United States Trust Law and the Hague Conventionon Trusts1

By Michael W. Galligan

Practitioners who develop estate plans for indi-viduals and families with international holdingsquickly learn, often to their chagrin, that many coun-tries in the world, including some of the wealthiestand most economically important, do not have theinstitution of the trust and do not understand trusts.The purpose of the Hague Convention on the LawApplicable to Trusts and on Their Recognition is togain the consent of countries that do not have trusts torecognize trusts validly established in countries thathave trusts and to permit these trusts to function onan international basis with all the legal rights andprivileges of trusts. The United States was a vital par-ticipant in the international conference that led to thedrafting and approval of the Convention by theHague Conference on Private International Law and isa signatory to the Convention.

Unfortunately, the United States has not ratifiedthe Convention, which means that the United States isnot yet officially a party to the Convention. Whilemost of the major common law jurisdictions havebecome parties, only the Netherlands and Italy,among the civil law countries that do not ordinarilyrecognize trusts, have ratified the Convention. In theopinion of many, the failure of the United States toratify the Convention has become a major disincentiveto other important civil law countries that do not ordi-narily recognize trusts, such as France, Germany,Japan, and Switzerland to become parties to the Con-vention.

In 1998, at the behest of the office of the AssistantLegal Advisor to the Secretary of State for PrivateInternational Law, the Committee on InternationalEstate Planning of the Trusts and Estates Section ofthe New York State Bar Association, with the approvalof the Executive Committee of the Trusts and EstatesSection, became actively involved in efforts to pro-mote U.S. ratification of the Convention. In canvasingsupport from the other major estate planning organi-zations in the United States, certain questions wereraised about the effect the Convention would have onU.S. law concerning transfers of property to trusts,existing U.S. conflicts-of-law rules related to trusts,and the jurisidiction of U.S. courts over trusts. Thisarticle addresses each of these issues. The article con-cludes that (1) the Convention would not cause for-eign law to apply to transfers of U.S. real property totrusts, (2) application of the Convention’s choice-of-law rules will have no effect on domestic trusts andshould not, as a practical matter, significantly change

the way U.S. courts currently apply choice-of-lawrules to foreign trusts, and (3) the Convention will notenlarge the jurisdiction of U.S. federal courts overdomestic and foreign trusts.

1. The Convention Will Not CauseForeign Law to Apply to theDisposition of U.S. Real Property

The purpose of the Convention is to enable truststo operate as legal persons in jurisdictions where theypreviously have not been accorded legal status and toeliminate the possibility that a trustee of a valid trustcould be considered to be acting in the trustee’s indi-vidual capacity. For a trust to operate as a legal personmeans, among other matters, recognition of the capac-ity of the trustee to hold real property validly trans-ferred to the trust in the name of the trust, withoutdanger that the property would be considered proper-ty of the trustee in the trustee’s individual capacity.Every jurisdiction within the United States (includingLouisiana) recognizes the institution of the trust andthe right of trusts to own real property without hav-ing the property rights of the trustee qua trustee con-fused with the property rights of the person acting astrustee. The Convention simply confirms this funda-mental principle of trust law and provides a mecha-nism whereby this salutary principle may be recog-nized in countries where this principle, up to now, hasnot been generally recognized.

Article 8 requires state parties to apply the gov-erning law of the trust only in matters affecting theinternal order of the trust, such as the appointment,removal and resignation of a trustee, the rights andduties of trustees among themselves, the rights oftrustees to delegate their authority, the power oftrustees to dispose of and acquire assets, the power ofinvestment, restrictions on the duration of a trust, theliability of the trustees to the beneficiaries, the distri-bution of trust assets and the duty to account. Article11 lays down the primary rule of the Convention thata trust eligible for recognition under the provisions ofthe Convention is to be treated as a trust, and there-fore, “at a minimum, that the trust property consti-tutes a separate fund, that the trustee may sue and besued in his capacity as trustee, and that he mayappear or act in this capacity before a notary or anyperson acting in an official capacity.” This means (1)that personal creditors of the trustees have norecourse against trust assets, (2) that the trust assetsshall not form part of a trustee’s estate in insolvency

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or bankruptcy, (3) that the trust assets will not formpart of the matrimonial property of a trustee or atrustee’s spouse nor part of the trustee’s estate atdeath, and (4) that trust assets may be recovered whenthe trustee, in breach of trust, has mingled trust assetswith the trustee’s personal assets.

