Trust fund: How to protect and transfer property in the Czech Republic (trust)
A trust fund (the “fund”) is a legal instrument that, since 2014 in Czech and in continental Europe and EU, has enabled the protection of property from creditors and intergenerational preservation of property. It allows the separation of your property from your ownership and its entrustment to independent management in the so-called ownerless property regime.
It is most often established by entrepreneurs who want to protect their hard-earned wealth and protect themselves in the event that, God forbid, the business fails. This ensures that the property of the trust fund is not affected by execution or insolvency.
The fund is also established by people who want children or their representatives (spouse, etc.) to be unable to sell, devalue, etc. the property intended for the children. The key is that separate and independent ownership is created that is not the property of you (the founder), nor the administrator, nor the beneficiary. It actually stands alone as if without an owner. Is managed and acted as the owner by the fund administrator.
This structure proves particularly effective for protecting family assets, planning intergenerational succession, and ensuring long-term property management. The concept gained prominence among the rich and powerful, such as Andrej Babiš (Czech prime minister).
Why should you consider a trust fund?
You should consider a trust fund primarily because it represents a reliable and robust mechanism for protecting and separating assets from your person. The administrator retains full control over it for life. But creditors cannot get hold of it, nor will it fall into divorce or inheritance proceedings. By separating assets from your personal assets, you reliably protect them from risks associated with business. This includes possible executions or insolvency proceedings.
Furthermore, a trust fund is an extremely effective tool for intergenerational transfer. It allows you to organize property relations during your lifetime. And ensure a smooth transfer of assets without the need for lengthy inheritance proceedings. At the same time, the fund creates a legal structure with clear rules. These rules define in detail the terms of asset management and performance for your loved ones. It helps prevent family disputes. And also prevents the assets from being scattered by children or their representatives, because they technically do not belong to them.
How a trust fund works and who manages it - step-by-step instructions
Step 1 - contact us, we are experts in trust funds, we have already established many of them, with us you will have the best service.
Step 2 - Establishing a trust fund by signing a notarial deed (ND). Trust fund is done by setting aside assets and entrusting these assets to a trustee for a specific purpose by contract or by acquiring them in the event of death, in the form of a notarial deed, where we will describe all this.
Come to our office and we will prepare everything for you with a cooperating notary. Due to the costs of the ND itself, we recommend transferring only one property to the fund. And donating the others with our professional donation contracts. The fund itself is created on the date of entry in the trust fund register. Except in the case where the fund is established by acquisition in the event of death - in which case it is created upon the death of the testator.
And how it works?
The founder is you, who establishes the fund, allocates the assets and issues the statute in the form of a trust deed. After the assets are allocated, you lose ownership rights to them by registration in the land register. But you typically retain a certain degree of control through the right to supervise the management of the fund. Or you are the trustee yourself (we recommend).
The trustee is the key person who exercises ownership rights to the assets in the fund in his own name. But on behalf of the fund. The assets of the fund are not his property. This ensures that he is not subject to his personal obligations. We recommend that the trustee be entrusted with full management. This also includes the reproduction of the assets.
Another important person is the Beneficiary. The beneficiary is a person who is to be paid from the fund according to the conditions set out in the statute. Typically paid, for example, a financial amount as a share of the rent, etc. The beneficiary can be granted either the right to the fruits and benefits (e.g. rent, dividends). Or the right to the property itself from the fund. This is not recommended because its value is being reduced and should be increased.
The fund’s basic and regulatory document is the Statute. Which is issued by the founder in the form of a notarial deed (ND). The Statute is a kind of “constitution” of the fund and must contain minimum legal requirements. These include the name of the fund. The definition of the purpose and designation of the beneficiary or the method of its designation, methods of administration, etc.
Tax aspects that you should know
For income tax purposes, the fund is considered a separate taxpayer of corporate income tax and is subject to the standard rate. Taxation of benefits to beneficiaries has its own specific rules. Since the fiction applies that it is first paid from the fund’s profit and only then from the other assets of the fund. If it is paid from the fund’s profit, such income to the beneficiary is considered income from capital assets. And is subject to a withholding tax of 15% for individuals.
