Proper Law of a Trust: Definition and Related Terms

The proper law of a trust definition is short: it is the body of law that decides whether a trust was validly created, what its terms mean, what the trustee must do and what the beneficiaries can claim. In most legal systems the settlor chooses it in the trust deed, and the choice is respected within limits. It is not the same thing as the place where the trust is run day to day, which is why the terms below are worth reading together.

The entries are alphabetical. Where a term has a fuller treatment elsewhere on the site, the entry links to it. Everything here is general information; how a term applies to a particular trust depends on residence, the countries of the beneficiaries, the nature of the assets and the canton or country involved, and calls for an individual analysis.

A

AEOI (automatic exchange of information)

The system under which tax authorities receive account information about foreign account holders from financial institutions abroad. For a trust, the data reported can include the settlor, the trustee, the protector and the beneficiaries. It follows the place of the account and the tax status of the persons involved, not the proper law of the trust.

Asset-protection statute

A law, found in some trust seats, that restricts how far a creditor of the settlor can reach assets placed in a trust. Such statutes have limits and conditions, and a court elsewhere may not give them effect. See how they compare across seats.

B

Beneficiary

A person, or a class of persons, for whose benefit the trustee holds and administers the trust assets. The proper law determines what rights a beneficiary has: for example, whether they can demand information or only ask the trustee to consider them. Rights differ markedly between a fixed interest and a discretionary arrangement.

C

Choice-of-law clause

The provision in the trust deed naming the law that governs the trust. It is the usual way the proper law is fixed. Under the Hague Convention, a trust is governed by the law chosen by the settlor, provided that law has rules on trusts or on the category of trust concerned.

Civil-law country

A country whose private law rests on codes rather than on judge-made precedent, and which usually has no domestic trust of its own. Its courts may still recognise a foreign trust, notably under the Hague Convention, while applying their own mandatory rules to the settlor's estate.

Common-law country

A country whose law of trusts developed through the courts of equity, and which therefore has a rich body of trust doctrine. Most popular trust seats are common-law systems, which is one reason their trust statutes are familiar to practitioners.

CRS (Common Reporting Standard)

The international standard that underpins automatic exchange of financial account information. Whether a trust is treated as a reporting entity depends on its features and on who manages it, not on the label of its governing law.

D

Decanting

The transfer of assets from one trust into another, usually to update the terms or to change the governing law. Whether it is possible depends on the law of the original trust and on the powers in the trust deed. See decanting.

Discretionary trust

A trust in which the trustee decides who among the beneficiaries receives distributions, and when. The scope of that discretion, and how far a court will review its exercise, are matters of the proper law.

F

FINMA

The Swiss Financial Market Supervisory Authority. Professional trustees in Switzerland are subject to its supervision, which it carries out together with a supervisory organisation authorised by it.

Firewall legislation

A statute in a trust seat that tells its own courts to apply local law to certain questions, such as the validity of a transfer or the rights of heirs, and to disregard foreign rules to the contrary. Its practical reach depends on where the assets and the people are. See firewall legislation.

Flee clause

A provision allowing the trustee or protector to move the trust to another governing law if the original seat becomes unsuitable. It must be drafted carefully, because the proper law decides whether it is valid. See flee clause.

Forced heirship

Rules, common in civil-law countries, that reserve part of an estate for close family. A trust under a foreign proper law can be challenged on this ground by heirs in their home country. The question is explored in forced heirship and trusts.

G

Governing law

The law that applies to a trust. In practice it is a synonym of proper law, though some commentators reserve "governing law" for the law chosen in the deed and "proper law" for the law the trust is found to be governed by when no choice, or an ineffective choice, was made. The distinction from the seat is set out in governing law versus seat.

H

Hague Trusts Convention

The 1985 Convention on the Law Applicable to Trusts and on their Recognition. It sets rules for identifying the applicable law and obliges contracting states to recognise trusts governed by it. Switzerland ties its legal definition of a trustee to a trust within the meaning of this Convention. A fuller account is in the guide to the Hague Convention.

