“We have one of the most transparent legal frameworks for trusts in Europe. With the register of beneficial owners, we go further than traditional jurisdictions,” says Jakub Hollmann, a partner at our firm, in an interview for Právní rádce.
Trust funds were “popularized” in our country by Prime Minister Andrej Babiš and his decision to transfer the Agrofert holding into them. “Placing assets of officials or public administration functionaries into trust funds is a completely standard procedure,” says Jakub Hollmann, the youngest partner of the law firm Císař, Češka, Smutný advokát, about the prime minister’s approach. But the devil is often in the details. In the interview, he confirmed that the interest of entrepreneurs to protect assets from business risks and for relatives surged sharply last year due to the coronavirus crisis.
What kind of people come to you asking for help with setting up trust funds?
There are two types of clients: those who were afraid for their health and didn’t know what awaited us at the end or during the pandemic. They also wanted to prevent risks from disorganized assets. The second group was those who wanted to organize, structure, and protect assets they had gained through business. I dare say that last year’s crisis strengthened the Czech public’s awareness about what true values are, what assets are, and how they deserve protection. Many entrepreneurs were sidelined from their activities and faced considerable risks. Or they simply had time to think and asked many questions.
What is the basic purpose of trust funds?
Primarily, they enable peaceful intergenerational transfer of assets, their organization, and protection. Because in business you are often targeted, whether by alleged creditors or fake promissory note creditors. There are many types of economic attacks that can happen. Protecting assets through trust funds means you don’t want them to be affected by business risk. Another advantage is setting your own rules for inheritance purposes. Conflict of interest is also one of the reasons for establishing trust funds.
Speaking of risk diversification as one reason to establish a trust fund, what exactly does it protect me from?
Imagine you own, besides general essentials, real estate, a car, some inheritance, and you do business. If you do business through a company, you are liable for debts up to the unpaid share capital. If you do business as a sole trader, you are liable with all your assets. If you commit a crime during business in a company, your personal assets might also be at risk, and the liability up to unpaid share capital becomes just an illusion. There are many business risks, including alleged creditors or harassing insolvency petitions. These cases shook the Czech business scene in the past. Putting assets into a trust fund means legally separating those assets from yourself. The assets you are liable for are only those registered in your name. If the transfer is not for an illicit purpose, it has no causal link to business risk, and you protect assets for your family significantly.
When is it considered a transfer for illicit purpose?
When there is a causal link between committing a crime or an attempt to avoid some obligations, typically paying alimony, debts, or promissory note maturity. For example, if you intend to pay a debt and two or three years before you transfer assets into a trust fund, the creditor can claim relative invalidity of the transfer, and the court will usually agree.
Trust funds are not entirely new in Czech law, though they were forgotten during the previous regime…
Trust funds or their equivalents existed here since 1811, survived the First Republic, but were abolished by socialist civil codes. This causes great mistrust in the Czech public toward this tool since the new civil code revived it. In the first two years, funds were heavily criticized, even by Robert Pelikán, who stopped criticizing only after becoming Minister of Justice. On the other hand, he pushed for a tax amendment that enabled their operation.
So at first, they weren’t used much due to tax reasons? Only the 2016 amendment enabled them to work in Czech law?
The original proposal in the civil code was incomplete from the tax perspective. You need the structure of the trust fund to behave like a corporate holding, not to tax each asset transfer separately, which was the case originally.
Why are they gaining prominence only now?
Due to expropriation and totalitarianism, private property practically didn’t exist in the past. If it did, it had to be traceable so the party could take care of it. Then came the transformation in the 1990s, a wild privatization, and more than ever the saying “easy come, easy go” applied. People didn’t worry much about organizing their assets. Now, 30 years after the revolution, entrepreneurs have built assets and begin to think about organizing and intergenerational transfer within families.
So the inheritance system weakens, and people try to arrange assets during their lifetime?
Yes, because wills are easily challengeable. If you distribute assets by will among heirs and one isn’t happy, they can delay the inheritance process with various procedural obstacles. This forces other heirs to compromise. Putting assets into trust funds sets clear rules from the start, and there’s no discussion about changing these rules unless the founder explicitly agrees.
Can heirs influence what happens to the trust fund assets after the founder’s death?
Here, two legal cultures meet: Anglo-Saxon and continental. Anglo-Saxon law has a landmark case from the mid-19th century, Saunders vs. Vautier, allowing beneficiaries to change the trust terms unanimously. Czech law does not allow this, which I think is correct. The founder has the right to decide alone about their assets, which they acquired and multiplied, including how they are managed and distributed.
Is there a risk that trust funds undermine traditional inheritance law?
Trust funds actually provide much more freedom in deciding about assets and what happens after death. They stand alongside inheritance law but are the most flexible of inheritance tools. Even in the Anglo-Saxon world, you can disinherit compulsory heirs through them, respecting liberal ownership rights. If you establish a trust fund with all your assets during your lifetime, it’s not considered removing them from inheritance.
It’s not only inheritance; companies face succession issues too. Can trust funds help there?
This is common in family business succession, where the founder doesn’t yet trust the heir to run the company. They put the company into a trust fund, appoint one or two trustees who participate in management, and set exact conditions under which the heir will become the sole trustee and manage the company, or the company participation is canceled, and it operates outside the fund. It can be a transition phase until the heir gains education, experience, or fulfills other conditions set by the founder.
Practically, if I want to establish a trust fund, what do I need and how much will it cost?
