A few days after this news service covered the creation of family offices in Hungary, we return to the country for this guest article about how foundations can be an important part of the wealth protection toolkit.
This news service carries this article about Hungary, and the structures that exist to help high net worth individuals. Aliant is an international law firm that this news service recently wrote about in connection to the creation of family offices in Hungary.
The article’s author is Dr Ákos Menyhei, and the editors are pleased to share his insights. (More information about the writer below.)
The usual editorial disclaimers apply. Email email@example.com if you wish to respond.
Legislators today are facing increasing difficulty in striking the ideal balance between transparency and privacy, particularly in regard to sensitive financial and business information. Their pursuit for transparency, particularly through the establishment of beneficial ownership registers, is a crucial step in tackling money laundering, corruption, and other illicit activities. However, it is equally important to respect the rights of individuals to protect their sensitive information. This delicate issue has become increasingly relevant for high net worth individuals who strive to comply with regulations while safeguarding their privacy. For them, privacy is not about hiding information from the authorities but about ensuring the safety of their families and themselves.
Traditionally, one of the tools that HNW individuals have used for asset protection and estate planning is the traditional trust. A trust is a legal arrangement in which assets are held by a trustee on behalf of beneficiaries. It has been a reliable mechanism for preserving wealth, minimising tax liabilities, and facilitating the transfer of assets to future generations. In the past, trusts offered a certain level of privacy, as the trustee's name was associated with the assets while the identities of the beneficiaries remained confidential. However, the evolving landscape of privacy legislation has exposed the limitations of traditional trusts in safeguarding sensitive information.
Governments around the world are increasingly focused on transparency and combatting financial crimes. To achieve these goals, beneficial ownership registers have been established to identify the individuals who ultimately own or control companies, trusts, and other legal entities. The objective is to prevent money laundering, terrorist financing, and tax evasion by ensuring that ownership structures are transparent and accountable. While these measures are vital, they present challenges for HNW individuals seeking to protect their privacy.
The encroachment of privacy legislation not only compromises the confidentiality of trust beneficiaries but also introduces complexity and administrative burdens. Trustees are now subject to increased reporting requirements and disclosure obligations. They are expected to provide detailed information about trust assets, beneficiaries, and settlors. Compliance with these regulations can be time consuming, expensive, and may deter individuals from using traditional trusts as an estate planning tool.
Furthermore, the erosion of privacy associated with traditional trusts can have tangible implications for the safety and security of HNW individuals and their families. Privacy is not solely about discretion for these individuals but is a vital element for protecting their personal wellbeing. Public exposure of their financial affairs can make them targets for fraud, extortion, or even physical harm. Individuals in high-profile positions, entrepreneurs, and those residing in politically unstable regions are particularly vulnerable. Therefore, the loss of privacy resulting from encroaching privacy legislation significantly impacts the peace of mind and security of HNW individuals and their families.
In response to these challenges, alternative solutions are emerging that offer enhanced privacy protections. One such solution is the establishment of an Asset Management Foundation (AMF) registered in Hungary. An AMF is a unique type of foundation where asset management is its primary economic function, with distributions made to beneficiaries. The founder may stipulate in the deed of the foundation, that the board of trustees has the power to appoint the beneficiary in a private and undisclosed document. In this case, the board members of the AMF are considered as the beneficial owners, provided it retains the freedom to appoint future beneficiaries, while no individual exercises control over the management of the foundation. This arrangement can offer greater protection against potential third-party claims. The mandatory minimum capital requirement for establishing an AMF in Hungary is $2 million, and the founder can contribute both bankable and non-bankable assets.
Another solution gaining traction is the hybrid trust, which combines elements of a traditional trust with the management provided by an AMF. When a trust relationship is managed by an AMF, the beneficiary is considered to be the AMF itself, as defined by the AMF Act. This classification of beneficial ownership may provide unprecedented privacy for high net worth individuals. Trusts, asset management foundations, and hybrid trusts established in Hungary are considered leading asset protection structures today. These structures enjoy tax-neutral treatment and are valuable and versatile instruments in tax planning.
To illustrate the effectiveness of such structures in practice, let's consider a brief case study of a South-East Asian family with diverse business interests in manufacturing, trade, and hospitality.
As part of Aliant-Menyhei-Molnár-B. Szabó’s contribution, we established a family office for this family in Hungary. The initial step involved setting up an asset management foundation with a $2 million contribution, facilitated by a Hungarian lawyer. The founder's name in this case remains undisclosed since the asset management foundation was created by the designated representative of the family. The board of the foundation consists of esteemed Hungarian trustees who also provide the family office services. The auditing is carried out by a Hungarian company with international expertise, and the protector is a Hungarian law firm.
The list of beneficiaries and the distribution policy of the
asset management foundation is outlined in a confidential
document prepared by the founder. Consequently, the potential
beneficiaries' names are not disclosed in any publicly accessible
documentation, as the power to appoint beneficiaries lies with
the foundation's board, as specified in the undisclosed document.
This structure offers several key advantages, including the
exclusion of CRS [common reporting standard] applicability due to
the absence of cross-border elements. Additionally, neither the
founder nor the beneficiaries of the asset management foundation
are listed in any publicly accessible records.
In the subsequent phase of establishing the structure, the assets were transferred to a hybrid trust, which provides maximum safety and privacy for the beneficiaries. When the AMF acts as a trustee of a hybrid trust, this activity is not under the act about the trustees and their activities; therefore, the relationship is completely private and confidential. Moreover, this activity of the AMF is not under the AML act, therefore, no authority may claim information about the trust assets.
The delicate balance between transparency and privacy in sensitive financial and business information is a pressing concern for legislators and high net worth individuals alike. While the pursuit of transparency is crucial for combatting financial crimes, the erosion of privacy associated with traditional trusts poses challenges. As privacy legislation continues to evolve, exploring alternative structures such as Asset Management Foundations and hybrid trusts can offer enhanced privacy protections. These enable a greater balance between transparency and individual privacy to ensure the safety and security of individuals and their families while upholding the integrity of the global financial system.
About the author
Dr Ákos Menyhei, LL M, TEP, is managing partner of Primus Wealth as well as member of the Society of Trust and Estate Practitioners. Dr Menyhei has comprehensive international experience in providing tax and estate planning, structuring and wealth management services to high net worth families and individuals around the globe.
He is one of the authors of Limits to Tax Planning (Linde Verlag 2013), The Trust (HVG-ORAC 2014), Business Law in Hungary (Patrocinium 2016), The Foundation (HVG-ORAC 2021), and editor of Introduction of the Trust in Hungary and the International Practice (HVG-ORAC 2017).
His research interests include the implementation of the trust in civil law jurisdictions. He is an HC assistant professor of the trustee diploma program of St Stephan University, Budapest. Aliant : https://aliantlaw.com/