Clients are increasingly trying to protect their assets, and interest in trust funds is growing.

With a bit of exaggeration, one could say that the Czech Republic is experiencing the longest period during which successful families have not been deprived of their assets. "Whenever a generation acquired assets in the past 100 years, a change in the political or economic situation usually caused them to lose it," says Jakub Hollmann, lawyer and partner at the law firm Císař, Češka, Smutný. Hollmann specializes in trust funds and the transfer of family wealth between generations.

“More than thirty years after the revolution, we are entering a phase where we again have a generation that has acquired wealth and is deciding how to manage it,” he says in an interview for HN. The basic question entrepreneurs face is whether to pass their business on to the next generation or to sell it. According to Hollmann, passing on a family business can be more challenging but may ensure the continuation of family tradition and preservation of values for the future.

Which path do your clients choose?

Increasingly, they try to keep the wealth within the family. When you have a successful company, you naturally receive very attractive offers for it. But you can also look at it differently — it probably also provides you with good profits, meaning you have the financial means for a very comfortable life. Selling will certainly get you more money, but what will you do with it? Your everyday life will not improve dramatically. Of course, you can buy more assets that generate income, but with that comes more responsibilities. Or you will simply have the money in your account and spend it. Owning a successful business is also associated with a certain social prestige and recognition, which a client might lose by selling. Simply owning wealth does not automatically make someone personally interesting in society.

Another thing is that successful entrepreneurs were used to running the company day-to-day for about 30 years or at least overseeing it from the supervisory board. After selling, they realize, somewhat exaggeratedly, that they have nowhere to get up for in the morning. No one calls or writes to them all day asking them to participate in running the company. It is clear from these clients that it does not matter if they are 60, 70, or 75 years old — they quickly start to miss their work life. This is also a common example showing that entrepreneurs do not always care only about money but have connected their lives with a company that carries their values and often their name.

All this leads to greater client interest in how to set up wealth management for future generations. Logically, there is growing interest in trust and foundation funds, which are institutions created or adapted precisely for managing wealth.

Trust funds have been part of Czech legislation for about ten years. How would you evaluate this period?

From the start, when trust funds were being introduced into the Civil Code, I believed there would be interest. That is why our law firm began working in this area. In the early years, I would say from 2014 to 2018, the term “trust fund” evoked ideas of opaque structures for people. We encountered distrust towards this institution. Once this was overcome, people often said trust funds were only for the wealthy. Even this perception is changing. The clients coming to us are far from only large entrepreneurs.

Who are your clients then?

Their range is really broad, and this is one of the things that surprised me the most in the past ten years — trust and foundation funds do not attract only one segment of society. They include families with relatively small businesses whose goal is to both preserve the family business and establish basic rules and philosophy for future generations. These are people living their productive years and working based on their own philosophy, which they want to pass along with their wealth to the family.

Then there are clients who inherited or restituted property and do not want to divide it.

And we must not forget entrepreneurs who are still before or at the peak of their careers and realize that through trust or foundation funds they can consolidate their wealth in a way that allows them, for example, to limit certain business risks and thus be bolder in their business.

On the other hand: why not sell the company and divide the money among the family?

Yes, that may sound simple and tempting. From another perspective, however, such money can be a burden. You get a certain amount of money for your company that you pass to the next generation, but what you cannot pass this way are the intangible things: how hard it was to get to this stage, how much care, effort, energy, sacrifice, and nerves went into your wealth. “Simple” money from a sale often spoils promising young lives because the incoming generation lacks motivation to achieve something on their own. Loss of motivation and life without ambition remain small problems, but we all know distorted fates caused by wealth. A properly set trust or foundation fund, on the other hand, keeps the family motivated to develop and succeed in the family business, benefiting the whole family.

What are the most common requests from clients?

The basic request is usually to “get things in order.” The company, which is the driving force for the client, is usually in order, but clients often acquire various things with dividends or business income, including investments. These are usually somewhat messy and unorganized. Private wealth is scattered in many places. There are assets requiring passwords or electronic keys, and only the clients know what they are and where they are stored.

So clients most often say, “I have a business, I have some private assets, and I want to organize things so that if something happens to me, it will be clear what happens to my wealth, how it should be managed, and who should manage it.” And this does not necessarily mean the end of life. Even an injury that incapacitates a person for two or three months can cause huge problems in managing wealth and running a company.

And what about motivating the next generation to go into business?

This is usually the second most common request. To show them that the path is not yet worn, just “pre-worn,” and it’s up to them whether they want to take over the family business. When we establish trust or foundation funds, the whole family or the circle of beneficiaries is always involved, from small children to adults. Children then begin to perceive that there are other family rules besides “parents are to be obeyed.” They very quickly realize they are part of the family business and don’t even consider doing something else. Sometimes children do not want to take over the company management. But the fund allows you to give the possibility to return to managing the company in later generations, even great-grandchildren.

