Generational Succession in Family Businesses: Trust Management, Asset Management Foundations, and Family Charters

Family businesses represent a significant share of the Hungarian economy, many of which were founded in the early 1990s. As founders age, generational succession – the transfer of business assets and leadership to the next generation – has become one of the most complex legal and business challenges. Below, we review the available legal instruments, their advantages and limitations, and practical recommendations.

The Legal Toolkit for Generational Succession

Several legal instruments are available for planning family business succession, used in combination rather than as alternatives:

1. Trust Management (Bizalmi Vagyonkezelés – BVK)

Legal basis: Civil Code (Ptk.) Sections 6:310–6:330 and Act CXIII of 2019 on Trust Companies and Their Activities

Trust management was introduced into Hungarian law when the new Civil Code entered into force (15 March 2014). Its key features:

• The settlor (founder) transfers assets to a trustee
• The trustee manages the assets for the benefit of beneficiaries
• The managed assets are legally separated from the trustee’s own assets (Ptk. Section 6:312) – ensuring asset protection
• The trustee acts according to the conditions set out in the trust management contract

Advantages for succession:

• The owner can transfer assets during their lifetime, without waiting for inheritance
• Beneficial entitlement (right to dividends, yields) can be separated from business management
• The settlor may set conditions (e.g., educational or professional requirements for beneficiaries’ participation in company management)
• Managed assets are protected from beneficiaries’ creditors and divorce property division (Ptk. Section 6:312(3))

The trustee (Act CXIII of 2019):

• Professional (business-like) trust management may only be performed by trust companies licenced and supervised by the National Bank of Hungary (MNB)
• Ad hoc (non-professional) trust management: natural or legal persons may act as trustees (Ptk. Section 6:311), provided the activity is not conducted on a business basis

2. Asset Management Foundation (Vagyonkezelő Alapítvány)

Legal basis: Act XIII of 2019 on Asset Management Foundations

The asset management foundation is a special type of foundation created specifically for asset management – including the intergenerational preservation of family wealth:

• The founder transfers assets to the foundation, which manages them for the benefit of beneficiaries
• The foundation is a legal entity – the assets become its property
• Beneficiaries may include the founder’s family members
• The board of trustees manages the foundation according to the rules set in the founding charter

Advantages over trust management (BVK):

• Legal personality: the foundation is an independent legal entity, enhancing long-term asset stability
• Multigenerational structure: the foundation does not automatically terminate upon the founder’s death
• Oversight mechanisms: the board of trustees and supervisory board provide control

3. Corporate Law Instruments

Transfer of business shares (Ptk. Sections 3:167–3:170) alone rarely suffices for succession management, but it is an important tool within a comprehensive strategy:

• Amendment of articles of association: incorporation of special succession provisions (e.g., rules on inheritance of membership upon a member’s death – Ptk. Section 3:170)
• Preferential voting rights: voting structures facilitating the gradual transfer of control
• Pre-emption rights: to maintain family ownership (Ptk. Section 3:167(2))
• Consent requirements: restricting the transfer of business shares to outsiders (Ptk. Section 3:167(5))

4. Inheritance Law Instruments

If succession planning is not completed during the founder’s lifetime, inheritance law rules apply:

• Will (Ptk. Sections 7:10–7:48): disposition of the estate
• Compulsory share (Ptk. Sections 7:75–7:86): the minimum portion to which statutory heirs are entitled, which limits testamentary freedom – business shares cannot be excluded from the compulsory share base
• Probate proceedings: proceedings before the notary public, which may temporarily create uncertainty in the company’s operations

Important: trust management and asset management foundations are particularly advantageous because assets are transferred during the founder’s lifetime – thereby limiting the scope of inheritance law (and especially compulsory share obligations).

The Legal Nature of the Family Constitution (Family Charter)

What Is a Family Charter?

