Protecting the family fortune from both external and internal threats and passing it on safely to the next generation can often be the greatest challenge of all. How can one ensure the integrity of one’s family’s fortune even after death and prevent it from being divided into co-ownership shares?
How can the integrity of family assets be safeguarded?
Traditional instruments, such as a will or an inheritance agreement, often reach their limits (e.g. the rights of compulsory heirs or the obligation to leave one quarter of the estate unrestricted in the case of an inheritance agreement). One solution may be to place key assets (e.g. property, securities or shares in companies, etc.) into a trust or foundation, which may be a suitable alternative in some cases. Whilst between 2014 and 2016, trusts or endowment funds may have given the impression of being tools for concealing assets, today’s transparent Trust Register ensures a high degree of legitimacy for these structures.
Trusts as a flexible alternative to a will
One of the main pitfalls of a will is that, over time, it may no longer reflect the testator’s wishes as they stood at the end of their life, nor the current situation of their estate (e.g. the subsequent sale of a house that was included in the will). At the same time, it is important to note that the interpretation of a will itself depends entirely on the future interpretation of the notary who will handle the probate proceedings following the testator’s death. The interpretation of a will may also be superseded by an agreement amongst the heirs or by a court ruling which invalidates the will.
A trust or endowment fund, however, allows the terms of the future distribution of assets to be set whilst the settlor is still alive; by transferring assets into a trust or endowment fund, the assets cease to be the property of the settlor and, in the event of their death, do not form part of the probate proceedings (estate).
As a result, in practice, it is possible to decide freely and effectively on the future of the assets, regardless of compulsory heirs, and the obligation to set aside one quarter of the estate from distribution does not apply.
Assets placed in a trust or endowment fund may also be used by the settlor, provided this is specified in the statutes (e.g. for the purpose of taking residence in a property belonging to the trust, etc.). At the same time, the assets may be released to the beneficiaries only after the founder’s death, either gradually in the form of regular payments or even as a lump sum, subject to the fulfilment of conditions specified by the founder in the statutes (e.g. upon reaching the age of majority, after graduating from university, upon the birth of a child, etc.). Unlike a will, therefore, a trust or endowment fund is essentially a living entity that adapts to the settlor’s vision of a fair distribution of assets.
Protection against the fragmentation of assets and family disputes
A key advantage of a trust is the preservation of the unity of the assets. In a trust, the assets are not owned by individuals but by the trust itself (as an entity without legal personhood). This is critical in the case of shares in companies or property, where the division into small shares amongst multiple heirs could lead to the administration of the assets being paralysed or to the forced sale of the assets and the distribution of the proceeds amongst the heirs.
Properly drafted fund statutes can also protect the assets from risky investment activities by family members, and from the consequences of their divorces or enforcement proceedings. This is because the fund’s assets are separate from the personal assets of family members, which eliminates the risk that the family’s assets might be jeopardised.
Intergenerational planning
A trust is therefore not merely an entity similar to a commercial corporation, but can also be viewed as a means of targeted preparation of successors for the continued management and development of the family assets. It allows the settlor to make use of a unique ‘trial period’ during which, whilst still alive, they can observe how the beneficiaries perform in managing the assets and, on that basis, modify the final decision as to whether to retain the assets in the trust or sell them in the future.
From analysis to implementation
Setting up a trust is not merely an administrative act, but a process of strategic planning. When establishing a trust or endowment fund, the following procedure is recommended:
- Legal and tax analysis: Assessment of the structure of assets, family ties and tax implications both domestically and abroad.
- Drafting of the statutes: Precise definition of the rules governing the trust’s operation, and appointment of the trustee and beneficiaries.
- Transfer of assets to the trust and registration: Transfer of assets and registration in the Trust Register (or, where applicable, in the Commercial Register or the Land Registry).
Points to bear in mind
- Consistency in the wording of the statutes.
- Individual risks: The structure must reflect the specific circumstances of the family in question – the risk of marital breakdown among children, the health of family members or the impact of high-risk business ventures.
Source: Act No. 89/2012, the Civil Code; Act No. 37/2021, on the Register of Beneficial Owners
Author: Hana Marešová, Associate, Dispute Resolution, LYNX Czech Republic