The trust fund is slowly but surely becoming an established tool for asset management purposes, following in the footsteps of foreign trusts and trust-like entities that have long been popular. In the introductory article of this series, we will focus on defining the trust fund, the issue of its legal personality, actions on behalf of the fund, and the various types of trust funds.
What is a trust fund?
A trust fund can be defined, with reference to the relevant legal regulation,[1] as an entity without legal personality that is created by (i) the founder (or founders) setting aside assets from their exclusive ownership, (ii) appointing a trustee to manage the designated assets based on a contract or a testamentary disposition, who (iii) commits to managing the assets, and (iv) is bound by the predetermined purpose of the trust fund.[2]
A specific feature of the trust fund is primarily the absence of ownership rights for all involved parties (i.e., especially the founder, trustee, beneficiaries, and others) to the assets set aside into the trust fund and managed by the trustee.[3] The trustee, in accordance with the conditions and restrictions set by the trust deed, merely exercises ownership rights,[4] while simultaneously being obligated to act in accordance with the rules of due diligence, which primarily manifest through the duty to preserve and grow the core assets of the trust fund and to ensure the fulfillment of the purpose defined by the trust deed.
The key defining feature of a trust fund is its purpose, which can be either publicly beneficial or private.[5] While the purpose of a publicly beneficial trust fund is primarily to support and develop cultural, educational, scientific, religious, charitable, and similar activities, a private trust fund is usually established to support a specific person (the beneficiary). The beneficiary and other persons connected with the trust fund will be covered in a separate article within this series.
Legal Personality
A trust fund is not a legal entity but rather an entity without legal personality, meaning it lacks the capacity to hold rights and obligations within the legal system.[6] This gives trust funds in the Czech Republic a rather specific status and is one of the fundamental distinguishing features separating trust funds from foundations or endowment funds, which do have legal personality.
Legal personality is also not granted to the trust fund for the purposes of civil procedural law.[7] However, the trust fund holds a specific position under tax regulations, where it is granted so-called tax subjectivity by law.[8] A separate article will address the tax-related aspects in detail.
Acting on behalf of the trust fund
The trust fund itself does not have legal personality. However, this does not mean it cannot appear in legal relationships. The trust fund is represented by the trustee, and under the current legal framework, the only requirement placed on the trustee is legal capacity.[9] In practice, however, founders usually impose stricter requirements on the trustee, which are then defined in the trust deed (statute).[10] These requirements typically include a university degree, relevant professional experience, integrity, and a number of other qualifications.[11]
When acting on behalf of the trust fund, the trustee does not act as a representative, nor can their position be equated with that of a member of a corporate body.[12] The trustee acts in their own name but on account of the trust fund.
The trustee is entitled to full management of the trust fund’s assets pursuant to § 1456 in conjunction with § 1409 et seq. of the Civil Code. Without further restrictions, the trustee is thus authorized to manage the trust fund’s assets, alter their nature, and invest them. Even in this case, the founder may impose limitations on the trustee, for example by defining specific areas in which the trustee is authorized to invest. Similarly, it is not possible to completely exclude the trustee’s right to invest.[13] Except for specific cases, the trustee is also required to perform their duties personally, meaning they cannot fully delegate all actions to a third party.
The founder is entitled to set limits on the trustee’s actions within the framework of the trust deed. This stems from the principle of flexibility of the trust fund.[14] Typically, it is common for the founder to condition the trustee’s investments above a certain value on the consent of a protector or another optional “body.” However, when limiting the trustee’s actions, it is not possible for the restrictions to negate the essence of the trustee’s role.[15]
We often encounter the question of who should serve as the trustee. Ideally, it is recommended that the trustee be a person with experience in asset management. In the case of trust funds whose purpose is to manage family assets without further growing them, it may be more appropriate to appoint a family member or a close family acquaintance as the trustee.
For completeness, I add that in accordance with Section 65d letter f) of the Act on Public Registers of Legal Entities and Natural Persons, the manner of acting of trustees is also recorded in the register of trust funds. However, this issue will be discussed in detail in subsequent parts of this series.
Types of Trust Funds
Just as is the case abroad, the Czech legal framework also distinguishes several types of trust funds, with the different types mainly based on the purpose set and its modifications. Fundamentally, we distinguish trust funds for private purposes and those for public benefit.[16] In professional circles, there is also discussion about the possibility of combining these purposes. While some authors lean towards allowing such a combination,[17] others reject this possibility.[18] However, together with colleagues, we believe that in interpreting § 1449 of the Civil Code, priority should be given to the autonomy of will, thereby allowing the combination of public benefit and private purposes.[19]
Primarily in the case of private trust funds, we distinguish several basic types. These include:
Business trust funds, which primarily serve the purpose of generating profit through business activities, carried out mainly by the contributed business corporations and the appreciation of the managed assets.
Family trust funds, which are estimated to have the highest representation in the Czech Republic and primarily serve the purpose of managing family assets and facilitating their smooth intergenerational transfer.
Securing trust funds, which are established for the purpose of securing a debt or as a means to repay it. Recently, these have been mainly used in the context of development projects.
Investment trust funds, within the meaning of Act No. 240/2013 Coll., on investment companies and investment funds, represent a special type of trust funds characterized by a number of specifics. The founder of an investment trust fund can only be a qualified investor, and the trustee must hold a license issued by the Czech National Bank.
The trust fund represents one of the most effective tools for asset management, which has been introduced into the Czech legal system since 2014. Despite ongoing professional discussions, it can be concluded that a trust fund is not a legal entity and the law does not grant it legal personality. The trustee acts in their own name on behalf of the fund and is entrusted with so-called full asset management. The trust fund is characterized by significant flexibility, and generally, according to the purpose and its specifications, several types of trust funds are distinguished, primarily business, family, and securing trust funds. In the next part, we will take a closer look at the trust fund in an international context, its origin, and possible further development.
Author: Jakub Hollmann
Written for Právníprostor.cz.
