Memoranda of Wishes – What are they and how do they work?

If you have a trust, or are setting up a trust, it is important to understand a little about what a Memorandum of Wishes (a MoW) is, and how to create one.

In order to explain what a MoW is, it’s helpful to start with a hypothetical situation:

Honza is the founder of a family trust which he is establishing for the benefit of his children and grandchildren. He will place his house in the trust. Among the things Honza wants the trust to do is:

• Never sell the house, and
• Pay 33% of the money to his daughter Jana, but only if she gets married and has been drug free for five years or more. If she continues to take drugs the money should go to his other children/grandchildren

Objectives like this are typical of the kind of things our clients want.

When we are faced with requirements like this, we advise clients that they have a choice. They can enshrine their requirements in the trust documents as fixed rules, or alternatively they can set them out as strong ‘guidelines’ in their MoW. In most cases, the trustees of a discretionary trust are given very wide powers to do things like invest the trust assets, distribute money, sell property and so on. We generally encourage our clients to give their trustees this higher level of flexibility for a number of reasons. Most important is that things change. Families evolve over time.

In Honza’s case, he could set out the conditions related to the house and Jana in the Trust Statute. If he does this then:

• The wishes become ‘fixed’ – meaning even Honza cannot change his mind later
• The trustees will be absolutely bound to comply with the conditions, even if doing so would be stupid. Remember that a trust can last 100 years. So an instruction never to sell a house, which might seem sensible today, but may not look so clever in 70 years. In such a situation, the trustees will either be forced to do the ‘stupid thing’ or alternatively go through a very expensive and time consuming legal process to seek approval from the courts to do something else
• Because his conditions about Jana will be in the Trust Statue, they will be potentially visible to Jana, to Honza’s other children, his grandchildren and in some cases also to the general public.

 

Sometimes putting things like this in the trust statute is the right thing, but in most cases, and certainly in Honza’s case, we would advise against doing this and instead recommend he give his trustees discretionary powers and a MoW.

Even if some things are fixed in the Trust Statue, clients may still wish to provide a MoW to give guidance to trustees in relation to the things that are not fixed – for example investment policies.

 

What is a MoW?

A MoW is a written expression of what Honza would like the trustees to do. It is not a formal legal document and can be changed by Honza at any time simply by writing a letter to his trustees. It remains in force even after Honza is dead.

What’s important to note about a MoW is that it is binding, but not totally binding, on the trustees. They are required to respect it, but in the end, and more importantly, they are absolutely bound to act consistently with the objectives of the trust, in the interests of the beneficiaries, and exercising due managerial care and responsibility.

When these things and the MoW conflict, then the trustees have to power – after carefully considering their options – and fully recording their justification – to do something other than is set out in the MoW. This does of course open up a small risk that the trustees might, after Honza is dead, do something that he would not have wanted. But remember that the trustees are bound by their duties above, and must always have a good, and justified reason for departing from the MoW. In most cases, this small loss of certainty is more than compensated for by the extra flexibility and confidentiality achieved as a result.
In Honza’s case, if he puts his wishes in a MoW;

• he can change his MoW whenever he wants – simply by writing a letter to his trustees (a legal document is not required)
• the MOW is confidential. It is not a public document and will not be visible to family members or to anyone else unless the trustees need to produce it in court to justify their actions

Creating a MoW

 

As we mentioned above, a MoW is not legally binding upon the trustee. The purpose is to provide guidance to the trustees to assist their decision making.
Anything that is not covered in the MoW is left to the discretion of the trustees.

There is no prescribed form to a memorandum of wishes and they can be as short or as detailed as you want. In more complex cases, we are happy to work with clients to review and prepare their MoWs; we can ensure that all important points are covered, and that the MoW is workable. At minimum, the MoW should explain who actually gets the money, when and under what conditions and also deal with issues such as what happens if one of the beneficiaries has died. We can also offer clients some ‘template’ MoWs which cover the important points and which can be used as a basis for developing their own.

 

Departing from a MoW

In practice, the trustees cannot depart from the MoW while Honza is alive.

If, after Honza is dead, the trustees want to do something that is not consistent with the MoW they must:

• Physically meet, in person, to discuss this decision. Departing from a MoW is one of the things that is classified as a ‘Momentous Decision’. From international experience, we know that momentous decisions can only be made in a personal meeting of trustees. To depart from the MoW, the alternative must not simply be ‘better’. Instead it is necessary for the trustees to show that following the MoW would result in a breach or their duties to the trust and to the beneficiary.
• A momentous decision, including any discussion and arguments on either side must always be fully documented, in writing and signed by all the trustees. It is important that the minutes of the meeting set out fully, and exactly, why the trustees are ignoring the MoW.