Trust funds aren’t established on the first or second meeting. It requires trust between client and lawyer. Many companies offer quick setups, but risk causing more problems than benefits. The lawyer usually spends weeks or months understanding the reasons, family situation, business risks, problems, and vision for the future. Detailed asset knowledge isn’t always necessary; sometimes clients hide assets and add them later. Fees vary widely depending on complexity.
Does the state control what happens in trust funds? How much?
There are about 3,000 funds today. No public registry of assets held. The state accesses the founding deed listing the assets at fund creation, but often the assets aren’t fully listed because notaries’ fees depend on asset value. So minimal assets are listed initially and increased later. The state tracks real estate registered to trustees, vehicles, and other registered assets. Trust funds are not legal entities but are treated as such for accounting and tax purposes. Czech law is quite transparent here, even more than traditional trust jurisdictions. The current government aimed to improve the legal framework to address early criticism.
If I put assets into a trust fund, could I lose them or be defrauded?
Like any business, trust funds have risks, mainly due to the trustee’s broad powers in asset management and transactions. The trustee’s quality is crucial—morally and professionally. Future legislation will likely increase trustee requirements, qualifications, education, and liability insurance to minimize risks of misappropriation.
Why are smaller assets in trust funds less common? Is it because setup and management are complex and costly?
Simple asset structures allow simple arrangements, no big worries. More assets mean more complex structuring, ensuring assets generate income or at least hedge inflation. Today’s 30-year-olds often inherited assets, don’t know their value or significance, and don’t know how to manage them. Founders often establish funds for decades ahead because they don’t trust heirs in their 30s to manage the assets.
What if things don’t go as planned? Can I reclaim the assets?
Trust funds are flexible but limited by law, public order, and good morals. Founders can set a fund duration or keep options to intervene or terminate it every few years. But frequent founder intervention risks losing the protection status, as one must balance control and protection. If you don’t worry about control accusations, you can keep intervention rights or let trustees terminate the fund under conditions.
What development can we expect for trust funds?
I expect that, just like in Western countries, individual banking institutions will also adapt to establishing trust funds here. For banks, it is much easier to finance such structures. Even in our conditions, many banks routinely work with trust funds. They provide loans for business, real estate purchases, and even non-business purposes. Banks realize that business activities conducted through trust funds are not hidden or uncontrollable. On the contrary, imagine the owner of a company operating in industry, who is 70 years old, and the bank does not want to provide new financing for the next 10 or 15 years due to age. It forces him to do something with the business entity. The owner places the company into a trust fund, appoints a trustee, and his successors. The bank sees that the company has a future and grants the loan.
How do courts view trust funds? It is a relatively new institute, so have there been questions that had to be unified through case law?
There is no case law yet that would significantly modify or develop trust funds. However, it must be said that courts are very cautious when assessing disputes in funds, and it is advocacy that is very creative. If you find the right analogy from foreign regulations, courts can be persuaded and are willing to hear the original intent of the founder. We often have to refer to decisions of foreign courts that dealt with these issues because domestic court decisions are lacking. We are waiting for appellate decisions that would take a position on certain trust fund questions. A new legislative amendment is also inevitable. The position of the founder is too free in our Civil Code and will have to be modified, as it will not comply with European AML standards and conflict of interest issues.
Where to seek inspiration for changes?
The Czech regulation is mainly inspired by the Quebec law. I think that was not the happiest solution. Quebec is roughly half Anglo-Saxon and half continental law, whereas we are purely a continental legal system. From my point of view, it would be better to look to Liechtenstein, but mainly I believe we should accede to the Hague Trust Convention of 1985. It contains essential requirements and principles of trust functioning. It has long been shown that countries that joined and signed this convention have a functional national trust institute.
Regarding countries around us where trusts also exist, there are, for example, German Treuhands, which were established specifically for financial operations. In France, the beneficiary only has those rights assigned by the founder in the founding statute, and no others. This is a very limited possibility for the beneficiary to act towards the trustee and protect their interest in the trust fund.
Is it common worldwide that politicians use this institute upon taking office due to fears of conflicts of interest?
Placing assets of public officials or officials in public administration into trust funds is a completely standard matter. It should be said that although the Prime Minister’s motives were and are criticized, he followed a completely standardized path. If you look at the UK, Austria, or Liechtenstein, politicians entering public life there place assets into trust funds, and there is a whole range of legislation and ethical codes issued by national parliaments on how each politician should prevent conflicts of interest between their business activities and the performance of their office, with one recommendation being placing assets into a trust or trust fund.
After the holidays, you are preparing a series in the Legal Advisor focused on trust funds. What can our readers look forward to?
We want to introduce funds to the public from the perspective of their practical impact. The series should answer the most frequent questions clients bring and aims to provide a guide on how to establish a trust fund with minimal effort and maximum efficiency. For example, we will look closely at what you mentioned in your questions—how effective a trust fund is as a tool for asset protection, what data about funds is publicly available, and exactly where they must be registered. We will also focus on basic tax issues related to trust funds.
You are the youngest partner in AK CČS. Will trust funds continue to be among your specializations?
As a law firm, we represent seven of the ten largest companies in the Czech market in terms of tax payments to the state budget, and many clients, including large corporations, come to us with issues related to cultivating and organizing their assets. Trust funds are not an offer we do alongside lawyering—they are a direct part of it. Not only I, but also my colleagues respond to current developments not only in the financial sector but also in other industries where we must keep pace with the times and be experts in all respects. This opens a new range of specializations for us. This is related to the overall shift in the legal profession. The main change I see is that modern lawyering is and will be more about strategic and comprehensive advisory rather than merely producing opinions or analyses related to a single topic or expertise.
Author: Martin Drtina