However, the key tax advantage is the exemption from any form of inheritance tax. The beneficiary’s free income from assets that have been allocated to the fund by acquisition in the event of death is exempt from personal income tax. And you also avoid huge notary fees calculated on the value of the inheritance. Especially if you plan to pass on larger assets.
This arrangement significantly increases the attractiveness of the fund for inheritance planning. And the effective low-cost transfer of assets to subsequent generations and their effective protection. It is also important that the allocation of assets to the fund (by acquisition in the event of death or by acquisition in the event of death) is viewed for income tax purposes as a contribution to a business corporation. Which essentially means that the founder would not be taxed upon the contribution itself.
Is a trust fund right for you? Advantages and risks
A trust fund is not a universal solution and is most advantageous for managing larger assets.
Advantages:
- Protection and separation of assets: The assets are separated from personal assets and are protected from risks such as business (execution, insolvency).
- Be the administrator, you still have full control over the assets,
- Set aside full management, you can continue to expand the assets, sell them, etc. when you see fit,
- Flexibility in transfer: Allows for precise setting of the conditions and time horizon of fulfilment (unlike immediate inheritance), you can set the time horizon, e.g. children will receive real estate only after reaching the age of 25 or until their children, until then rent, etc.
- Security for the future: It will secure the financial needs of your loved ones in the long term, you will prevent a sale, which is otherwise limited to a maximum of your lifetime.
- Low costs and long-term value: Establishment and administration are simple, quick and inexpensive. Our experienced lawyers will guide you every step of the way. The price for a comprehensive establishment is around 50-75,000 CZK + VAT including notary and administrative fees and can be prepared within a week and transferred within a month (cadastral period of at least 21 days in the case of real estate, this is what we do most often).
Minor disadvantages:
- Sometimes complications of direct creditworthiness from banks as a sole proprietorship: By separating the property, you lose direct ownership in the eyes of bank, which bothers some banks if you want to use the property as base for collateral. Usually, however, the banks have not had a problem with this, only once.
- Minor administrative burden: It is necessary to keep accounts, file tax returns, but since you already know everything well and know that it is not a problem with an accountant, because you already have active companies, so it will not be a problem.
What to watch out for: Protection from creditors and abuse
Although the fund provides asset protection, this protection is not absolute. It can be breached in cases where the asset allocation was made with the intention of harming the creditor, e.g. just before the commencement of foreclosure. The law explicitly enshrines the joint and several liability of all participants - the trustee, the founder or the beneficiary - who participate in acts aimed at intentionally harming the rights of the founder’s creditor. However, it is not easy for a creditor to invoke such protection.
Creditors can also defend themselves by invoking the ineffectiveness of a legal act through the institute of the objectibility of legal acts (a type of action). If it was done with the intention of harming them, they must prove it. Therein lies the complexity for the creditor. Judicial practice is gradually defining the boundaries of the permissible use of a trust fund. Now playing in the favour of the trust fund.
In general, assets in a trust fund cannot be subject to executions, neither directed at the trustee nor at the beneficiary. The beneficiary can only be seized what you pay them from the trust fund. This protects the assets against the extravagance of descendants.
The same is true in insolvency.
Why contact specialists from ModerniPravnik.cz
Establishing a fund is a complex process. It requires professional legal and tax assistance. Before establishing it, it is necessary to carefully consider the goals and expectations of the fund. Realistically evaluate the cost-benefit ratio and carefully plan the fund structure and Statute. The key is choosing a suitable and trustworthy trustee. Come to us and we will prepare the best solution tailored to you, our reviews show our extensive experience.
Contact us! We will be happy to help you analyse your situation and to find the most effective solution for the protection and management of your assets, whether it is a trust fund or another suitable legal instrument.
Author: Mgr. Petr Uklein, attorney and Matěj Šedivý, legal trainee
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