Hereditary fund: a new instument for succession law in Russia

On 1 September this year regulations in the Russian Civil Code relating to hereditary funds came into effect, which created a new instrument for succession planning.

A hereditary fund is a special legal entity that is similar to trust structures used in many Western countries and which can be used as an instrument for succession planning to protect and maintain businesses and reduce the risks of business losses when an owner passes away.

According to the changes made to Russian legislation, an individual making a will is able to establish a special hereditary fund that will manage property transferred as inheritance. Any property can be added to a hereditary fund. The decision to create a hereditary fund is made by an individual when he drafts a will with a notary and must contain certain information including the fund’s management and procedural terms, size, methods for maintaining the fund and its timescales as well as details of individuals appointed to manage the fund or procedures for appointing such individuals.

Registration of a hereditary fund with the relevant state department is made after an individual’s death by a notary who was responsible for the succession matter. The will, as with any notary document, is stored in the Unified Information System of Notaries which allows a notary to access promptly all relevant information. The potential to create a fund during the lifetime of the founder is not provided for by the law, as such a founder cannot be certain that will’s objectives will be performed in accordance with his wishes.

Property of a hereditary fund is formed when the fund is created, during the fund’s activities as well as from income received by the fund. The property of the fund cannot be transferred without remuneration.

The terms of management of the fund must include provisions for the transfer of the property to the beneficiaries in the future; such a transfer could be dependent on certain conditions being met.

The beneficiaries of a fund have the right to receive part or all of the fund’s property in accordance with the fund’s terms and hold the right to request and receive information from the fund about its activities.

As an instrument to protect the assets of a fund, legislation provides that the fund’s charter or terms requires the consent of the fund’s managers or board before entering into a transaction listed in the charter.

Despite a good deal of borrowing from foreign experience and providing individuals with additional and more flexible instruments for succession planning, this legal new instrument is not perfect and suffers from some shortcomings. As such, the use of this new instrument should be carried out cautiously and in accordance with a well-designed plan.

When advising clients on potential instruments for succession planning, we assess the feasibility of this new tool taking into account the client’s opinion and interests and with regard to other mechanisms that might be available, and we are ready, where appropriate, to help our clients create hereditary funds in accordance with the legislation.

Together with our partner, Elena Antonova, a St Petersburg notary, we will follow carefully the development in the use of the new instrument for succession planning.

Please see Federal law ‘On changes to the first, second and third parts of the Russian Civil Code’ dated 29 July 2017, number 259-FZ