘an inconvenience and an impossibility in law, that
two men severally should have several rights in fee-
simples in one and the same land simul and semel’4
which at first sight may seem hard reasoning when a
trust can effectively, if not by the same mechanism,
achieve the same result.
The fundamental difference between the civil law
and common law is that full beneficial title at
common law is only established when the trust is
no longer in existence, whereas under civil law the
beneficial owner may treat himself as having the
right of disposition of the property at any time.
This is more than a Jesuitical distinction, and the
end result is that the common law mind and the
civil law mind start from different points when con-
sidering the legal and economic enjoyment of
property.
3. The Kamener Report (1921)
4. Abbot of Bury v Bokenham (1535) 1 Dyer, 7b
5. Maurizio Lupoi, Trusts: A Comprehensive Study (CUP 2000) 149–50.
Trusts & Trustees, Vol. 16, No. 3, April 2010
The question is, given the use of the common law
trust by persons based in civil law countries, how can
some reconciliation be achieved? Oddly perhaps, this
may be done using New Zealand law. This article will
consider possible solutions under these heads; the
Hague Convention, forced heirship, control and
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sham issues, and the use of a civil law structure, the
limited partnership, to stand between the trust and
the settlors, all in the New Zealand context.
The Hague Convention on trusts
The twain began to meet with the Convention on the
Law Applicable to Trusts and their Recognition
(Hague 1985) (‘the Hague Convention’) where it
was recognized that international commercial and
private activities involving trusts required integration
and recognition. Although only adopted by seven
countries, five of which are civil law countries (and
not by New Zealand, which although discovered
by the Dutch and first settled by the French, has an
irredeemably English legal system), the Hague
Convention began the attempt to reconcile civil law
and common law concepts. However, it is hard to
disagree with Lupoi when referring to the ‘high
degree of uncertainty regarding the rules of conflict
in the area of trusts, the lack of reliable precedents,
and the profoundly unsatisfactory nature of judicial
attempts to impose a system in this area, even with
the Hague convention’.5 Even in common law coun-
tries, the diversity of rules (one needs only to refer to
the rules against perpetuities, the rules concerning
purpose trusts and protective trusts), there is
inconsistency.
The last 10 years have seen an explosion of inter-
national trusts established, mainly for wealthy
families, in New Zealand. A large proportion of
these trusts have introduced property or have bene-
ficiaries situated in civil law countries. The reasons for
these structures are manifold, and include justifiable
concerns about asset protection and kidnapping,
Trusts & Trustees, Vol. 16, No. 3, April 2010
as well as the more conventional requirements of suc-
cession planning, the maintenance of a family busi-
ness or patrimony, or the presence of family members
in a variety of countries.
In this respect the lawyer’s picnic is not only being
prepared, the food is on the table. It will be interesting
to see how New Zealand courts will deal with this
multi-jurisdictional litigation that has been seen in,
for example the Cayman Islands and Bermuda.
Dr Tony Molloy’s recent learned article,6 concerning
the ability of the New Zealand judiciary to deal with
trust claims rings a true note of concern as, as trusts
move from the generation of the patriarch or settlor
to the second and third generation of beneficiaries,
when claims, disputes and misunderstandings will
intensify and will find their way in to the Courts.
New Zealand as an international trust jurisdiction
may have trouble in coping with this, in the absence
of a clear understanding of the legal concepts
involved. Moreover it will not be able to call to aid
the Hague convention.
But in fact New Zealand because of its peculiar
historical circumstances that lead to unique develop-
ments in its law, may find itself more able to
accommodate the problems than other common law
countries, or countries which have adopted the Hague
Convention.
New Zealand, by reason of its peculiar histori-
cal circumstances, which have lead to unique
developments in its law, may find itself more
able to accommodate the problems than other
common law countries
Forced heirship
To take a Brazilian example, Article 17 of the Law of
Introduction to the Civil Code of Brazil, provides that
‘laws, acts and judgments of another country as well
6. New Zealand: Cuckoos in the nest in an otherwise promising trust and investment jurisdiction, Offshore Investment, November 2009.
7. Arnoldo Wald,?? P 120, para 117.
8. (1984) 547 50 2d 0143.
