Hereditary fund: alternative to trusts in the Russian law?

Comment of the Managing Partner Galina Pavlova to the article in the Law Journal, devoted to the creation of hereditary funds in Russia.
On September 1, 2018 Federal Law No. 259-FZ dated July 29, 2017 "On Amendments to Parts One, Two and Three of the Civil Code of the Russian Federation" came into force, which allows citizens to order the creation of hereditary fund according to the testamentary procedure for the purpose of managing the mass of the succession. It is assumed that the new legal mechanism should create the ground for painless inheritance of business in the Russian conditions, becoming an alternative to the trust as a tool of trust administration of property.

We asked the experts to evaluate this institution to analyze its advantages and disadvantages. What is the significance of its introduction into the Russian legal order, and will it be in demand in Russia?

Galina Pavlova, Managing Partner of Pavlova & Partners Law Firm, candidate of legal Sciences:

- Prior to the effective date of the regulations on the hereditary fund, there was a discussion that this new form of inheritance does not correspond fully to the meaning put to the very idea of creating such a fund, since the fund can be registered only after the death of the ancestor; the management procedure provided for by the ancestor pro vita, may turn out to be inoperative, and it is almost impossible to change it, etc.

Of course, we have to agree with such criticism, but it should be noted that the beginning has been made already, and we are starting to form the institute of inheritance planning. Recently I got a letter, the part of which I will allow myself to quote:
"Our client has set us the task to organize a hereditary fund for him, as well as to transfer there the assets he owns, which are located in different countries, but a major share of them is in Russia." And here is the first practical question. How will documents issued by a notary be recognized abroad? Apparently, in most cases it will be impossible without a judicial procedure of recognition in a certain country.

To some extent, the question is not a new one or unexpected. It is rather difficult to inherit devise located abroad, even in cases when there are bilateral agreements on the provision of legal assistance. Probably, without the tools of international regulation, it will be no less difficult to transfer this property to the hereditary fund, as well as to carry out activities of such a fund with its recognition abroad.

Insufficient involvement of the Russian Federation in international conventions regulating the interaction of countries in terms of testaments and testamentary arrangements (for various reasons — political, economic), of course, will not influence a practical implementation of innovations in the Civil Code of the RF in the best way.

The next issue of concern for legal practitioners is the question of spousal share. If the fund is created without considering a spousal share, is it possible for a surviving spouse to protect his/her rights? For example, you can create an inheritance fund by a court decision (if the notary evades this obligation). According to the court decision, the liquidation of the inheritance fund can also be carried out — based on the claims of the state governing bodies, as well as in connection with the beginning of the period before which expiration the fund had to operate, the beginning of the circumstances specified in the terms and conditions of management of the inheritance fund, or inability to form the fund's bodies. In addition, it is possible to appeal the actions of the notary who violates the orders of the ancestor regarding the establishment of the hereditary foundation and the terms and conditions of its management.

But the possibility to appeal the transfer of property, part of the property to the hereditary fund is not provided for. It is clear that it remains possible to appeal the testament itself, but in the case of the hereditary fund everything will be much more complicated, since on the basis of the property the authorized capital is formed, etc. Because of the property subject to the transfer of the hereditary fund, there is a probability that the third parties will face problems, not only the surviving spouses. Hereditary fund is created in pursuance of the testament of the citizen and on the basis of his/her property. In case of a "standard" inheritance a notary before issuing a certificate of title to inheritance checks the formation of the hereditary mass, makes sure in its belonging to an ancestor. Property that is specified in the testament, but by the time of death does not belong to the ancestor, is not subject to inheritance. The formation of the property to be transferred to the inheritance fund will take place by the will of the ancestor in the process of preparation of the testament and other necessary documents (the Charter of the Fund, the formation of management bodies, etc.). The obligation of the notary to verify the ownership of the property by the person who declared the testament with the creation of the inheritance fund is not provided for.

We are all certainly interested in hearing the opinion of notaries, who have probably already started to certify such testaments. The advantages and disadvantages of Law No. 259-FZ will be more obvious in its practical application.

These and other questions will be the subject of discussion and additional regulation. We hope that over time the institution of the inheritance fund will become a fully functional and effective element of inheritance law.

The full article on hereditary funds is available on a commercial basis here

The text of the comment by G. Pavlova is available following the link:

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Ирина Кошечкина