The Puerto Rico Trust Code
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344 INTERNATIONAL LA WYER in Vietnam. The specific contract negotiated with the government will pro- vide the best legal safeguard. EDITOR'S NOTE: Firms in the United States or that are owned by nationals or residents of the United States are prohibited from investment in Vietnam by United States Government regulations. TANG THI THANH TRAi LE The Puerto Rico Trust Code Introduction The Commonwealth of Puerto Rico, through its industrial incentive and tax exemption laws of recent years, "Operation Bootstrap," has skillfully raised its standard of living to the highest level of any country south of the Rio Grande.' By contrast, Puerto Rico's laws relating to express trusts have remained underdeveloped. As a result, profits and capital gains realized on investments attracted to Puerto Rico by Operation Bootstrap are often moved out of Puerto Rico for portfolio investment through express trusts in jurisdictions whose laws are more hospitable. Express trusts hesitate to invest funds in Puerto Rico because of uncertainty as to the applicable law. These points struck this writer with some force when he sought to make use of express testamentary and inter vivos trusts as part of the estate plan of a client who settled in Puerto Rico after building up a successful business there with the help of Operation Bootstrap. 2 Present Puerto Rican Law of Express Trusts Since Columbus's discovery of Puerto Rico in 1493, the basic source of the domestic civil of Puerto Rico has been Spanish law; Spanish law, in its turn, was profoundly influenced by Roman law as embodied in the Code of Justinian. The second most important source of the civil law of Puerto Rico has been the Civil Code of Louisiana? There was no specific authority in the jurisprudence of Puerto Rico for express trusts until 1928, when the 'Governor Carlos Romero-Barcelo, N.Y. Times, Dec. 30, 1978, at 19. 'See Segall, Kelley & McConnell, Estate Planning Comes to Puerto Rico, 55 A.B.A.J. 464 (1969). Following the adoption of new estate and gift tax laws by Puerto Rico effective January 1, 1969 (Act No. 167, approved June 30, 1968), it was anticipated by the authors that "estate planning techniques developed by stateside lawyers" would be encouraged. They noted, how- ever, that "Puerto Rico has borrowed the federal system of taxing gifts and estates but has retained its civil law system of property descent and distribution." 55 A.B.A.J. 464, 469 (1969). 'See, e.g., Civil Code of Puerto Rico, tit. 31, §§ I, 14-21, 131 etseq. (absence), 221 etseq. (marriage), 321 et seq. (divorce), 441 et seq. (paternity and filiation), 1501 et seq. (usufruct); see also Dart, The Influence of the Ancient Laws of Spain on the Jurisprudenceof Louisiana, 6 TUL. L. REV. 83 (1931); Tucker, Source Books of Louisiana Law, 8 TUL. L. REV. 396 (1934). The Puerto Rico Trust Code common law concept of an express trust was introduced by Chapter 221 of the Civil Code, entitled "Constitution of Trusts (Fideicommissa)." These provisions were drived from a trust code enacted three years earlier in Panama, a civil law jurisdiction not otherwise noted as a fountainhead of jurisprudence for common law subjects such as trusts.' Louisiana is a juris- diction whose civil jurisprudence, like that of Puerto Rico, originated in the Spanish Civil Code. (Unlike Puerto Rico, though, Louisiana's laws show the influence of the Code Napoleon). Louisiana's experience with engraft- ing the common law of express trusts onto its earlier jurisprudence has finally produced a trust code whose provisions serve as a better model for Puerto Rico than does Panamanian law. The concept of the fideicommissum is recognized by Justinian. It is a sort of trust without a trustee that is similar to a common law life estate. Section 2541,6 the first section of the present Puerto Rico Trust Code, defines a trust in terms that relate the new concept being engrafted on the old law directly to the civil law terminology of the old law of Justinian's Civil Code: "A trust (fideicommissum) is an irrevocable mandate whereby cer- tain property is transferred to a person, named the trustee (fiduciario), in order that he may dispose of it as directed by the party who transfers the property, named constituent (fideicomitente), for his own benefit or for the benefit of a third party, named the beneficiary (cestui que trust) or (fi- deicomisario).7 'Express trusts have been a part of the law of Puerto Rico since enactment of §§ 1-41 of the Act of April 23, 1928, No. 41, page 294. This Act was incorporated into the Civil Code of Puerto Rico by the final provisions of the Code, as amended April 28, 1930, No. 48, page 358, § 9. It is now §§ 2541 through 2581 by Act of May 8, 1953, No. 211, page 504, effective May 8, 1952. See LAWS OF PUERTO Rico ANNOTATED, 2d ed. 1967 (Engi.), Vol. 7A, Civil Code, Table 31, Subtitle 4, Obligations and Contracts, Chapter 221, entitled "Constitution of Trusts (Fideicommissa)." 