Articles 179
as any declarations of will, shall not have effect in
Brazil where they offend national sovereignty, public
order or public decency’. A learned author has made
the point that this does not mean a Brazilian court
will not recognize a trust created in another country.7
Rather, the question is whether, in a particular case,
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the trust will be considered ineffective because it
offends national sovereignty, public order or decency.
Broadly, the law of succession in Brazil permits a
Brazilian person to dispose of no more than one half
of his property or patrimony. The manner and value
of that disposition is fixed at the time of the testator’s
death. This calculation adds in gifts already made by
the testator to successors while he was living (col-
lation), although the settlor may exclude this calcula-
tion in his will.
To the extent that a disposition exceeds the value of
property that the testator may dispose of, the gift is
nullified. Up until the time a court declares the exces-
sive disposition, a nullity gift or transfer is valid; the
trustee’s title, to the extent that it can be attacked, is
voidable. Even then the ultimate beneficiaries of the
trust must be identified to determine whether there is
in truth an excessive disposition. Conceivably a trus-
tee could head off a claim by exercising its discretion
to ensure that a complaining beneficiary received his
or her entitlement.
So far, attempts to attach dispositions even in
‘Hague’ countries have not been successful, unless a
sham argument succeeds.
In Sanchez v Sanchez Davilia,8 a Venezuelan resi-
dent disposed of property to a trustee in Florida. The
beneficiaries of the trust were only two of his 14 chil-
dren. A forced heirship claim was launched in
Venezuela. At first instance the court ordered that
the funds should be returned to Venezuela as the
father could not create a valid trust in Florida with
assets which he did not have the ability to dispose of
under Venezuelan law. On appeal the judgment was
reversed because it was clear under Florida the
180 Articles
disposition was governed solely by Florida law, and
that US law did not recognize the limitations that
would have applied in Venezuela.
Two cases in New York have made it clear that the
New York courts will refuse to recognize foreign law
in the area of forced heirship [Re: Renard (1982)9 and
a more recent case (2008)],10 where the grandson of
the investment banker Andre Meyer claimed in a New
York court that his mother, as a French citizen, was
required to leave 75 per cent of her estate held by a
New York trust to her three children, rather than
permit the trustee to make a substantial distribution
to a New York charity. At first instance the court
simply found that the mother was not a domiciliary
of France and French law did not apply. However, on
appeal, it was held the case should have been decided
on the basis that trust property passed according to
the law of the trustee, not the law of the donor’s
domicile. It was further stated the forced heirship
provisions of a civil law jurisdiction like France are
inapplicable to inter vivos transfers of property situ-
ated in New York, irrespective of where the transfer-
or’s domicile was.
So, the law of the trust and trustee will govern the
determination of the beneficiary’s rights and the abil-
ity to enforce those rights will depend on the trustee
being subject to the personal jurisdiction of the court.
This may be subject to cases where property, for
example real estate, is situated in another country,
at which point the courts of that country may claim
exclusive jurisdiction.
However, a claim for succession rights will be more
successful in a country which has subscribed to the
Hague Convention. This is because Articles 15 and 16
of the Convention provide that the legal rules of
a forum may not be excluded in relation to certain
public policy rights, such as succession. Furthermore,
Article 18 allows the provisions of the Convention to
be disregarded if they are incompatible with public
policy. So, to take the Brazilian example, the public
order provisions of the Brazilian constitution, may be
9. (1982) 5 NYZd, 973, 439 RE 2d, 341.
10. Saul Elnaday, New York Trusts and Estates Law Blog, 20 March 2009.
Trusts & Trustees, Vol. 16, No. 3, April 2010
used to attack a disposition to a trust. Thus, in a
jurisdiction such as Switzerland, which does not
have its own trust jurisprudence and in which a for-
eign law proper trust law is likely to be adopted, the
risks of a successful forced heirship claim are greater.
Conversely in countries like New Zealand, which have
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not adopted the Convention, the chances of success
are much reduced, especially where the property in
issue is not situated in the country to where the claim
emanates.
