The New Civil Code introduces a large number of changes into the Czech legal environment. One of the most significant of these is the introduction of a previously unknown institution in Czech law – the trust fund. A trust fund is a standard institution in Anglo-Saxon common law, where it is known as a trust, characterised by the ability to partition trust assets from the assets of the founder.
1. Trust funds and their characteristics
A trust fund holds intentionally partitioned assets without legal subjectivity – assets with no owner – intended for a specified purpose, whether public or private. This gives rise to separate ownership, to which the original owner no longer has ownership rights. These rights are exercised by a so-called trustee, who does not own the assets in the fund but is obligated to protect, increase, ensure the fulfilment of the purpose of the fund and respect the rights of so-called beneficiaries of the fund. The trustee is therefore responsible for the complete management of the assets set aside by the founder. The beneficiary/beneficiaries are then entitled to payment from the fund and also oversee the activities of the trustee.
Trust funds are similar to foundations, but differ in their lack of legal persona, their greater variability of purpose, absence of public supervision and possible temporary duration.
2. Establishment of a trust fund
A trust fund is primarily established by setting aside certain assets from the assets of the founder of the fund. As well as setting aside assets, at least one trustee must agree to take responsibility for the management of the newly established fund. When establishing a trust fund, the founder issues compulsory statutes of the trust fund in the form of a public document. The preparation of these statutes is a relatively complicated matter, as the statutes cover numerous formalities and are very difficult to change in the future. It is therefore important to give this aspect due attention and it is best left to a law firm.
A trust fund can also be set up with provision in the event of death, typically in a will. In such a case, the will must also include the statutes of the trust fund, which implies that the will from which the trust fund is established must have the form of a public document (§1452 (3) NCC)), i.e. typically a notarial record.
Another reason for establishing a trust fund may be special legislation.
3. Benefits of a trust fund
One advantage of a trust fund is that allocated assets are protected from potential creditors, who could otherwise lay claim to the founder’s assets. It is therefore possible to use a trust fund to secure against the adverse consequences of insolvency.
Another advantage may be to protect the founder’s assets from spendthrift spending by the beneficiary (who may also be an heir), as the trust has specific terms and conditions for payment (e.g. completion of studies, achievement of a certain age, etc.).
A trust fund can also be used for investment without the risk of affecting the founder’s assets if unsuccessful.
Tax benefits, which are standard for trust funds elsewhere in the world, can also be expected.
4. Overseeing trust fund management
The founder of the trust fund (or in the case of the founder’s death or dissolution, the founder’s legal successor) has the right to oversee the management of the trust fund, as does the beneficiary/beneficiaries or person/s designated in the statutes. If the beneficiary cannot be determined or has not yet been designated, the founder will appoint a person authorised to oversee/supervise the fund in the interests of the beneficiary/beneficiaries (if such a procedure is not possible or the founder does not act, such a person will be appointed at the proposal of the court). In certain special cases, the law may delegate special supervisory authority to another person or public body.
5. Conclusion
A trust fund is therefore a completely new institute and it will be interesting to see how it fares in the Czech legal environment. Trust funds will undoubtedly find their use, for example, by more affluent parents and grandparents who want to give their underage children part of their assets, but are concerned how their children will use these assets given their young age and lack of experience. A trust fund can therefore motivate children by, for example, paying more “pocket money” or other bonuses if/when they fulfil certain conditions (acceptance to a school, achieve a certain study average, etc.).
Trust funds can also be established for public purposes, to fulfil educational, scientific or other beneficial objectives.
The question is how the Czech public is going to deal with the relatively hidden ownership structure of trust funds and whether trust funds will be used, for example, to hide money from criminal activity, etc.