I

Irrevocable trust

A trust the settlor cannot unilaterally undo once it is created. Whether a trust is irrevocable, and what powers the settlor may keep without undermining it, depends on the proper law.

L

Letter of wishes

A non-binding note from the settlor to the trustee describing how discretions might be exercised. Its weight varies: some laws treat it as a relevant consideration for the trustee, others give it little formal standing.

LEFin / FinIA / FINIG

The Swiss Financial Institutions Act. It treats trustees as financial institutions, and defines a trustee as someone who, on a professional basis, manages or disposes of a separate estate for a beneficiary or a specific purpose under a trust deed within the meaning of the 1985 Hague Convention (Article 17, paragraph 2). Trustees fall under FINMA supervision (Article 61).

M

Mandatory rules

Provisions of a country's law that apply regardless of a contrary choice of law. They include, depending on the country, rules on heirs' reserved shares, on creditors and on certain matrimonial rights. They are the main reason a chosen proper law does not settle every question.

O

Offshore

A loose label for a seat outside the settlor's country of residence. It says nothing about regulation or reputation; those are assessed seat by seat. See Switzerland as a trust seat for a regulated example.

P

Proper law

The law that governs a trust's creation, validity, effects and administration. It is normally the law chosen in the trust deed; absent a valid choice, a court looks to the law with which the trust is most closely connected, such as the place of administration, the location of the assets or the settlor's intentions. For example: a family living in Lausanne sets up a trust whose deed chooses Jersey law. Jersey law then decides how the trustee must act and what the beneficiaries may require, while a Swiss court asked to rule on the family's estate would still apply Swiss mandatory rules. The two jurisdictions are set side by side in Switzerland vs Jersey.

Protector

A person appointed to oversee the trustee, often with powers such as approving distributions or replacing the trustee. The extent of such powers and the duties attached to them depend on the proper law.

Purpose trust

A trust created to pursue an aim rather than to benefit named persons. Many legal systems either forbid this or require a statute; the proper law decides whether it is possible. See purpose trust.

R

Recognition

The acceptance by a country's courts and authorities that a foreign trust exists and has legal effects. The extent of recognition is shown on the map of Hague parties.

Reserved powers

Powers the settlor keeps over a trust, such as the power to change investments or remove the trustee. Too many reserved powers can lead a court to question whether the trust is genuine. The proper law sets the tolerance.

Revocable trust

A trust that the settlor can end or amend. In many legal systems its assets remain reachable by the settlor's creditors, and tax authorities may treat them as still belonging to the settlor.

S

Seat of administration

The place where the trust is in fact administered: where the trustee acts, keeps records and takes decisions. It can differ from the proper law and matters for supervision, tax residence and reporting.

Settlor

The person who creates the trust and transfers assets to it. Also called the constituant or Errichter in civil-law languages. The settlor's residence is often what triggers mandatory rules.

Situs

The place where an asset is located, which can determine which country's law governs title, registration or transfer. See situs.

STAR trust

A purpose-oriented trust form created by statute in one common-law seat, which lets the trust pursue purposes and allows enforcement by an appointed person. It is a creature of that seat's law and is not available under every proper law.

T

Trust deed

The document that creates the trust and sets out its terms, including the choice of law, the powers of the trustee and the identity or class of the beneficiaries. In Swiss practice, a trustee's authorisation is tied to a trust deed within the meaning of the Hague Convention.

Trustee

The person or company that holds legal title to the trust assets and manages them for the beneficiaries or the stated purpose. In Switzerland, under the FinIA, a professional trustee must meet authorisation requirements and is supervised.

V

VISTA trust

A trust form that lets the trustee hold shares in a company without a duty to diversify or monitor the business. It exists only under the law of the seat that created it. See VISTA trust.

W

Winding up

The ending of a trust and distribution of its assets. The proper law determines how long a trust may last, how it can be terminated early and what the trustee must do on exit.