There is a popular saying regarding Trusts which is that "the limit of trusts is the imagination", given its known flexibility and application in terms of contracts and its success, brought about by the practical experience obtained from its development throughout history. This has led to the conclusion that this instrument, which is becoming more commonplace every day, is clearly useful in any activity, provided that these activities are legal and it is applicable to an infinite series of objectives, whether individual or collective, all for the common good.

One may say that the Trust Contract is extremely peculiar, not only for the characteristics and modality which it displays, but also this affirmation, for the greater part, becomes more meaningful if we examine its origins which date back to ancient Rome up until it passes into Common Law, which will be analyzed later.

To give an idea of the general way in which trusts function, we will define the three essential elements at work: the settlor, who is the owner of the goods and rights that form part of the trust; the trustee, who is responsible for administering the equity in the trust and the beneficiary of the trust.

The flexibility of trusts, as previously mentioned, is based on the fact that it covers all types of goods and rights so that any item may become the object of a trust. This explains the importance that this type of contract is gaining, because the real element of the contract, specifically the entrusted goods, are without limits, except those established by the law and by the owner of the goods.

It is interesting to quickly analyze what is mentioned in article 634 of our Commercial Code which refers to the goods that form part of the trust as autonomous equity set aside for the purpose of the trust. This matter of autonomous equity has been criticized and there have been many questions asked with regards to the idea that the equity entrusted can in no way be autonomous because it is a real element of the contract and must necessarily have an owner. Actually, the majority are of the opinion that all the goods and rights that are entrusted to the trustee should be registered. This is what makes it attractive, if we examine it from another perspective. Once the goods are handed over to the trustee, they cease to be the equity of the settlor and can not be pursued by third parties.

Going back to the historical background of the trust contract and continuing with its development, it was mentioned that its origin was in Rome and was derived from other well known and widely used instruments from that era, as in the case of Pactum Fiduciae, in which there was a debtor who transferred ownership of a particular object to the creditor as security in the event that, when the time came for repayment of the debt and the debtor reneged on his obligation, the contract gave the creditor the implicit right to retain the object. Another instrument used was the Fideicommissum, in which an individual, by means of a will, transfers various goods, the main objective being to ensure, as the owner, that the goods are utilized for the benefit of third parties and, later on, leaving open the option of transferring to them the goods of the trust. Finally, there is the Mayorazgo which is a legal instrument associated more with the feudal institutions, in which the first-born had the right to inherit the goods of his ancestor and so on successively.

To continue with the historical development of trusts, there is the "trust" of the Anglo-Saxon Law, which has been around for approximately nine hundred years and has maintained its relevancy in spite of the social and economic transformation that occurred in England, affirming that it is an invention of the English Law, even though it is also said that the concept of trust comes from the Roman Law.

In fact, it was during the Middle Ages, through the Mechanism for Feudal Property that the concept of trust originated and consisted in the feudal lord or the king being able to take over the lands and goods of his subjects who, at the time of their deaths, did not have anyone to inherit their possessions or, by the same token, if they committed a serious crime. This idea was based on the belief that the subjects did not have ownership of the land or of certain goods in their possession, but the condition existed that, in exchange for working the land and providing certain specific goods and services to the owner of the fief or the king, the subjects could enjoy a real concession.

Also related to the "trust" is the fact that in those days the Church expressly prohibited the concentration of lands in its hands. From this came the idea of the so called "usage" whereby the possessor or owner of lands transferred them to another, the objective being that a third party would utilize them, and it was in this way that, in many instances, it really was the Church who made use of the lands, even though the true owner was someone else.

The Anglo-American "trust" has three elements to it which are well known: the Trustee who is the administrator of the trust, the Beneficiary and the Settlor or the one who establishes the "trust".

The equity or corpus consists of the goods being transferred by the Settlor and it is the administration of it that provides the source of income. The trustee legally has mere right over the goods of the "trust" and, consequently, may dispose of them although, by so doing, he violates the rules of the "trust".

"Trust" implies confidence, the reason being that the trustee should play the role of a good father and he is prohibited from profiting from the goods of the "trust". In Anglo-Saxon Law, there is nothing that prohibits the beneficiary from also being the trustee and vice versa, but there can not be only one beneficiary in the trust who is also the only trustee, for the simple reason that this person would have absolute control of the goods.

Latin America and Trusts:

In Latin America, with regard to Trusts and their regulation, there are two movements: the first follows the influence of the Mexican standards and is applied by the Commercial Codes of Venezuela, Honduras and El Salvador; the second leans more towards the Panamanian law and is used in Costa Rica and Puerto Rico.

In the first case, the trustee must be a financial institution, supervised and regulated by the State, for example, a bank while, in the second instance, the trustee can be any individual with the legal capacity to carry out this function.

The existence of these differences between the two movements also means that the legal problems confronting the two systems are different: the Mexican type trust is less flexible in terms of the objectives and transactions which are the responsibility of the trustee. On the other hand, with respect to the Costa Rican trust, the trustee has fewer limitations when managing the goods in trust, although this implies greater responsibility for his wide range of powers. For example, in cases of malpractice, the trustee may be held responsible.

For the period 1925 to 1950, a total of thirteen Latin American countries adopted measures, indirectly or directly, to adapt and regulate the functioning of trusts. In certain countries like Mexico, and those countries whose legislation is based on the Mexican statutes, their policies were highly restrictive with close supervision of trust activities; other countries adopted more liberal criteria in relation to the capacity of the trustee, all that the power of being a trustee implies and the types of contracts that he could execute.

In other countries, in an indirect manner and by means of the regulation of banking activities like the "confidence commissions", the functioning of trustees was permitted in a somewhat restricted manner.

As of 1950, countries have been opting for specific legislation, either a codified section, as in the case of Honduras and Costa Rica, or complimentary legislation, as in the case of Venezuela.

Bio: Licda. Adriana Vargas Zamora a lawyer, notary and is an expert in international asset protection and tax strategies. She specializes in wealth protection and tax minimization, international asset protection trusts and foundations, international business corporations, limited liability companies, worldwide investing, yacht registrations, and global banking. Ms. Vargas is a member of ITPA (The International Tax Planners Association), ABA (American Bar Association), IBA (International Bar Association) and The Colegio de Abogados en Costa Rica. To find out more about any offshore tax havens or set up a tax plan that is right for you, please call for a FREE Report "The Tax Planning Guide", or drop an email to the author.

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