Foundation and trust funds offer options for asset management, including within the family, when it comes to the so-called family funds. We will briefly summarize where we can find their legal regulation, when the funds are created and what their purpose is, as well as the differences between them. In particular, we will focus on the rights of beneficiaries, because their position is not as obvious and unequivocal as it may seem at first glance. An important role is played by founding legal proceedings, in which the founder defines their position. Beneficiaries generally have the right to the performance specified in the founding legal act. However, the problem arises as soon as the founding legal act is not sufficiently certain, as a conflict between the interests of the founder and the beneficiary may subsequently arise.
Endowment and trust funds in general
endowment fund
In theory, an endowment fund represents a legal entity, which ranks among foundation. The relevant legislation can be found in § 394 et seq. Act No. 89/2012 Coll., Civil Code (hereinafter "Civil Code"). The purpose of the endowment fund is socially or economically useful[1], but in accordance with the general rule stated in § 144 par. 1 of the Civil Code, it can also be established for a purely private purpose.[2]
When setting it up, you can choose from two options:
- writing down articles of incorporation a
- acquisition in case of death.[3]
However, the creation of the fund itself always occurs only on the day of registration in the foundation register.[4] The fund's assets consist of the founder's deposits and donations, and are not limited by any minimum amount.[5] Originally, the foundation fund was regulated by a separate law, but as a result of the recodification of private law, its regulation, as well as the regulation of the foundation, was taken over by the Civil Code. It was during the recodification that the rules for the use of foundations for non-public purposes were relaxed. Currently, one can observe the rise in popularity of endowment funds established for a private purpose, as we will show below.
Trust Fund
Unlike an endowment fund the trust fund is not a legal entity. The legal regulation can be found in § 1448 et seq. of the Civil Code. This fund can also be established for a private purpose (and in this case private use is the primary purpose of the given institute), when it serves for the benefit of a certain person or in his memory. However, it can also be established for the purpose of investing in order to achieve a profit to be distributed among the founders, beneficiaries and other persons.[6]
A trust fund is created by setting aside property from the founder's property.
He entrusts it to the administrator for a specific purpose:
- by contract, respectively by statute, or
- acquisition in case of death.[7]
Although it is not a legal entity, it must be emphasized that the property in the fund is not the property of the founder, administrator, or the person to be paid from the fund.[8] It is the so-called ownership without an owner (the property thus does not belong to a legal or natural person, but to its purpose), which is based on the Quebec fiduciary concept. Although this regime of separate ownership is common in France, for example, and the Quebec fiduciary is based on the French concept of ownership, this concept is foreign to our Central European legal environment, and that is why the implementation of a trust fund according to the Quebec model brings with it many difficulties.
Family Endowment Fund and Family Trust Fund
If the founder of the endowment fund so determines in the founding legal proceedings, all family members can easily become beneficiaries, i.e. the so-called family endowment fund. Of course, this option can be narrowed down to only some specific family members, or a condition can be added for the appointment of future beneficiaries, or the range of potential beneficiaries can be determined.
A similar case is in the case of a trust fund, when the founder specifies in the statute that family members will become beneficiaries, i.e. it will be a so-called family trust fund.
Za benefits these funds can be considered especially related to possible inheritance proceedings, when thanks to the foundation fund the founder does not have to worry about the fragmentation of the property among his heirs, and through them he will ensure the protection of property and the care of his family members in the future. These are far from the only advantages of their use, but for the purposes of this article we will not deal with them and refer to, for example, our earlier article on the topic of intergenerational transfer of property, where we dealt comprehensively with their use in family structures.
Beneficiaries of foundation and trust funds
Beneficiaries of the endowment fund
If we look in the section dedicated to foundations in the Civil Code, we find that it does not regulate the position of beneficiaries of foundation funds in any way. According to Professor Ronovská, the beneficiary of the foundation, i.e. the foundation fund, can be characterized as anyone, i.e natural or legal person who can have any economic benefit from the assets allocated to these structures.[9] For the position of the beneficiary, the will of the founder, which he will show in the founding legal proceedings, is pivotal.
However, the beneficiaries are never the owners of the assets allocated to the endowment funds. As their legal regulation is modest and thus apparently leaves a large degree of discretion to the founders when setting them up, in practice we often encounter using mechanisms well known to the Liechtenstein trust. In contrast to the domestic endowment fund, it is tailored directly to the management of family assets.
Beneficiaries of the trust
In § 1457 et seq. we can find an amendment to the Civil Code intended, i.e. beneficiaries from trust funds. He can be thoughtful both a natural person and a legal entity, even another trust fund.[10] An important document for the position of the beneficiary is the statute, as it determines the conditions under which the beneficiary will be paid from the trust fund, as well as the extent of the payment. However, they cannot be associated with the right to performance within the trust fund no obligations.[11] A change in the range of beneficiaries after the creation of the trust fund is possible under certain conditions, if the statute allows it, otherwise it applies the principle of permanence.
