How to protect and grow your assets using a trust in the Czech Republic

Trusts are becoming more and more common in the Czech Republic and can be an important tool for safeguarding personal and family wealth.

Expats.cz

Written by Expats.cz
Published on 23.06.2021 15:00 (updated on 24.06.2021)

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As a tool of wealth protection, or for securing assets and property for future generations, trusts have a lengthy history in anglophone countries. While trusts have existed in the Czech Republic since 1811, because the Communist government dismantled trust laws in 1964, it wasn't until the Czech Civil Code overhaul in 2014 that the current legal framework for the incorporation of trusts was implemented.

The provisions of the new Czech Civil Code related to trusts were modeled on those of Quebec, Canada, which, like the Czech Republic, is a civil law jurisdiction, like France or Switzerland, where codified statutes predominate as opposed to a common law jurisdiction, such as England and Wales where case law is of primary importance.

Trusts can still be a relatively misunderstood concept in countries that have a history of civil law. In fact, up until recently, under Czech law, courts did not recognize an instrument of trust, and as such individuals, Czech or foreign, living in the Czech Republic had to move their assets out of the country and form a trust elsewhere.

This is no longer the case and with a number of benefits of incorporating a trust – among them, protection against legal forfeiture, divorce, or inheritance – there's no better time to do so in the Czech Republic. However, before you proceed with doing so you'll need to take some important steps.

Determine which assets you want to be protected by a trust

A person can opt to put any sort of wealth they own into a trust. This includes not only money or financial wealth such as stocks and bonds. Properties, corporations, cars, land -- anything you can own can be put into a trust for any length of time: a trust can be incorporated for an unlimited time, a limited time, or until a certain condition, as set out by the founder of the trust is fulfilled.

Understand how a trust functions

Trusts protect wealth because the property in the trust doesn’t belong to anybody, and it can’t be claimed as someone’s personal assets. You can still make use of your home, control your company, or drive your car but once those assets are protected in a trust, nobody needs to know you own them.

This is because, in publicly available registries, records simply show that certain properties or corporations are owned by a trust.

The Trade Registry, for instance, shows a list of trusts. The public can only see information about the name of the trust and who is the trustee. No information about the founder, beneficiary, or assets is made public. This information is disclosed only to the authorities and the courts.

The wealth that is held in trust is still subject to taxation at a corporate income tax rate of 19 percent. If there is a property managed by the trust, there is property tax. For those having a car in trust, there is a road tax.

Appoint the key stakeholders for your trust

Asking yourself a series of questions will help determine who will play which roles in the execution of your trust. Who do you trust well enough to make your trustee? What conditions must the trustee follow? Who is the beneficiary? What conditions must the beneficiary meet? How shall the trustee take care of the assets? What if no beneficiary remains alive to benefit from the trust?

The founder of the trust is the person who puts his or her assets into the trust. The founder sets rules of the game, and the trustee and beneficiary play according to them. The founder chooses the first trustee and determines what the trustee shall do. The founder also sets rules for choosing other trustees so the trust can continue indefinitely.

The founder also sets the rules for beneficiaries as well and has broad powers in this regard. If the founder, a parent, for instance, establishes a condition that the beneficiary, a child, say, can benefit from the trust only if they have a university degree, are married for at least five years, and have two kids by 40, then the beneficiary must meet those conditions or has no right to any of the benefits secured in the trust.

The trustee takes full legal responsibility for the administration of the trust. They must follow the founder’s conditions and wishes and act as caretakers of all the properties in the trust.

They are allowed to take actions in the best interests of the beneficiaries (they can buy/sell properties, stocks, crypto, shares of companies, for instance) but cannot profit from the trust, although a trustee is generally paid a percentage from the assets depending on his or her level of responsibility and related work. Neither can a trustee be in conflict of interest (for instance, a trustee who owns a company cannot order services for the trust from that entity or sell personal property to the trust without proper evaluation).

The beneficiary has the easiest (and some would say best) role in the trust. They have no responsibility with regards to the legal matters surrounding the trust but can take advantage of the trust’s benefits. They must simply fulfill the conditions set by the founder.

Learn the many applications of a trust fund

Private pension fund – This is one of the more popular types of trust in the Czech Republic. Here founders can incorporate their trust as their private pension fund. The founder incorporates their own trust and transfers some funds there. During their active working life, they add more cash into trust to let the assets grow. When the founder retires, they start to receive monthly benefits from the trust. This trust can be transferred later to children so they can continue to increase their wealth.

Corporate trust – A trust can be incorporated by corporations as well as individuals. A Trust incorporated by a corporation can serve as a pension and social fund. Such a trust can pay an extra pension for retired employees. Another option can be paying extra benefits for employees for their work anniversary, for example reaching 10 years at the company, reaching 50 years or age, becoming an employee of the month, or any other condition set by the founder.  

Inheritances – In cases where multiple assets (properties all over the world, land, corporations, cash, cryptocurrencies) of different values are owned by a founder it might be difficult to split it fairly between multiple inheritors without the need to sell off the assets and transfer the cash. When assets are transferred to a trust, there is no such need. Beneficiaries can use all the benefits and needn't worry about losing any value. With trust, the founder can set his or her own rules for inheritance, meaning different rules can be established for each family member.

A trust also makes sense for grandparents who want don't get along with their children and wish to transfer wealth to a grandchild and leave the parent out of the equation or parents of a disabled child because the founder can set rules and parents needn't worry about what's going to happen to the family property if the disabled child can't look after it. A trust can also protect the family wealth from a child who might spend it recklessly by enabling a trustee to set conditions about what and how much the beneficiary can spend.

Seek legal help to develop the best strategy for your trust

Changes can be made to the trust based on the will of the founder and/or the consent of the beneficiary, but it's very complicated. When incorporating a trust you should have a clear plan of what the trust should do, and you should consider every possibility that can occur. The saying, “measure twice, cut once,” applies to setting up a trust. Any notary public is able to incorporate a trust for you. On the other hand, not every notary can explain all consequences related to a trust.

This article was written in cooperation with the Fivoka, an English-speaking firm that offers a number of services to foreigners and businesses in the Czech Republic. The firm can assist you with the establishment and incorporation of your own trust and/or company, as well as their corporate changes, and asset management. Read more about our partner content policies here.

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