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News

Trusts – the Legal Rules and their Application in Practice

27.03.2017
Company: bnt attorneys-at-law s.r.o.

Trusts in the light of the amendment to the Civil Code, and their broad range of possible applications.

A trust is a special form of fiduciary asset management, incorporated in Czech law as a new institution by the new Civil Code and effective as of 1 January 2014. However, the fact that the relevant legal provisions provide only a barebone framework of rules, coupled with the lack of case law, has given rise to uncertainties of interpretation with respect to some of these statutory provisions.

The working principle of trusts is the separation of certain assets from the trust's creator's ("settlor's") property while they are still alive (or for the event of their death, in the case of a testamentary trust), such that they are no longer owned by the settlor but are instead managed by a fiduciary manager (the "trustee"), either for a specific purpose or for the benefit of specific persons (the "beneficiaries"). In other words, we are dealing with the administration of a set of assets which does not itself avail of legal personhood (i.e., the ability to retain rights or to be bound by obligations), with the trustee acting on the account of these assets. Conceptually, the trust comes closest to the foundation (though the latter does have legal personality).

The successful and smooth operation of the trust is crucially dependent on the choice of the trustee(s) whose duty it is to strive for the multiplication of the trust's property and its use for the welfare of the beneficiaries (or, as the case may be, for other purposes as per the trust deed), and to do so with the due care of a prudent businessperson; it is further dependent on setting proper conditions for distributions (payouts) from the trust and rules for the management of the trust's property, all of which lie in the hands of the settlor. The settlor is moreover in charge of exercising oversight over the trustee (alongside the beneficiary and possibly other specific "protectors").

A difference is being made between trusts that were created for private purposes and charitable trusts. The latter are being established to achieve public welfare e.g. by meeting scientific or cultural needs, and their primary purpose must not be the generation of profit, nor the operation of a business enterprise. All other trusts are considered private trusts. In practical terms, this differentiation between two kinds of trusts largely manifests itself in more or less stringent registration duties (see further below).

The trustee is entitled to remuneration for the management of the trust's property. In the absence of any explicit arrangement in this respect, it is assumed by law that the trustee is entitled to "customary remuneration" depending on the nature of their services. One should also keep in mind that the management of the trust's property is associated with certain expenses for which the trustee must be reimbursed (e.g. from the proceeds generated by the trust's property).

Thanks to its flexibility, trusts are used not only in the realm of business relations but also e.g. for private wealth management in families.

In other words, a trust may be created so as to ensure the preservation of wealth for a future generation who takes no part in managing the assets which form this wealth.

The creation of a trust may also be driven by an attempt to prevent the creditors of its participants from satisfying their claims from the assets spun out into the trust (given that the latter has technically speaking no owner). Note that specific distributions out of the separate trust property for the welfare of the beneficiaries may still be used to satisfy the claims of their creditors. At the same time, one should keep in mind that the Civil Code, and the Insolvency Act (within the ambit of insolvency procedures), may hamper the creation of a trust, in that these laws provide for the relative inoperativeness of legal transactions which hurt the interests of creditors.

As of the time of writing, the only registration duties of trusts concern the registration for taxes. However, effective as of 1 January 2018, trusts will become subject to mandatory registration under an amendment to the Civil Code (and related amendment to the Act on public registers of legal and natural persons), the objective of which is to improve the transparency of trusts. Under these new rules, the settlor and the trustee must in any case be registered; where a trust was created for private purposes, the beneficiaries must be registered as well. While the data of the beneficiary, the grantor, and other participants will not be disclosed without their consent, this data can still be made available to anyone who proves to have a legal interest in the information (i.e., typically, creditors).

This amendment obviously makes trusts somewhat less attractive, given that the anonymity previously granted to its participants forms part of its appeal.

 

Source:

Act No. 89/2012 Coll., the Civil Code; Act No. 304/2013 Coll., on public registers of legal and natural persons

Josková, L., Pěsna, L. Správa cizího majetku (Administration of Third-Party Property), Prague: Wolters

 

Lola Laštovičková, Advokát (attorney-at-law)
lola.lastovickova@bnt.eu
+420 222 929 301
bnt office Praha 1

Tags: Law |

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