Passing on wealth without risk. Seven tips on how to protect family assets in a trust fund
22 \ 05 \ 2024
How to pass a business to the next generation and motivate them to take care of family assets? Set up a trust fund. The rules are entirely up to you — you can even require your heirs to attend church regularly.
“But don’t be sentimental, be purely pragmatic,” says Jakub Hollmann from CCS Premium Trust.
So how do you pragmatically build a strong and functioning trust fund?
“Lately, we are most often approached by people in their sixties who have spent decades building family wealth and are now facing the question of what to do next with their lifelong work. They don’t want to sell it but are looking for a way to spark their heirs’ interest in taking over,” says Jakub Hollmann, Chairman of the Board of CCS Premium Trust, a company specializing in trust fund services.
Trust funds are a strong motivator: the founder retains control over the allocated assets, family members can benefit from them, but at the same time the fund obliges them to follow the rules, and the assets are protected from wastefulness of descendants and other risks.
It is possible to protect a family business for several generations, and for family companies, trust funds can be an alternative to probate proceedings.
“In probate, a notary decides the fate of your assets — a person who knows nothing about you or your property and whose actions you cannot influence, as they decide according to certain rules. With trust funds, you don’t have to undergo such procedures,” notes Jakub Hollmann.
What advice does he give to those who decide to establish a trust fund?
Your assets, your rules
“Descendants often receive an apartment, a car, and a certain minimum financial standard; anything beyond that they must earn. If they want to benefit from the family assets, they have to work in the company, manage family real estate, or show proper respect to the founder,” explains Jakub Hollmann, outlining the basic framework of most trust funds.
As the founder of a trust fund, you can set any rules for family members that do not violate good morals, including seemingly quirky conditions, such as children attending Christmas Eve dinner or regularly going to church.
It is entirely up to them whether they fulfill these conditions, but their entitlement to distributions from the fund and access to the allocated assets depends on it.
If the founder reserves the right, the rules can be changed over time. “When establishing a fund, we advise clients to suppress emotions. Don’t be sentimental but pragmatic. When sitting down to set the rules, they shouldn’t be too specific because a situation that lasts six months may not be valid in ten years. The rules should be clear and balance specificity with abstraction,” recommends Hollmann.
Be the trustee of your fund
If you decide to place your company into a trust fund, you don’t need to fear any radical changes in how it operates — it can function just as before. A trust fund acts as a legal entity, with the same accounting, tax, and legal obligations.
“And the company will be a more trustworthy partner for banks or private investors because they will be assured of long-term stability and know there won’t be changes in ownership every few years, for example, due to inheritance proceedings,” adds Jakub Hollmann.
The trust fund is managed either by an independent person or, most often in the Czech Republic, by the founder themselves. Even for the founder, nothing radically changes — they just won’t oversee their assets as a private individual.
“The trustee must always act in accordance with the statute and cannot do anything contrary to its provisions. This differs from the statutory body in a business company, where the standard is to act with the care of a prudent manager. However, the care of a prudent manager can be interpreted quite broadly,” says the Chairman of the Board of CCS Premium Trust.
Establish the fund as early as possible
When to establish a trust fund? Right away, if possible. It doesn’t matter if you are 35 or 85 years old. If you have decided to place your assets into a fund and solve succession in the company, for example, it makes no sense to wait until circumstances force you to act. Timely resolved property relations also serve as prevention against future disputes.
Funds are suitable for everyone with assets over one million euros. Setting up the simplest structures takes around three months, while the more complex ones can take up to a year.
“Motivations vary. Some establish a trust fund for asset protection, others want to organize assets in case of unforeseen events, and some for the sake of ownership privacy,” adds Hollmann.
The fund must be tailor-made
In the last five years, the number of trust funds in the Czech Republic has roughly quadrupled. With growing interest, the number of advisory companies and template solutions has also increased. Always verify the advisor’s experience and avoid template solutions completely.
It is crucial that trust funds correspond to individual needs and are set up by an experienced lawyer or advisor.
“With poor establishment, many problems can arise—from excessive tax burden due to a lack of proper tax analysis, to asset freezing, or the inability to obtain bank financing due to an unsuitable structure,” describes typical pitfalls of template solutions Jakub Hollmann.
Although a poorly established fund is not an irreversible process, restructuring it is difficult and costly.
Set up the structure
Assets in a trust fund can include real estate, movable property, works of art, or securities. The fund can be established by a natural or legal person through documentation that defines the purpose, founder, trustee, and beneficiaries, and sets the duration of the fund.
The fund can complement a family holding as a secure “vault” protecting part of the assets and enabling their distribution to family members.
Consider all scenarios
When setting up a trust fund, think about all future situations that may arise, including potential disputes. The fund is established for decades and should be able to respond to changes in tax regimes, the need for extraordinary health care for any family member, and also how the family will develop across generations.
“Founders should also think about ensuring their comfort in retirement. The asset structure should take care of them automatically without requiring complicated instructions,” advises Jakub Hollmann.
Parallel security abroad
You can create a parallel foreign structure alongside the trust fund for unpredictable events such as war conflicts, political changes, tax regime shifts, or other circumstances.
“A parallel structure can hold no assets or activities. You pay only a fee, and if needed, you simply transfer assets to the foreign alternative,” explains Hollmann.
The conditions under which you can transfer and subsequently manage the assets should be governed by a so-called exit clause.
Choose the foreign alternative in countries with a stable legal environment. In most cases, this is a Liechtenstein foundation, whose setup is compatible with Czech law.
You can read the full article on Forbes.cz (May 22, 2024)
