TRUST FUND FORMATION

A trust fund is a legal tool that has been available for use in the Czech Republic again since 2014, whereas abroad trust funds (trusts) are well known and popular. All such funds have the same basis – they are an entity without legal personality. In other words, they are a set of ownerless assets segregated for a particular purpose for the benefit of third parties.

Interestingly, under the law, during the fund's existence the segregated assets belong to no one. This is one of the most important reasons why it is advantageous to set one up.

With every trust fund there are at least three people involved (sometimes three groups of people). If we understand what they do, we can understand how a trust fund works.

The first person sets up the fund, into which they segregate assets. This person is called the settlor. Once they segregate the assets into the fund, they cease to be the owner. The assets therefore do not become part of their estate, and they set their own rules in relation to these assets.

Another person one day receives the assets. Either they benefit from them gradually or acquire them all at once. This person is called the beneficiary. They may then acquire the assets when a set time comes or after fulfilling the conditions the settlor determined upon formation.

A third person looks after the segregated assets in the meantime. This person is called the trustee. They follow the rules the settlor set and act in accordance with the purpose of the fund and in the best interests of the beneficiaries. During the fund's existence, the segregated assets are registered in the trustee's name, but these assets do not belong to the trustee.

• If you have children from a previous relationship, then setting up this fund is particularly recommended
• You wish to pass assets to your grandchildren, while not wanting your children to receive them
• You wish to set aside money so that grandchildren can go and study at a better university
• You do business and wish to protect your assets from the risks that may arise from this activity (e.g. bankruptcy) or from possible future personal risks (e.g. divorce)
• You wish for your assets to pass to your children in the future, but for some reason you don't want to simply hand them over – e.g. because they have a problematic partner or a limited ability to manage money (gambling, mental disability, etc.)
• You have built a family business and feel that your children will not be the best managers, yet you still want them to draw benefits as if they were the owners of the company
• You want to decide yourself how your assets are dealt with after your death and gain the certainty that the decisions you made cannot be challenged
• You wish to avoid future unwelcome changes in the area of inheritance taxes (currently the 4% tax is not applied to immovable property placed into the fund)
• You wish to set up a fund that bears your name, from which scholarships or similar awards would be paid, e.g. in your home town, at the school you attended, etc.
• You are a group of people who share an interest (a construction investment, a racehorse, a weekend house) and are looking for a simple and financially undemanding structure to manage it

Martin is an entrepreneur who runs a working-at-heights business. One of his workers is seriously injured at work and their family sues him. The court eventually rules that Martin did not train his worker adequately on occupational safety and thereby breached the duty of care of a prudent manager. Martin is therefore ordered to pay for long-term treatment and the damage caused.

Although Martin was insured against such a risk, the money from the policy is not enough for him and he will be forced to sell the family house in which he lives with his partner and children in order to pay for everything.

How could Martin have prevented the loss of the house? Note that this does not free him from the obligation to pay for the damage, but he could have kept a roof over his head. If he had, in good time (that is, when things were going well and nothing was happening), set up a trust fund and placed the house into it with the intention of preserving it for the benefit of his family, then it would no longer have belonged to him. And he could not have lost it.

In such a case Martin would have had to appoint a trustee (e.g. an independent lawyer or a friend), for whom he would set the rules on how they may deal with the assets in the fund. There can be more than one trustee; it is recommended to have at least two appointed. The trustee is the person who will be responsible for the assets in the fund, but does not become their owner.

The trustee's task would be to manage the assets for the benefit of the beneficiaries, which would be Martin's wife and children, or his grandchildren. At the moment when Martin's worker was seriously injured and the court ordered him to pay for the damage, Martin would still be obliged to pay the money, but the house would not be affected in any way, because the house would no longer belong to Martin. He would have no access to it, and a third party therefore could not demand that it be sold.

Jiří is a successful 52-year-old entrepreneur who has two children with his wife. At present, however, he lives with a new girlfriend, with whom he has a daughter. He never divorced his wife, though, and she cannot stand Jiří's new partner. Jiří dies unexpectedly of a heart attack.

The survivors have a problem. His legal heirs are all the children from both relationships and his wife. The current partner has no claim to a share of the inheritance. The inheritance will therefore need to be divided into 4 parts (the wife and 3 children). This will cause problems for Jiří's partner, and she will very likely have to sell their current home and pay out to the wife and her children the assets to which they have a legal claim. It is almost certain they will not avoid conflict.

How could Jiří have protected his current partner, secured her a peaceful home and funds, and at the same time fairly provided for all his children?

A simple solution would have been a trust fund in which Jiří was the settlor. During his lifetime he could at the same time have been the trustee, but he would still have needed at least one more independent person alongside him. The beneficiaries would have been all his current (and future) children and his current partner. He would have set the rules in such a way that his partner could live in their house and have enough money available. The children would be supported in their studies or other activities and one day the entire assets could be divided among them proportionally.