To what extent is your work legal and to what extent psychological?

Psychology obviously plays an important role. You have to gain the client’s trust that you are a partner in managing their wealth and understand the problem they face. You must explain that there is a solution involving organizing and setting internal rules. You must show that there are several options but recommend the most suitable one. Legal setup is naturally fundamental.

Can you use model schemes, or is each case individual?

We have many cases behind us, so we can create models for the most common situations and then tailor them.

Returning to the potential benefits of selling wealth. Selling can prevent family disputes about who will take over and manage the company…

Yes, disputes between siblings over company management are common. The founder was usually one person with the final say. But if two descendants must decide, problems can arise. It doesn’t matter whether the company or a family cottage is being passed on. An external element like partners or spouses can add to the emotional mess that is almost unsolvable. That is why trust funds and other structures exist to prevent disputes among heirs. But the situation must be addressed before the family is already quarrelling.

What usually prevents the family from falling apart over company management?

It always depends on how the founder sets the rules. Often trust funds address how other persons outside the direct line join the family. Also, funds don’t allow much room for quarrels or confrontational dialogue among descendants because the founder sets clear rules in advance. There is no space for debating new rules. Not everyone likes this, but usually, rules are set to motivate cooperation and company development, with clear competencies. The founder can change rules anytime.

Do you succeed in convincing clients to put all rules on paper? Do they write something like a family constitution?

During fund establishment, we prepare additional documents according to needs and goals alongside obligatory documents. Examples include wish lists specifying the founder’s interests or family constitutions. These are usually prepared for funds involving the whole family, aiming to preserve and track family values across generations.

Can it be said that entrepreneurial families and clans are just forming in the Czech Republic now?

Yes, as we said earlier. Our society lacks awareness that family also has a wealth dimension and it is important to keep it together and strengthen it based on shared values. For companies not affected by violent property confiscation, this situation is normal.

How many trust funds exist in the Czech Republic now? What about future trends?

Currently, about five thousand, with the biggest growth in the last three years. The trend is clear; in the next five years, the number could double to ten thousand.

Looking at Europe, the Czech Republic is one of the few countries regulating trust and foundation funds for private purposes, which is positive and may attract foreign clients. Such funds also exist in the UK, France, Switzerland, and Liechtenstein.

Why the increased interest in the last three years? Covid, the tragic death of Petr Kellner?

Both unfortunate events made people reflect on whether their affairs are in order. Covid forced reflection, especially for older, more vulnerable people staying at home. The tragic death of Petr Kellner showed that unexpected situations can occur without everyone being prepared.

Another reason increasing interest is protecting the next generation and beneficiary anonymity. If you transfer wealth by will or gift agreement today, it appears in public registers like the land registry or commercial register. Some clients wanted to prevent their children or grandchildren from encountering partners interested only in their wealth. There are now programs that easily scan public registers and reveal who owns what.

Who do clients usually appoint as fund administrators? Someone external or from their close circle?

Often the founder themselves or someone close, like long-time trusted company staff such as CFO or lawyer. For larger companies and assets, a collective of professional managers plus someone close is typical. Sometimes a single administrator suffices; for significant matters, unanimous decisions may be required.

Our company acts as administrator in some funds but more often as protector, similar to a supervisory board. The protector must confirm important decisions and bears final legal and financial responsibility. If the administrator or protector acts against the law or founder’s terms, they are liable. Thus, these roles require experts who understand their responsibilities. This assures founders and beneficiaries that the fund is managed professionally with due care.

How many trust funds has your company helped establish?

There is a difference between how many funds we have established from scratch and how many we provide legal or consulting services to. We have set up about 60 funds from the start. We provide ongoing legal and advisory services to over 200 funds.

What are the main differences between a trust fund and a foundation fund?

A trust fund offers greater flexibility in its setup and a higher degree of anonymity for the beneficiaries. It is also less demanding in terms of required professionals in its governing bodies since it only needs one administrator, whereas a foundation fund must have a board of at least three members.

On the other hand, a foundation fund has legal personality, so it is recognized as a standard legal entity. This is not the case for a trust fund. Therefore, if you plan to place real estate abroad into the entity, we would recommend a foundation fund. If the institution is mainly intended for managing your family wealth, especially within the Czech Republic, then a trust fund would be preferable.

Of course, this choice does not have to be final — one institution can be transformed into the other and vice versa.

Published in Hospodářských novinách on August 14, 2023

Author: Milan Mikulka