The key idea to note here is that while the Con-vention requires the trust’s governing law to apply tothe internal order of the trust, it does not authorize atrust to own real property in any other way than thatallowed by local law. Articles 4 and 15 make it clearthat the Convention does not purport to impose anyrule of application or choice-of-law with regard to themanner in which property is transferred to or fromthe trust nor with regard to issues affecting the rela-tionships of the trust to others persons “outside” thetrust. Article 4 provides that the Convention does notapply to issues regarding “the validity of wills orother acts by which assets are transferred to thetrustee.” In the Explanatory Report that is included inthe travaux preparatoires of the Convention, Proceed-ings of the Fifteenth Session of the Hague Conferenceon Private International Law, Vol. II, 370, 381, Profes-sor Alfred Overbeck states,

A transfer of assets to the trustee is asine qua non condition for the creationof a trust. But the law designated bythe Convention applies only to theestablishment of the trust itself, andnot to the validity of the act by whichthe transfer of assets is carried out.This act is entirely governed by thelaw to which the conflicts rules of theforum submit it.2

Consistent with this view, Article 15 sets forth keyareas of law that continue to be governed by the lawdesignated by the forum, including the protection ofminors, marital rights, succession rights, the protec-tion of creditors in bankruptcy—and most important-ly for our purposes here—“the transfer of title toproperty and security interests in property.” As Pro-fessor Overbeck explains, when “the law applicable toa trust recognized as such will encroach on the area ofanother law designated by the forum’s conflict rules,”under Article 15, “it is then that other law which willprevail . . . as concerns the mandatory rules of thatother law,”3 it being the intent of Article 15 “to pre-serve above all the forum’s substantive law in caseswhere its conflicts rules designated its own law.”4

According to Article 12, “[w]here the trusteedesires to register assets, movable or immovable, ordocuments of title to them, he shall be entitled, in sofar as this is not prohibited by or inconsistent with the lawof the State where registration is sought, to do so in his

capacity as trustee or in such other way that the exis-tence of the trust is disclosed.” (emphasis added). Pre-sumably, if registration were a prerequisite to owningproperty at all, the forum would make some form ofregistration available in order to abide by Article 11.But beyond that, the forum state is afforded unlimitedauthority to require a trust to conform to the samerules regarding ownership of real property that anyother person or entity authorized to own real propertyin the forum state would have to follow.5

2. Analysis of Effect of the Conventionon U.S. Choice-of-law Rules RegardingTrusts

The Convention does not apply to interstate con-flicts of law issues regarding domestic trust andshould not, as a practical matter, significantly changethe way U.S. courts currently apply choice-of-lawrules to foreign trusts.

(a) Impact on Domestic Trusts

The Convention is not intended to deal with con-flicts of law issues concerning domestic trusts. Article24 provides that a state with different territorial unitswith their own rules of law regarding trusts is notbound to apply the Convention “to conflicts solelybetween the laws of such units.” In other words,choice-of-law issues about domestic trusts that haveconnections with different states of the United Statesare not governed by the Convention, and thereforeneither are trusts that have connections with only onestate.

(b) General Approach of the Convention

It is helpful to differentiate between a “one-step”approach to the creation of trusts and a “two-step”approach. In the one-step approach, a trust is consti-tuted by a donation of property to a trustee, oftenthough not necessarily effected by a declaration ordeed of trust.6 The instrument and the transfer areintegrally connected so that if the transfer is invalidthe deed has to be a nullity. In the two-step approach,the trust instrument and the transfer of property areviewed separately. The trust is essentially establishedby the trust agreement (with what is often a tokentransfer of property to conform to the common lawrequirement that property be transferred to thetrustee). The transfers of the assets intended for thetrust are effected by separate deeds or instruments ofconveyance. The two-step approach has been incorpo-rated in New York’s recent inter-vivos trust legisla-tion, which requires that a trust agreement be validlyexecuted in conformity with the statutory require-ments for a valid agreement and that property betransferred to the trust by separate deed or instru-ment, rather than by the trust agreement.7

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The Convention essentially embraces a two-stepapproach. It clearly distinguishes between the trustinstrument and the transfer of property to the trust.8Article 3 states that the Convention “applies only totrusts created voluntarily and evidenced in writing.”Article 4 of the Convention expressly excludes fromthe Convention’s purview “the validity of wills orother acts by which assets are transferred to thetrustee.” The result is that the Convention focuses onthe obligations and rights established by the writtenevidence of the trust, but not the property laws thatgovern transfers to the trust. Under Article 15, the lat-ter are left to the law indicated by the situs of theproperty.

