Private trust funds and endowment funds are legal instruments under Czech law that have gained increased public attention in recent years. Particularly in connection with the growing importance of asset protection and wealth management. This applies both to “smaller” personal or family assets (such as family real estate) and to shares in large corporate groups. These fund-based structures allow for a sophisticated and comprehensive approach to the protection and administration of assets.
The desired solution typically involves not only effective shielding of assets from unforeseen adverse events that may affect the founder. But also ensuring the indivisibility of the assets and enabling their use by future generations. To the greatest extent possible in accordance with the founder’s intentions formed over a lifetime of wealth creation.
In order to choose the most appropriate solution for a specific case, it is essential to understand the key features of trusts and endowment funds. Although they may appear very similar at first glance, they are in fact distinct legal instruments. Below we therefore provide an overview of several fundamental aspects in which trust funds and endowment funds differ.
A trust fund may be established during the founder’s lifetime by setting aside assets and transferring them to a trustee under a trust deed. Or it may be created by way of a disposition mortis causa, upon the trustee’s acceptance of the assets into management.
Each trust must have its own trust deed (statute) governing the operation of the fund. This statute is issued by the founder in the form of a notarial deed.
The trust comes into existence upon its registration in the Register of Trust Funds. In the case of a trust established by disposition mortis causa upon the founder’s death.
An endowment fund is established by adopting a formation deed or by a disposition mortis causa. No prescribed statutory form is required for the formation deed. In addition to the formation deed, the endowment fund may also have statutes regulating its internal governance in greater detail.
The endowment fund always comes into existence upon its registration in a public register.
A trust fund is a pool of assets without legal personality. As such, it cannot itself acquire rights or incur obligations. All legal acts related to the trust fund are therefore carried out by the trustee or trustees. The trustees act in their own name but for the account of the trust fund. The manner in which the trustee represents the trust fund is governed by the trust deed.
Only a natural person may act as a trustee, including the founder or a beneficiary. However, in such cases at least one additional independent trustee must also be appointed.
In addition to the trustee, the trust deed may establish optional bodies such as a protector or a family council. These bodies most commonly perform supervisory or oversight functions.
By contrast, an endowment fund is a legal person with full legal personality. Its mandatory governing bodies are the board of directors and the supervisory board or a protector.
The law does not prescribe a minimum number of members of the board of directors, nor does it impose specific rules on representation or other limitations. As a result, members of the board may include legal entities, the founder, or even beneficiaries of the endowment fund. Unlike trust funds, there is no requirement for an additional independent person to be appointed in such cases. An exception applies to members of the supervisory body. They may not simultaneously serve on the board of directors due to an obvious conflict of interest.
The formation deed of an endowment fund may also establish additional bodies with specifically defined competencies.
The trust fund described in this article is a private trust fund. A private trust is designed as an instrument for the management of assets for the benefit of a specific persons. It may also be established exclusively for profit-generating purposes.
The precise definition of the trust fund’s purpose is always determined by the founder in the trust deed.
An endowment fund may be established for a socially or economically beneficial purpose. However, it cannot be established primarily for the purpose of generating profit. An endowment fund may therefore engage in business activities only as ancillary activities serving to support its principal purpose.
As a pool of assets without legal personality, a trust fund has no owner. Full authority over the management of the assets is vested in the trustees. They must act in accordance with the rules set out in the trust deed.
The initial assets are contributed by the founder, with no statutory minimum value required. Subsequently, any person may increase the assets of the trust fund by contributing property or financial resources. The contributor does not become a beneficiary and does not acquire any special rights merely as a result of the contribution.
Assets held in a trust may be invested and encumbered with third-party rights, unless such dealings are prohibited by the trust deed.
All assets of an endowment fund are owned directly by the endowment fund itself. The fund acquires its assets from contributions and donations made by the founder or third parties. No statutory minimum value applies to such contributions or donations.
Contributions and donations to an endowment fund do not, in themselves, give rise to any rights in relation to the endowment fund. Assets owned by an endowment fund may not be pledged or otherwise used to secure any debt. While such assets may be invested, any investment must always be prudent and careful.
The possibility of amending the trust deed has been the subject of significant debate since the trust fund was introduced into the Czech Civil Code. For several years, the prevailing view was that, except for court-ordered amendments, the trust deed could not be amended under any circumstances.
More recently, opinions have increasingly emphasized the private-law nature of trust funds and, consequently, the possibility of amending the trust deed. But only where such amendments are consistent with the founder’s original intent. In practice, this means that amendments may not amount to the adoption of an entirely new trust deed (so-called resettlement), nor may they change the purpose of the trust fund.
At the same time, the trust deed must expressly allow for amendments and should ideally set out the procedure for making them. This approach has now been confirmed by recent court decisions.
No comparable debate has arisen in relation to endowment funds, as both the formation deed and the statutes may generally be amended.
The founder may specify the scope of amendments that the founder alone may subsequently make, or may confer the authority to amend the formation deed on any body of the endowment fund. If the purpose of the endowment fund is to be changed, such a change must be expressly permitted in the formation deed or in the disposition mortis causa. Otherwise, a change of purpose is excluded.
Whether you are an individual seeking to protect family assets or an entrepreneur ensuring the continuity of your business, the proper structuring of asset management and protection is a crucial step towards safeguarding the long-term value and effective use of the wealth you have built over a lifetime.
Trust funds and endowment funds are not identical instruments. Each offers specific advantages as well as limitations that must be carefully considered when deciding which structure to adopt. To select the most suitable option for your particular situation, it is advisable to seek professional advice, in particular from legal and tax advisors.