'See Villella, The Problems of Trust Legislation in Civil Law Jurisdictions: The Law of Trusts in Puerto Rico, 19 TUL. L. REV. 374 (1945); Patton, Trust Systems in the Western Hemisphere, 19 TUL. L. REV. 398 (1945); Patton, El Futuro de laLegislacion de Fideicomiso, 17 REVISTA JURIDICA DE LA UNIVERSIDAD DE PUERTO Rico 221 (1948). These essays show that it was Dr. Ricardo J. Alfaro of Panama who drafted the bill which subsequently became Act No. 9 of 1925 for the creation of trusts in Panama, and that Atty. Miguel Guerra Mondragon, while he was Vice-President of Puerto Rico's House of Representatives, was the author of the bill which later became Act No. 41 of the Puerto Rico Laws of 1928. Act No. 41 was incorpo- rated verbatim into the Civil Code. See Belaval v. Court of Eminent Domain, 71 P.R.R. 246, 251 n.l & 2. In Alvarez v. Secretary of the Treasury, 80 P.R.R. 15 (1957), the Supreme Court noted: "The incorporation of some of the principles of the Anglo-Saxon trust into the Panamanian Law was not intended to create an independent civil institution bearing no relation to the rest of the civil system, but a civil institution coming more properly within the civil system." 80 P.R.R. 15, 40 (1957). For the most recent comprehensive analysis of Puerto Rico's Trust Code, see Vilella, El Fideicomiso Puertorriqueno II, 37 REV. COL. ABOG. P.R. 417 (1976). 'Sections 2541-81, ch. 221, Civil Code of Puerto Rico. Hereafter references to Sections and numbers are to the present Sections of Chapter 221 of the present Puerto Rico Civil Code. This is commonly cited as P.R. LAWS ANN. tit. 31 § 2541 (1955). 'The heading of P.R. LAWS ANN. tit. 31, ch. 21, is "Constitution of Trusts (Fideicommissa [sic]." This tends to confirm that the intent of the statute was to treat the engrafted cion as part of the original stock, not as separate or new and different legal device. 346 INTERNA TIONAL LA WYER This dovetailing, by use of parentheses of terminology from the common law of trusts with terminology of the analogous civil law concept is a draft- ing technique that can hardly fail to produce maximum ambiguity. To which of the two systems should one look for precedent to resolve close questions? This question points out a serious defect of the present Puerto Rico Trust Code. In Alvarez v. Secretary of the Treasury' and Belaval v. Court of Eminent Domain,9 the Supreme Court of Puerto Rico upheld what were essentially common law trusts created by parents for their minor children against assertions that such trusts were invalid. These were difficult cases to decide. In Alvarez, two concurring justices pointed out that "(1) the Puerto Rican trust is not the same as the Anglo-Saxon trust; (2) there is a fundamental difference between a testamentary trust and a trust inter vivos under [Puerto Rican] civil law; (3) the Puerto Rican trust is another civil institu- tion within our codified civil system."'" The definition of express trust in the Louisiana Civil Code does not make the mistake of defining a common law trust in civil law terms. It provides that "A trust, as the term is used in this Code, is the relationship resulting from the transfer of title to property to a person to be administered by him as a fiduciary for the benefit of another."' In the proposed new Puerto Rico Trust Code this approach is followed. The Alvarez decision has left lawyers uncertain whether a Puerto Rican trust is a creature of Puerto Rican or "Anglo-Saxon" law. 'Alvarez v. Secretary of the Treasury, 80 P.R.R. 15 (1957). The Supreme Court conceded that in the above cited definition (P.R. LAws ANN. tit. 31, § 2541) "The phrase 'irrevocable mandate' was used in an effort to couch the trust concept in terms familiar to civilistas. The wisdom of describing the law of trusts in terms of mandate has been questioned." 80 P.R.R. 15, 19 n.4 (1957). The holding of the court was that the settlor of the trust was liable for the income tax on accumulated income claimed by the Secretary of the Treasury on "Clifford" principles. 'Belaval v. Court of Eminent Domain, 71 P.R.R. 246 (1950): the error committed by the lower court is evident in holding that for the investment of the property held in trust the trustee should follow the procedure provided by §§ 614 et seq. of the Code of Civil Procedure, wherein, according to the Civil Code, the parents or the tutors of minors or of incapacitated persons need judicial authorization to do anything relative to the keeping of said minors or incapacitated persons or their property.