Using a management trust to administer a vulnerable adult’s estate

Following its simplification under the Modernisation of the Economy Act in 2008, the management trust can now be used to manage the estates of individuals, and in particular those of vulnerable adults. It offers a flexible alternative to standard, legal forms of protection, such as family authorisation, full guardianship (tutelle) and future protection mandates.

What is a management trust?

A management trust a legal mechanism by which an individual or an entity — the settlor — temporarily transfers the ownership of some of their assets or rights to a another individual or entity — the trustee — to manage these exclusively for the good of a beneficiary, which can be the settlor or a third party, within the terms of the trust agreement. The transferred assets are placed in a trust property that is separate from the trustee's own estate.
This devolves to the trustee the responsibility for managing part of all of the estate of a person in difficulty and strictly in that person’s interests.

Setting up a management trust for vulnerable adults

A person who is vulnerable yet still able to make decisions can set up a management trust ahead of time to manage their estate should they become incapacitated in the future.
However, by law, and even with the authorisation of the probate judge, an adult under full guardianship (tutelle) may not set up a management trust. The Cour de cassation — France’s highest court of appeal — appears to extends this limitation to other form of protection, including the future protection mandate⁽¹⁾. The only exception is partial guardianship (curatelle) since the adult concerned can transfer their estate to a trustee with the assistance of a guardian.

A trust agreement must be drawn up (and in some cases notarised) to specify the assets, the duration of the trust, the identity of the beneficiary and the trustee, as well as the rights and duties of the trustee.
The agreement must then be filed with the relevant tax office and the national trust register.

What are the key features of management trusts for vulnerable adults?

A management trust offers numerous advantages for vulnerable adults. It protects their independence, as it only pertains to the assets specified in the agreement. It provides targeted assistance and adapts to the needs of the vulnerable adult. And because it is overseen by a professional — be it a lawyer, a bank or an insurance company —the assets are efficiently and expertly managed.
A management trust also offers significant contractual flexibility. The settlor can define the exact duties and powers of the trustee, specifying which acts are allowed or restricted. The result is tailored management that considers the individual circumstances of the vulnerable adult. 
It also ensures the protection of the transferred assets: the trust property, independent of that of the settlor and the trustee, is shielded from the creditors of the two parties — a provision that prevents misappropriation by malicious parties and guarantees secure management of the assets. 
Finally, a management trust ensure legal security and scrupulous oversight. The trustee is bound by strict duties of loyalty and care and is accountable to the settlor and the beneficiary, in accordance with the monitoring and control procedures set out in the trust agreement. 
However, management trusts also present several limitations. For example, an adult under judicial protection (other than partial guardianship) may not set up a trust. Moreover, in France, trusts are still quite rare due to their complex and costly implementation. A further impediment is that the settlor and, where applicable, the beneficiary is free to withdraw from the trust agreement.
Management trusts versus future protection mandates

Management trusts and future protection mandates are both tools for pre-emptively organising the management of one's estate in case of future incapacity, with two notable differences:

• The future protection mandate offers comprehensive coverage, safeguarding both the Beneficiary’s person and the interests of their estate. The management trust is more limited in that it only concerns the assets specified in the trust agreement.

• The management trust also creates a trust property, effectively preventing the vulnerable settlor from managing their assets. Under a future protection mandate, the settlor retains ownership of their assets as well as their ability to perform certain acts at their discretion.

• The management trust is often seen as more flexible than the future protection mandate because it can be tailored to different management arrangements.

• The management trust is also better suited to managing complex assets and large estates. The trustee is necessarily a professional and therefore has the requisite expertise, unlike the future protection mandate representative who is often a close relation to the vulnerable person.

Management trust taxation

When performed outside the scope of business, the transfer of assets or rights into a trust property by a settlor does not trigger personal income tax, provided the following conditions are met:

• The settlor must be designated as the beneficiary or one of the beneficiaries of the trust agreement; 

• The trustee must undertake to record the transferred assets or rights in the trust property at the value at which they were acquired by the settlor. As such, any capital gains on the transferred assets are not taxable.

Upon termination of the trust, the resulting tax impacts must be appraised in a case-by-case basis.
It is important to note that real estate assets transferred into a trust property are included in the settlor’s assets liable for real estate wealth tax (IFI).
All told, a management trust is an attractive means for protecting vulnerable adults. Offering tailored and flexible management of assets, it is a valuable alternative to more restrictive protective measures that rely on judicial oversight. It is primarily intended for individuals with substantial fortunes or assets requiring specialised management.

⁽¹⁾ Opinion of the Cour de Cassation, 1st Civil Chamber, 20 October 2022, No. 22-70.011