“Recently, we have been most often sought out by people in their sixties who have spent decades building up their family fortune and are facing the question of how to proceed with their life’s work. They don’t want to sell it, but are looking for a way to get their offspring interested in taking over the reins,” says Jakub Hollmann, chairman of the board of CCS Premium Trust, which specialises in trust services. Trusts in particular are a powerful motivator; the settlor retains control of the earmarked assets, family members can benefit from them, but the trust also obliges them to follow the rules and the assets are protected from descendants’ profligacy and other risks. It is possible to protect a family business over several generations, and for family businesses, trusts can be an alternative to probate. “In it, the fate of your assets is decided by a notary, a person who knows nothing about you or your assets and whose actions you cannot influence because he or she decides according to certain rules. With trusts, there is no need to take such steps,” says Jakub Hollmann. What is his advice to those who decide to set up a trust fund?
1. Your property, your rules
“Descendants are often given an apartment, a car and a certain minimum financial standard, but anything more than that they have to earn. If they want to benefit from the family estate, they must work in a company, manage the family property or show due respect to the founder,” says Jakub Hollmann, who describes the basic framework of most trusts. As the settlor of a trust, you can set any rules for family members that don’t conflict with good morals, including seemingly quaint conditions such as children attending Christmas dinner or going to church regularly. It is entirely up to them to meet the conditions, but the benefits of the fund and access to the earmarked assets depend on it. If the founder reserves the right to do so, they can change the rules over time. “When setting up a fund, we advise clients to suppress emotions. They should not be sentimental, but pragmatic. When they sit over a piece of paper and set the rules, they should not be too specific because a situation that lasts six months may not be valid in ten years. The rules should be clear and there should be a balance between concreteness and abstractness,” Hollmann recommends.
2. Be the manager of your fund
If you decide to put your company into a trust, you don’t have to worry about anything radically changing, it can continue to operate as before. The trust operates as a legal entity, has the same accounting and the same tax and legal obligations. “And the company will be a more trustworthy partner for banks or private investors, because they will have the certainty of long-term stability and will know that there will not be a change of owners every few years, for example due to inheritance proceedings,” adds Jakub Hollmann. A trust fund is managed either by an independent person or, in the Czech Republic, most often by the founder himself. Nothing radically changes for him at that point either, he just won’t be overseeing his assets from the position of a natural person. “The trustee must always act in accordance with the statute and cannot do anything that is contrary to its wording. This is different from a statutory body in a company where the rule is to act with due care. However, due diligence can be interpreted quite expansively,” says the chairman of the board of CCS Premium Trust.
3. Establish the fund as soon as possible
When to set up a trust fund? Right away. It doesn’t matter if you’re 35 or 85. If you’ve decided to put assets into a trust to deal with, for example, succession in your company, there’s no point in waiting for circumstances to force you to do so. Early resolution of property relations also acts as a prevention of later disputes. The funds are suitable for anyone with assets of over one million euros; the simplest structures take around three months to set up, complex ones take a year. “The motivations are different. Someone sets up a trust for asset protection, someone wants to have assets organised in case of an unforeseen event, another wants to organise it for discretion of ownership,” Hollmann adds.
4. The fund must be tailored
Over the last five years, the number of trust funds in the Czech Republic has roughly quadrupled.With the growth of interest, the number of consulting companies and template solutions is also increasing. Always check the experience of the adviser and avoid templates altogether. With trusts, it is essential that they meet individual needs and are set up by an experienced lawyer or adviser. “If set up incorrectly, a number of problems can arise, from excessive tax burdens due to a failure to carry out a proper tax analysis, to the blocking of assets, to the inability to use bank financing if an inappropriate structure is chosen,” says Jakub Hollmann, describing the typical pitfalls of template solutions. While a bad fund set-up is not an irreversible process, redesigning the structure is challenging and expensive.
5. Set the structure
The assets in the trust may include real estate as well as movable property, works of art or securities. It may be established by a natural or legal person through documentation which then defines the purpose, settlor, trustee and beneficiaries and sets out the period for which the trust is to exist. The fund can be an adjunct to a family holding company as a safe “vault” that protects a portion of the assets and allows them to be distributed to family members.
6. Think of all scenarios
When setting up a trust, think about all future situations that may arise. Including potential disputes. A trust is set up for decades and should be able to respond to changes in tax treatment, the need for emergency health care for anyone in the family, and how the family will evolve generationally. “Founders should also think about providing for their comfort in retirement. The asset structure should take care of them automatically, without having to demanding instructions,” advises Jakub Hollmann.
7. Parallel security abroad
You can create a parallel offshore structure to the trust in case of unforeseen events such as war, changes in political arrangements, tax regimes or other circumstances. “The parallel structure can be assetless, activityless. You only pay a fee for it and just transfer the assets to the foreign alternative if necessary,” Hollmann describes. The conditions under which you will be able to transfer the assets and then manage them should be addressed by a so-called exit clause. Choose a foreign alternative in countries with a stable legal environment. In most cases, this is the Liechtenstein foundation, whose set-up is compatible with Czech law.
Read the full article on Forbes.cz (22. 5. 2024)