A claim for succession rights will be more
successful in a country which has subscribed to
the Hague Convention
Settlor control and shams
For social and security reasons, and because of the
rules as to indivisibility of property rights, problems
can arise with trusts in jurisdictions where it is per-
ceived that the settlor would effectively be giving up
powers of control of his patrimony to a trustee or a
stranger, over which he may have little influence. It is
often thought that a trust requires almost absolute
control by a trustee. However, even the Hague
Convention in Article 2 states that ‘the reservation
by the settlor of certain rights and powers, and the
fact that the trustee may itself have rights as a bene-
ficiary, are not necessarily inconsistent with the exis-
tence of a trust’. Having said that in some cases courts
have gone some distance in treating the settlor as
owner of trust property and a trust a ‘sham’ where
a trustee is acquiesced in the settlor treating the trust
property as his own, or where the trustee has exhib-
ited no understanding of its duties. How real is this
danger in New Zealand?
Problems can arise with trusts in jurisdictions
where it is perceived that the settlor would
effectively be giving up powers of control of his
Trusts & Trustees, Vol. 16, No. 3, April 2010
patrimony to a trustee ora stranger, over which
he may have little influence
Some guidance may be obtained from Reynolds
[2008] NZCA 122 a decision of the Court of Appeal.
This case involved a bankrupt property developer,
Mr Reynolds. He had no assets to administer, and the
Official Assignee contended that Mr Reynolds’ home,
owned by his family trust, should be available for his
creditors. The Official Assignee based his claim on the
argument that the trust was a sham or an ‘alter ego’ of
Mr Reynolds, who had exercised a great deal of influ-
ence over the trust, and was one of the trustees.
The Court of Appeal held that, as the Official
Assignee was as a matter of law in the same position
as Mr Reynolds, he could not defeat of the rights of
the beneficiaries (of which Mr Reynolds was not one).
The Court addressed three main questions:
i. Is a common intention between a settlor and the
trustees necessary before a sham can be found?
The Official Assignee had argued that it was not
necessary to prove a common intention between
both the settlor and the trustees to establish that the
trust was a sham, and that the intention of the settlor
to create a sham was sufficient.
The Court made several significant points during
the course of its analysis of the Official Assignee’s
assertions:
a. The law requires common intention on the part
of both the settlor and the trustee in order for a
finding of sham in respect of a bilateral trust. This
requirement ‘fades’ when a unilateral trust is
involved, but it would be wrong to claim that
common intention is not a requirement for a
finding of sham simply because in the case of a
unilateral trust there can be, by definition, no
finding of common intention.
b. While it is correct that the question of the trus-
tee’s intention is not relevant to the creation of a
11. Official Assignee in Bankruptcy in the Property of Gary Martin Reynolds v Alexander McLennan Wilson and Ors., [2008] NZCA 122, para 48.
Articles 181
trust, it does not follow that the trustee’s inten-
tion is of no relevance with regard to the finding
of a sham. Trusts and shams are two distinct
concepts, and shams should not simply be
thought of as a defective sub-species of trusts.
The Court expressed this idea as follows:
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The finding that a purported trust is void as a sham
does not amount to the invalidation of a trust. It is not
the trust as such which is the sham. There is no trust
to be a sham. It is the trust documentation that is the
sham.11
c. The question of common intention must be
ascertained from a subjective viewpoint, as the
whole concept of a sham is that on an objective
analysis of the documentation it has the appear-
ance of a valid transaction.
ii. Can a valid trust become a sham?
The Court’s opinion was that once a trust is validly
created, then a finding of emerging sham should not
be arrived at easily, as the beneficiaries have an inter-
est in the property of the trust from its inception. The
Court preferred an analysis whereby property that was
subsequently transferred into a trust could be treated
as being held under a sham arrangement, but with the
remainder of the trust being unaffected, stating that
‘unless the later appearance of a sham can be traced
back to the creation of the trust, the trust remains
valid’.
Once a trust is validly created, then a finding of
emerging sham should not be arrived at easily
iii. What is the relationship between the concept of a
sham trust and an alter ego trust?
The basic concept of the ‘alter ego’ argument is that
the settlor has retained such a degree of actual control
over the administration of the trust that the trustees
182 Articles
can be said to be ‘mere puppets’ of the settlor and the
Court is therefore justified in treating the trust as a
legal nullity, thereby allowing trust property to be
accessible to third party claimants.