This distinction is important because it puts inproper context an otherwise apparent inconsistencybetween the Convention and the Restatement Secondon Conflict of Laws regarding “trusts of land.”According to Restatement Second § 277(1), the con-struction of a trust of land is to be governed by thelaw chosen by the settlor. See Restatement (Second) ofConflict of Laws: Construction of Trust Instrument §277(1) (1969). To that extent, the Restatement is clearlyconsistent with the Convention. However, Restate-ment Second § 278 makes the law indicated by thesitus (which need not but is often likely to be the lawof the situs) the governing law regarding the validityof a trust of land, whereas the Convention looks firstto the law chosen by the settlor.9 This apparent incon-sistency is removed once one appreciates that validityfor the Restatement means the validity of the transferof land to the trust, which, under the Convention isalso governed by the law indicated by the situs.10

(c) Choice-of-law Rules for Foreign Trusts

Article 6 of the Convention provides that a trustshall be governed by the law chosen by the settlor,unless the law so chosen does not provide for trusts.Article 7 establishes as the default choice the law withwhich the trust is “most closely connected.” Relevantconsiderations are the place of the trust’s administra-tion, the situs of the trust’s assets, the place of resi-dence or business of the trustee, and “the objects ofthe trust and the places where they are to be fulfilled.”Article 9 provides that a severable aspect of the trust,particularly matters of administration, may be gov-erned by a different law. These principles are consis-tent with the choice-of-law rules commonly appliedby American courts. It is probably safe to say thatmost wills do not contain a choice-of-law provision.Testamentary trusts under such wills are in mostinstances governed by the law of the decedent’s domi-cile, which is most likely to be the place of the trust’sadministration, the situs of the trust’s assets, and theplace of residence of the trustee, if not always the

location where the beneficiaries, as “objects of thetrust,” may live.

Most courts will honor the choice-of-law con-tained in an inter vivos trust agreement as long asthere is some connection between the trust and thecountry whose law is so designated.11 Article 6 doesnot expressly require that the law chosen by the sett-lor have a substantial connection to the trust, but itdoes require that the law chosen by the settlor providefor trusts or the category of trust involved. Moreover,article 13 expressly excludes recognition in the casewhere the “significant elements” of a trust, other thanthe choice of applicable law, the place of administra-tion and of the habitual residence of the trustee, aremore closely connected to states that do not have theinstitution of the trust. As a practical matter, it ismuch more likely than not that a settlor’s choice oflaw will be based on some connection between thetrust, the trust grantor, the trust beneficiaries, or somerelated factor, and the country whose law is designat-ed.

Besides, articles 16 and 18 of the Convention givea court broad latitude to curb an effort to import arule that would offend the forum’s concepts of funda-mental justice, good order, or public policy, Article 16authorizes a court to apply the “law of the forumwhich must be applied even to international situa-tions,” i.e., “laws of immediate application” or“mandatory rules” designed to foster public health,vital economic interests, the protection of weaker par-ties, and so forth.12 Article 16 also permits a court toapply similar rules of another country if a case beforeit has a substantial connection with another country.And, under Article 18, the provisions of the Conven-tion may be disregarded “when their applicationwould be manifestly incompatible with public policy.”

As noted above, under Article 15, “the transfer oftitle to property and security interests in property”and other important areas of law regarding the rightsof third parties (including creditors’ rights, maritaland succession rights, and the rights of owners) are tobe governed by the choice-of-law rules of the foruminsofar as these cannot be varied by voluntary act.This means, for example, that a forum that applies therule against perpetuities to all transfers of real proper-ty would not be required to recognize a transfer ofreal property to a trust that, under its governing law,could last longer than the applicable perpetuities peri-od.13 It also means that a forum would not have toapply the law of a country unduly hostile to creditors’claims just because the law of that country happens tobe the governing law of the trust.

