Trusts have, of course, existed for hundreds of years – almost exclusively, at least until recently, as an Anglo-Saxon wealth-protection tool.
Their use is as valid today as it was back in the days of the Magna Carta. Nevertheless, trusts remain a little-understood concept in certain countries that have a history of civil law, as opposed to common law.
Until recently, under Czech law, the courts simply did not recognise a trust instrument. Instead, where a trust existed, they would work on the basis that the trustee was the trust property's full and beneficial owner.
Under these circumstances, individuals living in the Czech Republic who wished to make use of trust structures – whether of Czech nationality or foreign expatriates – have generally had to move their funds out of the country, to be invested in a trust formed elsewhere, such as in Jersey, the Isle of Man, or other jurisdictions.
All that’s changed, now. As reported, the Czech Republic's lawmakers have completely overhauled the country’s civil code – in what has been described as the largest and most significant reform of Czech civil law since the fall of Communism in 1989 – and in the process, they have enshrined the concept of trusts in Czech law.
Interestingly, the provisions of the new Czech Civil Code relating to trusts were modelled on those of Quebec, Canada, which, like the Czech Republic, is a civil law jurisdiction, like France or Switzerland (as opposed to a common law jurisdiction, such as England and Wales).
Basic facts of the new trusts regime
The tax regime for entry into the Czech Republic’s new trusts – along with the tax levied on the operation of such trusts, and distributions from them – compares favourably with that of, say, Czech corporate structures set up for the same purpose.
This, combined with a particularly generous inheritance tax regime, is likely to encourage a significant use of the new trust structure for succession planning.
Succession planning using trusts is particularly likely in cases involving the owners of family businesses set up in the Czech Republic in the aftermath of the so-called Velvet Revolution (in 1989), as the original entrepreneur founders begin to consider the best way to step back from the front line.
The structure is also expected to be utilised as a means of giving Czech investors greater access to various types of financial instruments that they otherwise would not have considered.
As is often the case with new legal structures anywhere in the world, there are some important questions about the Czech Republic’s new trusts law that have yet to be answered.
For example, Czech lawmakers have yet to decide how to permit a corporate trustee to manage a trust portfolio, rather than an individual. This will be clarified in future legislation, no doubt soon.
Second, the trust itself is by definition a free-standing, separate entity, and the property does not all vest in the trustee, so it is unclear how this will work in practice for matters outside the Czech Republic.
Third, the later involvement of the settlor in the trust after its creation is not fully addressed. However, since typically trusts are intended to continue to be functional even after the death of the settlor, we believe that trusts can properly contain mechanisms to replace trustees, and continue in line with their original purpose, as conditions change over time.
Fourth, and perhaps most important, it is unclear what practical problems will arise in Central Europe, once the actual usage of the new Czech Republic trust instrument fixes its boundaries before the courts and the market.
One thing is obvious even now, though. And that is the fact that the obtaining proper and integrated professional advice before embarking on any wealth-planning structure in the Czech Republic remains as important as ever.
Howard Chapman is a freelance solicitor (England & Wales) and registered European advocate (Czech Republic), living and practising in Prague since 2004. Petr Jakubec and Lars Klett are principal partners at the Prague law firm of Ueltzhöffer Klett Jakubec & Partnei . Jan Matejka is the owner of management consultancy HM Personal Progress. Czech Republic-based Christopher Lean is an associate of the Personal Finance Society and an IFA at Opes Fidelio, the new, overseas network arm of UK wealth manager Aisa.