While the Court accepted the idea that factual con-
trol over the trust by someone other than the trustee
may be evidence going towards a finding of sham, it
strongly rejected the idea of an alter ego as a ground
for invalidity. The Court stated that:
Actual control does not provide justification for look-
ing through/invalidating a trust. The uptake of control
by someone other than an authorized person cannot
be sufficient to extinguish the rights of beneficiaries
under a trust.12
The Court of Appeal’s decision in Reynolds can be
seen as a defence of the rights of beneficiaries, and
unwillingness on the part of the Court to broaden the
grounds upon which the ownership of trust property
can be challenged.
A Court will only look behind a transaction’s osten-
sible validity if there is good reason to do so, and
‘good reason’ is a high threshold, since a premium
is placed on commercial certainty . . . many fewer
trusts will be set aside if common intention is
required, and this promotes commercial certainty.13
If Reynolds is followed, it will clearly be difficult for a
foreign claimant to attack a New Zealand trust on the
basis of a sham argument, simply on the basis that a
degree of control, informal or formal, is given to a
settlor or another third party.
Control and management
This result would be re-enforced where a trust is
carefully drafted to enable a degree of external con-
trol, permitted by law. In New Zealand a series of
12. Reynolds [2008] NZCA 122, at para 70.
13. Ibid para 52.
Trusts & Trustees, Vol. 16, No. 3, April 2010
expedients have been devised, and contained in the
Trustee Act 1956, to enable trust powers to be shared.
In New Zealand a series of expedients have
been devised, and contained in the Trustee Act
1956, to enable trust powers to be shared
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Historically, British families who invested in New
Zealand established trusts in New Zealand to hold
their businesses or investments, but could not bear
to cede complete control to local trustees. So,
means were devised to enable home based advisors,
co-trustees, settlors, or family members to control, to
varying degrees, a trust’s activities. This was achieved
not only by ensuring New Zealand’s trust legislation
permitted a sharing of powers, but also by the diffu-
sion of powers that would normally be the sole pro-
venance of a trustee.
These remote control provisions, whose roots go
back to the 19th century, are still embedded in New
Zealand trust law. They are found in such concepts as
the advisory trustee, the managing trustee, the invest-
ment advisor and the delegated agent or attorney.
Furthermore, in 2002 the New Zealand Law
Commission recommended the extension of the law
as to the delegation of powers and the recognition
and regulation of protectors. This resulted in an
amending Bill introduced to Parliament in August
2007 and which is still under consideration by a
Select Committee. Under this proposed legislation,
protectors are given greater power than just approval
of trustee’s decisions: they may also have clear direc-
tive powers, akin to those of a trustee.
Where there are custodian and managing trustees
(under Section 50 of the Trustee Act), any corpora-
tion (that is any company) may be appointed to be a
custodian trustee. The trust property is vested in the
custodian as if that trustee was the sole owner. The
management of the trust property and exercise of
all powers and discretion, will remain vested in the
Trusts & Trustees, Vol. 16, No. 3, April 2010
managing trustee as if there were no custodian trustee
and, the custodian trustee is not be liable for acting
on any properly given direction by the managing trus-
tee. As far as all third parties are concerned, all
actions, proceedings and dealings are with the custo-
dial trustee. No person may enquire as to the concur-
rence of the managing trustee.
Under Section 49 of the Trustee Act, an advisory
trustee may be appointed on the creation of the trust,
or by any person having the power to appoint a new
trustee. In this case the responsible trustee remains
the owner of the trust property and the advisory trus-
tee is not to be treated as a trustee. However, the
responsible trustee must, before making any decision,
consult the advisory trustee on any matter relating
to the Trusts. The advisory trustee may advise a
responsible trustee on that matter or ignore it, but
if the responsible trustee acts on the advice it will
not be liable for any act or omission by reason of
it doing so.
Finally, under Section 13G of the Act, it is provided
that any trustee exercising any power of investment
shall ‘comply with any requirements of the instru-
ment’ that relate to the obtaining of any consent or
compliance of any direction with respect to invest-
ment funds. Consequently, an independent invest-
ment manager or director may be appointed, who
may direct investments, and the trustee will be exon-
erated from liability.