The family constitution (family charter) is a private law document concluded among the members of the owner family of a family business. It typically contains:

• The family’s values and objectives
• Decision-making mechanisms (family council, voting rules)
• Entry conditions for successors joining the business
• Agreements on the alienation of assets
• Conflict resolution procedures

Legal Classification

The family charter is not a specifically named legal institution (sui generis) in Hungarian law – no statute uses this term. In terms of its legal nature, it is an atypical (innominate) contract based on the principle of freedom of contract (Ptk. Section 6:59):

• Under Ptk. Section 6:58(1), “[t]he parties may freely enter into contracts and freely determine the content of contracts”
• A family charter can therefore be a valid and enforceable contract, provided it meets the general validity requirements (legal capacity, absence of defects of will, no conflict with mandatory rules, etc.)
• Obligations assumed therein are enforceable as contractual obligations (Ptk. Section 6:1)

Limitations:

• The family charter cannot restrict the right to the compulsory share (Ptk. Section 7:75) – mandatory inheritance law rules prevail
• Prohibitions on alienation and encumbrance (Ptk. Section 5:29) may be validly stipulated with obligatory (inter partes) effect, but in rem effect – i.e. opposability against third parties – requires registration in the property register (or other relevant register)
• The charter cannot replace the articles of association – corporate law provisions must be included in the articles of association

Asset Protection in Case of Divorce and Family Conflict

Protective Effect of Trust Management

Managed assets are not part of either the trustee’s or the beneficiary’s own assets (Ptk. Section 6:312):

• In case of the beneficiary’s divorce, managed assets are not subject to matrimonial property division (Ptk. Section 4:37 – managed assets under BVK do not fall within the scope of marital community property)
• The beneficiary’s creditors cannot access managed assets (asset segregation)

Important clarification: protection relates to the segregated managed assets. If the beneficiary uses payments received from the BVK (e.g., dividends) in the common household, those may be assessed under matrimonial property law rules.

Asset Transfer and Fraudulent Conveyance

Transferring assets into a BVK or foundation may not serve to defraud creditors. The rules on fraudulent contracts (Ptk. Section 6:120) apply:

• If the purpose of the asset transfer is to prejudice creditors, the affected creditor may request the court to declare the relative invalidity of the transfer

Tax Implications

Trust Management

• Managed assets constitute an independent tax subject for corporate tax purposes (Corporate Tax Act Section 2(6))
• Transfer of assets into a BVK does not trigger transfer duty under Act XCIII of 1990 on Duties if the gratuitous acquisition’s beneficiary is a direct-line relative of the settlor
• Taxation of payments to beneficiaries depends on the legal title of the payment

Asset Management Foundation

• The foundation is a corporate tax subject (Corporate Tax Act)
• Preferential tax treatment may apply under certain conditions
• The duty implications of transferring assets into the foundation depend on the specific circumstances

Practical Recommendations

Planning the Succession

1. Start early: succession planning takes years – do not wait until the last moment
2. Combined approach: BVK, asset management foundation, amendment of articles of association, and family charter should be applied together, not as alternatives
3. Review the articles of association: incorporate succession provisions (member’s death, share transfer rules)
4. Harmonise the will: if a BVK is in place, the will must be drafted in alignment with it

Drafting the Family Charter

1. Involvement of all stakeholders: the charter only works if all family members participate in its development and sign it
2. Legal form: a document bearing the attorney’s countersignature strengthens enforceability
3. Periodic review: the charter should be amended as family circumstances change (new marriage, birth, death)
4. Conflict resolution: include mediation or arbitration clauses

Engaging Experts

1. Attorney: designing the legal structure and preparing documents
2. Tax adviser: planning tax optimisation
3. Business consultant: leadership succession and family governance design
4. Psychologist/mediator: managing family dynamics – succession is not only a legal but also a human issue

Generational succession in family businesses is one of the most complex areas of Hungarian private law, situated at the intersection of corporate law, inheritance law, contract law, and tax law. The key to successful succession lies in early planning, combining the appropriate legal instruments, and family cooperation – legal frameworks alone cannot substitute for family consensus.