Section 279 of the Restatement Second on Conflictof Laws provides that the administration of a trust of

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an interest in land is determined by the law thatwould be applied by the courts of the situs of theland.14 “Administration” includes matters relating tothe “carrying out of the trust” such as the duties andpowers of trustees and their right to compensation,but not issues of construction such as the identity ofthe beneficiaries and the nature of their interests.15

Under the Convention, it is possible for a grantor toselect a governing law other than the law of the situs.But the apparent difference between the rule reflectedin the Restatement and the rule of the Convention dis-solves into virtual insignificance on closer inspection.According to the Restatement § 279, Comment a, “ifthe testator or settlor provides that the local law ofsome other state shall be applied to govern the admin-istration of the trust . . . the courts of the situs wouldapply the designated law as to issues which can becontrolled by the terms of the trust.” Again, Articles16 and 18 of the Convention give a court broad lati-tude to prevent the application of a rule that wouldoffend the forum’s concepts of fundamental justice,good order or public policy and to apply its “manda-tory rules” designed to foster vital economic interestssuch as the appropriate use and regulation of land.16

3. Analysis of Effect of the Conventionon the Jurisdiction of U.S. FederalCourts Over Trusts

Federal courts have, under 28 U.S.C. § 1331, juris-diction over matters arising under treaties of the Unit-ed States with other countries. However, U.S. ratifica-tion of the Convention should not permit litigants toattempt to remove jurisdiction over such matters astrust construction, beneficiary rights, and accountingissues from the state courts to the federal courts. Asdiscussed above, the Convention does not govern thechoice-of-law rules applied to inter-state conflictsissues. Thus, the Convention cannot be used as a basisfor conferring jurisdiction on a federal court in a dis-puted matter involving a domestic trust because theConvention does not apply to such trusts.

A foreign trustee may invoke the Conventionwhen there is an issue involving the recognition of thetrust’s right to operate within the United States as atrust. However, this does not enlarge the jurisdictionthat the federal courts currently have over certain for-eign trusts. Under 28 U.S.C. § 1332(a)(2), the federalcourts have jurisdiction over disputes between citi-zens of the United States and the citizens or subjectsof a foreign state. Foreign trustees are “citizens” offoreign countries and therefore the federal courtsalready have jurisdiction over disputes involving for-eign trusts as long as the diversity between the for-eign and United States parties is not broken by havinga foreign party on both sides of the claim or contro-versy.

In a case where complete diversity does notobtain between a foreign trust and the United Statesparties, the foreign trust would be required to availitself of a state court. The mere invocation of the Con-vention will confer neither federal question jurisdic-tion under 28 U.S.C. § 1331 nor supplemental jurisdic-tion under 28 U.S.C. § 1367 on the federal courts. It isa fundamental axiom of federal question jurisidictionbased on treaties that”[a]n action arises under a treatyonly when the treaty expressly or by implication pro-vides for a private right of action.”17 The Conventiondoes not provide any remedies or causes of action,and therefore confers no independent basis for federaljurisidiction.

Even if there were a private right of action toenforce the Convention’s choice-of-law rules, whichthere is not, any effort to invoke on that basis the sup-plemental jurisdiction of the federal courts withrespect to any legal remedy under the substantive lawof trusts would be likewise unavailing. To confer juris-diction on a federal district court with original juris-diction with respect to a supplemental claim, it is nec-essary under 28 U.S.C. § 1367(a) for the claim “to beso related to claims in the action within such originaljurisdiction that they form part of the same case orcontroversy under Article III of the United States Con-stitution.” While the issues of choice of law and recog-nition under the Convention may be significant pre-liminary issues in any claim or controversy, they areanalytically distinct from any particular claim or con-troversy and thus would not appear to have the requi-site relationship to such claim or controversy that §1367(a) requires. Indeed, by themselves, they wouldnot state a claim. Moreover, under 28 U.S.C. § 1367(b),a district court has discretion to decline supplementaljurisdiction whenever the supplemental claim “sub-stantially predominates over the claim or claims overwhich the district court has original jurisdiction.”While the threshold issues of applicable law andrecognition are clearly critical, it is hard to imagineany claim that would not predominate over the pre-liminary issues regarding the trust’s applicable lawand right to recognition because it is the claim and notthe threshold issues that would be the gravamen ofthe lawsuit.

Finally, because the Convention does not attemptto preempt issues regarding the validity of wills creat-ing trusts,18 the Convention would not affect statejurisdiction over ancillary probate and administrationproceedings related to estates of non-United Statesdecedents and would therefore not weaken the gener-al principle that federal courts should avoid interfer-ing in probate matters.19

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