Early last year, we published an article on the topic of trust funds, specifically focusing on planned legislative changes. We explained the concept of a trust fund and outlined the requirements for appointment as a trust fund administrator. In this article, we will compare these requirements across selected legal systems.
Trust funds represent one of the models of asset management that is particularly popular abroad and has a firm place in foreign legal systems, where it is generally referred to as a “trust.”
The essence of trust funds is that the owner of the assets has the option to determine how their assets will be managed in the future. It is important to emphasize that current legislation does not provide for the possibility of establishing conditions for asset management in the event of the settlor’s death; therefore, the settlor has no legal means to ensure that his wishes and vision are upheld even after his death.
The trust fund, as a specific institution of asset management, is not regulated in the legal system of the Slovak Republic, despite the fact that certain legal regulations use this concept (e.g., the Act on the Automatic Exchange of Financial Account Information for Tax Administration Purposes).
We have already addressed the issue of trust funds in a previous article, focusing primarily on the connection between this institution and the issue of family business.
A trust fund represents a set of assets, such as business shares in a family business, that is set aside for a specific purpose and managed by a third party (trustee) for the benefit of a predetermined person (beneficiary). A trust fund allows the owner of the assets to determine how their assets will be managed in the future, thereby preserving the unity of the assets and preventing their division, while also ensuring that such assets are not subject to inheritance. The rules governing the management of assets in a trust fund are defined in the trust fund’s charter, which is binding on the trust fund administrator; the administrator is obligated to manage the assets exclusively in accordance with the charter. The charter can therefore clearly define who, in what manner, and to what extent will participate in the family business and enjoy the benefits arising from it. The charter can therefore be described as the most important document in establishing a trust fund; we therefore recommend consulting on its drafting, or, if necessary, entrust it directly to experts, particularly to eliminate any risks that could arise from an incorrectly or inadequately drafted charter and lead to financial losses or similar consequences.
Trust Funds under the Czech Civil Code
During the recodification of private law, the Czech Republic incorporated trust funds into Act No. 89/2012 Coll., the Civil Code (hereinafter the “Czech Civil Code”), which classifies them under property rights, specifically in the section on the administration of third-party property. Such classification is logical, as the administration of third-party property is the very essence of trust funds. The Czech legal regulation of trust funds is relatively extensive, with nearly 30 provisions dedicated to them, which legally regulate the very essence of trust funds, their functions, the administration of assets, and their dissolution.
Under Czech law, a trust fund is created by separating assets from the founder’s ownership such that the separated assets are entrusted, pursuant to a contract, to a trustee who is obligated to manage them properly. Importantly, the establishment of a trust fund simultaneously creates separate and independent ownership of the assets thus set aside. However, the assets in a trust fund are not owned by the founder, the trustee, or the beneficiaries. The Czech Civil Code also establishes minimum content requirements for the trust fund’s charter, stipulating that it must include at least a description of the assets constituting the trust fund, the purpose and conditions for distributions from the trust fund, as well as information regarding the duration of the trust fund and its trustees. Any natural person who is fully capable of performing legal acts may serve as a trustee. If so provided by law, a legal entity may also be designated as a trustee. After the trust is established, its settlor retains the right to supervise it; for example, the settlor has the right to challenge the validity of a legal act performed by the trustee or to request the court to remove the trustee and appoint a new one. The trust terminates upon the expiration of the term for which it was established or upon the achievement of its stated purpose. Another cause of termination is an agreement among the beneficiaries to dissolve it. Last but not least, a trust fund may be dissolved by a court decision. Upon the dissolution of the trust fund, the assets held therein vest in the beneficiary. If there is no beneficiary, the assets revert to the founder. The last resort is to transfer the assets to state ownership in cases where the assets cannot be transferred to either the beneficiary or the founder of the trust, for example, because they are no longer alive.
Trust Funds Under German Law
The German Civil Code, like the Slovak one, does not contain specific provisions on trust funds. Nevertheless, this institution is recognized under German law, specifically as “Truehand,” and is further developed through case law. A Truehand is established either for the benefit of the settlor or for the benefit of a third party. Thus, like a trust, a Truehand is an institution for the management of another’s property established by contract. It therefore has a contractual nature. German law distinguishes between open and hidden Truehands, with the fundamental difference being the preservation of anonymity of the parties in the case of a hidden Truehand.
Anglo-American Trust
The Anglo-American legal system uses the term “trust” to refer to trust funds, which represent a flexible legal framework for the management of third-party assets with a high degree of legal protection. The establishment of a trust results in the complete separation of the founder’s assets, and the assets in the trust constitute a separate estate managed by a trustee for the benefit of a third party (beneficiary). In contrast to German law, a trust is always established for the benefit of a third party, never for the benefit of its founder. The trustee is obligated to manage the property in accordance with the trust deed, which sets forth specific rules for the administration of the entrusted property and the manner of its disposition. Trusts are typically anonymous, as information regarding the settlor and the beneficiary is not publicly accessible. The only information available is the name of the trustee. An interesting fact is that by establishing a trust, it is possible to bypass mandatory heirs in the event of inheritance.
