Fiduciary Asset Management: Don’t Repent at Leisure From Work Done in Haste

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.

The founder of LeitnerLaw Szabó & Partners Law Office has supported his clients with advice in various areas of international business law for more than two decades. In recent years, their work as attorneys has focused on family businesses, corporate transactions and competition law. LeitnerLaw will continue to focus on these areas and also welcomes client inquiries on tax, criminal and procedural law matters.

This article was first published in the Budapest Business Journal print issue of February 9, 2024.