An independent investment manager or direc-
tor may be appointed, who may direct invest-
ments, and the trustee will be exonerated
from liability
In the Trustee Amendment Bill guidance is given as
to the powers which may not be delegated by a trus-
tee; powers of appointment, powers to remove trus-
tees, and powers to direct vesting dates, powers to
direct distributions. However, there is no reason
why any of these powers may not be granted by the
trust instrument to third parties, including the settlor,
as the Act provides that these rules are subject to the
terms of the trust instrument.
Articles 183
And, if these rules are enshrined in the Trustee Act,
it is hard to imagine if a trust deed or a trustee and its
co-advisors acting in accordance with provisions of
the trust deed and in line with the statutory powers,
could be said to be acting so as to create a sham.
Moreover, and perhaps more importantly New
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Zealand provides the very means to solve the civil
law anxiety about excessive reservation of power to
a trustee.
Official recognition of a trust
Problems may arise as to the recognition of the trust
itself. Where a civil law country has not adopted the
Hague Convention (even though the Hague
Convention purports to define trusts for all pur-
poses), there is always a risk that public authorities
will choose not to recognize or at least understand a
trust. In such cases the interposing of an entity
between the trust and the host country, which is
familiar to and recognized by that country, will
shield the trust, whilst at the same time protecting
the succession, confidentiality and fiscal planning
advantages which the trust will provide. Companies
have been considered to be a convenient structure as
they transcend civil and common law concepts.
However difficulties with control, distribution and
local tax consequences can make companies
unworkable.
Companies have been considered to be a con-
venient structure as they transcend civil and
common law concepts. However difficulties
with control, distribution and local tax conse-
quences can make companies unworkable
A New Zealand structure, which is derived from the
civil law system and therefore easily recognizable, is
the Limited Partnership. Limited Partnerships have
their origins in Roman law, and were found in Italy
as early as the 10th century as commendas.
Commendas were used to give investors limited lia-
bility while the business manager, i.e. the general part-
ner had unlimited liability, but had the use of the
184 Articles
investor’s capital and carried on the commercial
activity. It also enabled investors who were squeamish
about usury laws from appearing to be directly
involved in lending activities for commercial pur-
poses. The commenda was reinforced by the
Napoleonic code of 1807 and it became popular in
developing economies. In New Zealand the com-
menda was adopted wholesale from Ireland in 1856
(which had borrowed the limited partnership struc-
ture from the French model) even before Limited
Liability companies were known, and before limited
partnerships were adopted in Britain. Limited
Partners (or as they were known Special
Partnerships) remain useful structures where one or
more financial backers wishes to contribute money or
resources while the other partners or partner per-
forms the actual work; as is well known they are
commonly used in the United States (Bloomberg
and CNN are limited partnerships). In New
Zealand, in contrast to the United Kingdom, limited
partnerships created under the Limited Partnerhips
Act 2008 have an indefinite life span, a separate
legal personality and transparent tax treatment.
There are also activities that limited partners can be
involved in while not participating in the manage-
ment of the limited partnership. The limited partner
may be situated overseas or in New Zealand as may be
the general partner. The only entity which needs to be
in New Zealand is the partnership itself. The agree-
ment is not registered but the existence of the
Trusts & Trustees, Vol. 16, No. 3, April 2010
partnership is registered in the Companies Registry.
The name of the general partner is the only partner
publically listed.
The limited partnerships advantages are twofold.
When used in conjunction with a New Zealand
trust, limited partnerships can mitigate any concerns
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about reservation of trustee powers. Control and
management may be exercised via the general partner,
whether the limited partner is in New Zealand, over-
seas or registered in New Zealand but controlled over-
seas. Certainly if there is any danger of settlor control
at the trust level, this can be modified by transferring
that control to the partnership.
The second advantage is this. In a jurisdiction
which does not recognize trusts or where a court or
other public authority may be unwilling to do so, the
use of the limited partnership will largely address that
problem. If the entity facing the regulator, bank or
fiscal authority is one which is familiar to and recog-
nized in that authority’s own jurisdiction and it is
treated as a legal entity both in New Zealand and in
its own jurisdiction, will go a long way to protecting
the underlying owner (the limited partner namely the
trustee), from attack by reason of control, recognition
or forced heirship claims.
In ajurisdiction which does not recognize trusts
or where a court or other public authority may
be unwilling to do so, the use ofthelimited part-
nership will largely address that problem