Magical Squirrel Clouds

Much of the focus of my previous articles has been on highlighting some of the many positive uses of Czech Trusts.

I have also argued quite strongly against what seems to me to be the significant overreaction on the part of some sections of the media to a range of potential problems and ‘threats’ that the introduction of trusts created. These related to the areas of money laundering and other criminal uses to which trusts could, at least in theory, be put. Many years of experience from other justification show that in reality, even in jurisdictions which much higher levels of confidentiality than the Czech Republic, trusts are not used for these purposes. If you want to launder money, there are (unfortunately) still many other vehicles that are far more effective than trusts.

Having said that, even these illusory fears and concerns have now been effectively quashed by the Czech Republic’s decision to introduce a register of trusts. We see this as a very positive step which will help build acceptance of trusts as a legitimate and valuable tool for managing family assets.

However, there is one, somewhat more real, threat that nobody seems to have mentioned so far, and which the proposed changes do not address.

 

What’s the Problem?

One of the fundamental principles of trust law internationally is that every trust for private purposes requires beneficiaries. In most countries, something that pretends to be a trust, but which does not have a beneficiary, will be invalid. At the risk of over-simplifying some come complex legal

concepts, all property (including property held in a trust) has to ‘belong’ to somebody. For the beneficiaries of a trust, they have what we refer to in common law as an ‘equitable interest’ This means what while they don’t have control of the property now, they know that it is being managed for their benefit and will, one day, be received by some of them. It is these beneficences who have the right to supervise the actions of the Trustees and ensure that the trust is being managed in their interests.

One exception to this internationally accepted rule (possibly the only exception – at least as far as we are aware) is the Canadian province of Quebec, where the concept of a trust in their Civil Code is based on the idea that trust assets are a ‘separate patrimony’, and therefore technically don’t belong to anyone. Even so, when you create a trust in Quebec, you still need to have a beneficiary. This is made clear by Paragraph 1267 which says:

“A personal trust is constituted gratuitously for the purpose of securing a benefit for a determinate or determinable person.”

As you are probably aware, the Czech Civil Code is modelled very closely on the Quebec law – which has functioned successfully for more than 20 years. Looking at the other provisions in the Czech code which relate to beneficences, they appear to be almost identical to matching provisions in the Quebec code, yet for some reason (perhaps an oversight?) there is no Czech equivalent of Paragraph 1267.

 

What does this mean?

It means that in Czech, it seems to be theoretically possible to create a trust with no beneficiaries at all. All that is necessary in Czech law is some method for appointing beneficiaries, which during the lifetime of the founder could mean that the founder simply nominates beneficiaries ‘later’ – when he is ready to do so.

 

Why is this bad?

It means that a dishonest person can simply take assets, and like a squirrel, put then away into a magical ‘cloud’ where they stay without belonging to anyone, and even indeed without any specification of ‘potential’ owners. At some later time the founder can nominate someone (including potentially even himself) to receive the money. A great tool for defeating the claims of creditors? We think so – because it creates the ability for the founder to ‘give away’ his assets to nobody, to retain effective control during his lifetime to decide who gets them, and to give them back to himself whenever he wants.

I have no idea whether such a structure would stand up in court, but given that it seems to be specifically permitted by Czech law, I think it might.

From my perspective as someone with international experience, this seems fundamentally wrong, As I said earlier, to me, all property, even property in a trust, has to ‘belong’ to somebody.

What Czech law seems to allow is an asset pool that is established by the founder, controlled by the founder, without any person or group of people who should benefit, and with the ability of the founder to then in turn pass to property on to some unnamed third person (or even back to himself). I’m not sure what this thing is, or what it’s called, but at least in my opinion, it shouldn’t be called a trust, and ideally shouldn’t be allowed to exist at all.

Hopefully this flaw in the Czech law will be addressed in a future review of the code. All that’s needed is the addition of a few extra words, as found in the Quebec Code