Asset protection is an essential consideration within the overall process of estate planning. Estate planning involves the management and distribution of one's assets during their lifetime and after death. But while many people focus on the distribution of assets after they have passed on, it is also necessary to consider strategies for protecting those assets during their lifetime, for the benefit of their heirs or beneficiaries. Without adequate asset protection, one's assets could be at risk of being lost, eroded, or mismanaged, which could then result in significant financial losses or legal disputes. Consequently, incorporating asset protection strategies into estate planning is crucial to achieving one's financial and personal goals while minimizing potential risks and liabilities.
When considering international asset protection, the goal is to create a legal barrier between the individual and their assets, making it difficult for creditors or other claimants to access the assets. Some common legal structures used in this context include offshore trusts, international business corporations (IBCs), and limited liability companies (LLCs), which may be established in countries with favorable tax and asset protection laws. However, these asset protection structures, particularly those established in offshore jurisdictions, are subject to various legislative challenges that can limit their effectiveness.
Most of these legislative challenges have been raised by governments around the world that have grown increasingly concerned over the transparency of large sums of money that are transferred internationally. For example, governments have been increasingly cracking down on tax evasion and aggressive tax planning, particularly involving offshore entities. Some countries have enacted legislation to limit the use of offshore trusts, IBCs, and LLCs for such tax avoidance purposes. These entities have also been used to conceal the ownership and movement of illicit funds. Thus, legislation to combat money laundering and other financial crimes could also impact the use of these entities.
As a corollary, many countries have also implemented legislation that requires the disclosure of beneficial ownership information for offshore trusts, IBCs, and LLCs, which can affect the level of privacy and confidentiality associated with these entities. International agreements and regulations that govern the use of offshore entities, and compliance with these regulations can also pose a challenge. These beneficial owner registers and widespread access to them put those with wealth in a difficult situation. They do not want to circumvent legitimate legal efforts, but they still desire security and protection for themselves by limiting those who can gain access to information about their wealth.
Meanwhile, the European Union offers a very strong and stable environment for international asset protection purposes, in which solutions available in Hungary provide exceptional protection and privacy for assets; namely trusts, asset management foundations and so-called hybrid trusts.
One of the most significant benefits of establishing a trust in Hungary is the unparalleled protection of the trust's assets. Under Hungarian law, the trustee is the sole owner of the trust assets, which eliminates dual ownership, providing robust asset protection. The Hungarian Civil Code also ensures that the interests of beneficiaries are protected, and the trustee's ownership is limited by the trust deed with strong contractual rights. This makes the Hungarian trust a secure and reliable structure for asset protection.
Additionally, the Hungarian trust is highly flexible, with relatively few mandatory rules that the settlor must follow. The trust arrangement must be in writing, and the assets managed by the trustee must be separated from each other and from the trustee's assets. Furthermore, the settlor and beneficiary cannot instruct the trustee, and the trustee cannot be the sole beneficiary. The maximum duration of the trust is 50 years, providing ample time to manage and protect assets.
An Asset Management Foundation (AMF) registered in Hungary is also an excellent option for families looking to manage their wealth across multiple generations. An AMF is a unique type of foundation in which asset management is its primary economic function, through making distributions to the beneficiaries named in the founding charter. One reason AMFs are highly effective for asset protection is that the board of the AMF is considered to be the beneficial owner, if it retains the freedom to appoint future beneficiaries, while no individual exercises control over the management of the foundation. This can provide greater protection against potential third-party claims. The mandatory minimum capital requirement for establishing an AMF in Hungary is USD 2 million, and according to the Civil Code, the founder can contribute bankable and non-bankable assets.
Finally, yet another solution, a so-called hybrid trust, offers a combination of the prior two, in which trust is managed by an AMF. According to the AMF Act, if a trust relationship is managed by an AMF, the beneficiary is the AMF itself. This classification of the beneficial ownership may provide unprecedented privacy for high net-worth individuals. While trusts, asset management foundations and hybrid trusts established in Hungary are considered to be today's leading asset protection structures, they enjoy tax neutral treatment and are valuable and versatile instruments in tax planning as well.
Several tax advantages provided by these asset protection structures offered in Hungary are as follows. First, transferring assets to a trust is tax- and duty-free. Second, non-qualified trusts are treated as corporate taxpayers and subject to corporate income tax and local taxes, but are not subject to VAT. They have their own tax number, tax return, and annual report, but are not considered legal persons or independent legal entities. Additionally, incoming dividends and capital gains are tax-exempt due to participation and intellectual property exemption regimes, and Hungary has a flat 9% general corporate income tax. Foreign-sourced income's withholding tax is reduced to 0-15% thanks to Hungary's vast double treaty network.
In the case of a qualified trust, if its settlor and beneficiaries are both private individuals, and the trust has only financial income, such as dividends, interest, capital gains, FX gains, swap gains, profit from options and receivables, this income can also be tax-exempt. Capital distribution is also tax-free, as is yield distribution to legal entities, while a maximum of 15% withholding tax is applied to yield distribution to private individuals. Finally, opening a permanent savings account for a qualified trust creates tax-exempt treatment on both the trust and individual levels for trust incomes after five years.
In conclusion, under the strong legal, economic, and political protective umbrella of the EU, combined with the maximum representation of the settlors' and the beneficiaries' interests, Hungary can today be considered the ultimate jurisdiction for those seeking asset and privacy protection. Aliant Hungary offers qualified legal professionals that can help individuals take advantage of the benefits offered by the Hungarian legal system to meet their specific needs and goals in providing long-term financial security for their families.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