Several are granted to the premeditated by law defenders of rights, for example the right to refuse the relevant performance, respectively the law in § 1461 par. 2 of the Civil Code gives the possibility to waive the right by a statement made in the form of a public document. If thoughtful can be defined, he has the right to supervise the administration of the trust fund. However, he is not granted any real right to the property in the trust fund, his right to performance from the trust fund is exercised against the trustee. This is a special relative obligation sui generis, because there is no contractual relationship between the trustee and the beneficiary, nor is the trustee personally responsible for performance towards the beneficiary.[12]
Conflict of interests of the founder and the interests of the beneficiaries
Certain rules for beneficiaries in a trust
In order to at least partially prevent a conflict between the interests of the founder and the interests of the beneficiaries, the Civil Code introduces a so-called person in the case of a trust fund. trustee. The trust administrator can also be the founder of the trust fund or the beneficiary, subject to the fulfillment of general conditions, but in this case the trust fund must have another trustee and the administrators must legally act together.[13] In the case of dissatisfaction with the actions of the trustee, the founder, trustee or other person who has a legal interest in it can propose to the court that the trustee impose or prohibit certain actions, or that the court even remove the trustee or appoint a new one. The invalidity of legal actions by which the administrator damages the fund itself or the right of the beneficiary can also be invoked in court.[14] In the event that the administrator appoints and dismisses the founder, the above does not apply to the founder.
The law does not determine the boundary between the protection of the beneficiary and the protection of the founder's intention. The founder's legal meeting, in which the founder defines the purpose of the fund, is always key. In the event that, in accordance with the original intention, the purpose could be achieved or better benefited by changing the statute of the fund, the law states that the court will amend the statute.[15] The definition of the purpose itself in the founding legal proceedings is therefore key. Based on that, the court will determine whether the purpose can be achieved in another way. As a rule, there should be no changes to the conditions for performance from the trust fund, to a change in the beneficiaries or to a change in the circle of beneficiaries.[16]
An example can be given the beneficiary's right to performance. This arises under the conditions determined by the statute.[17] In case of non-fulfilment, the beneficiary can go to court. However, if the beneficiary's position, granted to him by the founding legal act, was weak (for example, in the case of so-called potential beneficiaries[18]), there is the aforementioned risk of subsequent conflicts with the founder. These can be prevented by a sufficiently specific and comprehensible designation of the beneficiary in the founding legal proceedings, so that there is as little room for doubt and diversity of interpretation as possible.
Status of beneficiaries in the endowment fund
Alone the position of the beneficiaries of foundation funds and the change in the founding legal act we do not find it in the subsection dedicated to endowment funds in the Civil Code. Also in this case, the founding legal act and the purpose defined in it play a key role. According to the Supreme Court is the founder of the foundation fund authorized to change the charter of the foundation fund (as for the purpose) to the extent and in the manner that he expressly reserved for himself in the founding document, under the (analogously applied) conditions set for the amendment of foundation charters, and that he is also entitled under the same conditions to reserve the right to issue and change the statute of the foundation fund, or the right to appoint and dismiss members of the board of directors and the auditor.[19]
Therefore, in this case, it is necessary to apply to the legal regulation regarding the change of founding legal proceedings analogy. Therefore, although the position of the beneficiaries of the foundation fund is not explicitly regulated by law, due to the extensive, almost unlimited discretion of the founder, it can be concluded that compared to a trust, their protection is minimal.
In the case of the trust fund, it is his the founder effectively loses the rights to the allocated property[20], while in the case of an endowment fund, it can later change even the very purpose of the fund, and therefore interfere with the rights of the beneficiaries at first sight without restrictions. Which is something that is unthinkable in the conditions of a fiduciary governed by the principle of immutability and continuity of status. However, of course, as long as the beneficiaries of the endowment fund are validly registered as beneficiaries in accordance with the charter, the performance to which they are entitled during this time are fully enforceable.
Inspiration from foreign legislation and a trust fund
The rule Saunders in Vautier
English law brings a different point of view to trust funds. The rule based on the case of Saunders v Vautier is one of the oldest principles English trust law, quite possibly the most important. It states that a devisee with an absolute claim to the trust property, who is an adult and self-righteous, may require the trustee to transfer the trust property to his person, notwithstanding any instructions of the settlor. The transfer also terminates the trust.[21]
The mentioned rule does not apply in our legal system, as the will of the founder is key for us, as well as the purpose of the fund. And it is not surprising, given the inspiration from the Quebec model.
Claflin Rule in Claflin
It could be said that the Czech concept of trust embodied in the arrangement of the trust fund is, as far as the position of the beneficiaries is concerned, much closer to American Trust. In the case of the American trust, a different rule based on the case there is stipulated Claflin at Claflin.[22] Paraphrased, the rule reads that the settlor's wishes prevail as long as they are consistent with the originally intended purpose for which the trust was established. The Czech version of this rule is crystallized primarily in the provisions of § 1469 par. 2 of the Civil Code, which deals with changes to the statute, which, given the strong institutionalization of the domestic trust fund, is far more appropriate (than the concept of a trust based on the rule Saunders in Vautier).
The position of the beneficiaries is thus far weaker, when the will of the founder is always crucial when establishing a trust fund. Although the inclination of the Czech regulation to this concept of trust is obvious, it nevertheless remains unspoken.
záver
Trust and endowment funds bring with them an interesting property management option, but they also have their pitfalls. These include, for example conflicts of interest between founders and beneficiaries. In the event that the beneficiary claims his right to performance in court, this right must be sufficiently specified in the founding legal proceedings and must always be in accordance with the intended purpose of the fund.
The trust fund statute is subject to the principle of immutability, i.e. after the creation of the fund, its change is only possible in borderline cases.
In the case of an endowment fund, the charter can be changed if the founder reserves this right for himself.
Recommendation
Complications associated with this issue can be avoided by sufficiently specifying both the purpose of the fund itself and the position of the beneficiaries in the founding legal proceedings. However, if the founders exercise sufficient diligence in their founding legal proceedings, then trust and foundation funds are sometimes a good opportunity for them to manage their property, especially if it concerns family funds. They can subsequently save many problems associated with the protection of family assets through structures using family trust or foundation funds.
Source: epravo.cz
Do you need advice on setting up a trust or foundation fund? Not sure what is best for your property? Contact us and we will advise you on everything!
JUDr. Ing. Jan Vych, attorney and partner
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[1] § 394 par. 1 of Act no. 89/2012 Coll., Civil Code.
[2] PETROV, Jan, VÍTISK, Michal, BERAN, Vladimír et al. Civil Code. 2nd edition (3rd update). § 394. Prague: CH Beck, 2024, marg. C. 6.
[3] § 395 of Act no. 89/2012 Coll., Civil Code.
[4] § 397 of Act no. 89/2012 Coll., Civil Code.
[5] § 398 of Act no. 89/2012 Coll., Civil Code.
[6] § 1449 par. 2 of Act no. 89/2012 Coll., Civil Code.
[7] § 1448 par. 1 of Act no. 89/2012 Coll., Civil Code.
[8] § 1448 par. 3 of Act no. 89/2012 Coll., Civil Code.
[9] RONOVSKÁ, Kateřina. Beneficiaries of foundations designed to manage family assets. Legal perspectives, 2021, no. 22, p. 763-768.
[10] SPÁČIL, KRÁLÍK et al. Civil Code III. Great comments. Real rights (§ 976-1474). 2021, 2nd edition, p.1530.
[11] SPÁČIL, KRÁLÍK et al. Civil Code III. Great comments. Real rights (§ 976-1474). 2021, 2nd edition, p.1563.
[12] SPÁČIL, KRÁLÍK et al. Civil Code III. Great comments. Real rights (§ 976-1474). 2021, 2nd edition, p.1531.
[13] § 1454 of Act no. 89/2012 Coll., Civil Code.
[14] § 1466 par. 1 of Act no. 89/2012 Coll., Civil Code.
[15] § 1469 par. 2 of Act no. 89/2012 Coll., Civil Code.
[16] PETROV, Jan, VÍTISK, Michal, BERAN, Vladimír et al. Civil Code. 2nd edition (3rd update). § 1469. Prague: CH Beck, 2024, marg. C. 9.
[17] § 1459 of Act no. 89/2012 Coll., Civil Code.
[18] Closer to the breakdown of beneficiaries, e.g. RONOVSKÁ, Kateřina. Beneficiaries of foundations designed to manage family assets. Legal perspectives, 2021, no. 22, p. 763-768.
[19] Resolution of the Supreme Court of 27.3.2018 March 29, file no. Stamp: 3225 Cdo 2016/XNUMX.
[20] If the founder were to acquire too broad discretionary powers for himself, then the question opens before us as to whether the trust fund was validly created at all, since the trust fund is created by the allocation of property with the simultaneous inherent exemption from any form of ownership right to it by another person, or rather the person of the founder . For more details, see J. Turk's article. Consequences of the influence of the founder on the management of assets allocated to the trust fund. Available at: epravo.cz.
[21] AMBRUZ, Vladimir. The Saunders Rule in Vautier and the Trust. in TICHÝ, Luboš (ed.). Trust fund and trust - their functioning in an international comparison. Publication of the Center for Legal Comparative Studies of the Faculty of Law of Charles University in Prague. Prague: Center for Comparative Legal Studies, Faculty of Law, Charles University, 2016. ISBN 978-80-87975-55-8, p. 60.
[22] Contrary. feeling. with. 64.