Confidentiality

 

A trustee is not obliged to disclose a memorandum of wishes to anyone unless by court order in certain circumstances. Disclosing the wishes of a settlor to beneficiaries could lead to friction amongst the beneficiaries so trustees tend to keep this information confidential.

 

Regular Review

A memorandum of wishes should be reviewed on a regular basis and updated where necessary if it is to provide guidance to the trustees and fulfil the wishes of the settlor.

 

Storage

The trustees will usually store the settlor’s written wishes with other trust documents for future reference. Having a hard copy on file makes the document easily accessible for future consideration.

 

Conclusion

If you have a discretionary trust, or even a fixed trust with some discretionary aspects, it is important to create a MoW.
We are the Czech Republic’s leading trust administrators and we have many years of experience in dealing with issues such as this. If you would like help establishing a discretionary trust or with your MoW, please contact us on 212 245 872 or at info@trusty.cz

 

Conflict of Interest: A Guide for Trustees

As a Trustee, you must both recognise and avoid situations where your own interests conflict with:

• The best interests of the Trust,
• The best interests of the beneficiaries
• The purpose of the Trust

You must also be careful to ensure that your behaviour in relation to conflicts of interest does not jeopardise your duty of managerial care.

You need to be conscious of both direct and indirect conflicts of interest. An example of a direct conflict would be if the Trust is considering buying land from you, or perhaps hiring a construction company you own to repair a house owned by the trust. An example of an indirect interest would be if the Trust is considering buying land which is owned by your cousin.

This is a very important issue for Trustees because the courts in other trust countries take a very strict approach to the extent that in some countries decisions involving a conflict of interest are absolutely prohibited. We don’t expect the Czech courts will take such a strict approach, but it is still best to ensure that you deal with these issues very carefully.

Declaring your interest in a Proposed Transaction

Once you have sent your declaration, it must be discussed as part of the next trustees meeting and also before the transaction is entered into. It is very important, for your own protection, that a full record of the declaration and the discussion is noted in the minutes of the meeting.

When you prepare the declaration, you should explain why you think you may be conflicted, and explain both the nature and extent of your interest.

A declaration is not required when:

• You are not aware that there is a potential conflict of interest
• You are not aware of the transaction
• All the other Trustees are already aware of the conflict of interest

The last point partly covers you if you are a family trustee – as of course the other Trustees already know about your relationship with the beneficiaries. However, this applies only in relation to those relationships and not to other possible conflicts of interest that your co-trustees don’t know about.

We recommend that you always err on the side of caution, because failure to disclose a conflict of interest can expose you to personal liability and in some cases could even be a criminal offence. So if you are in doubt, it is better to make a declaration even if you feel the possibility of a conflict is small.

What to Do When a Fellow Trustee has a Conflict of Interest

When you become aware that one of your co-trustees has a potential conflict, you must take all reasonable steps to ensure that the decision that is ultimately made is beyond reproach.

This means you should discuss the issue with the other Trustees, take a vote and make sure the whole discussion is included in the minutes.

If the decision to be made in ‘momentous’ – which means an important one, then it is essential that you physically meet with the other Trustees.

When discussing the conflict, it is often appropriate for the conflicted trustee to remove him or herself from the discussion. How this happens depends on you, but the best idea is probably for the conflicted Trustee to leave the room where the meeting is taking place and have the exit formally noted in the minutes.

The remaining Trustees then decide whether or not the conflict should be authorised. The discussion should focus on what is in the best interests of the trust, the beneficiaries and the purpose of the Trust. The discussion should conclude with a formal vote on the matter.

The minutes of the meeting should include at least the following information:

• Which trustee or trustees are affected
• Type of conflict of interest (direct or indirect)
• If the conflict was previously known to the other trustees
• An outline of the discussion
• If anyone withdrew from the discussion and if they stayed in or left the room
• How the remaining trustees made the decision in the Trust’s best interests

If the conflicted trustee prepared a written declaration, a copy of this should be kept with the minutes.

Trusts with a Sole Trustee

If you are the sole trustee of a trust you should prepare a written declaration as explained above, and place it in the Trust minute book. You should also consider very carefully whether it is a good idea to proceed with the proposed transaction. However, if you are absolutely confident that it is in the best interest of the Trust and the beneficiaries and consistent with the purpose of the Trust, then you can go ahead. Even so, it is very important that the record of your decision fully sets out the potential conflict and your justification for making the decision.

Depending on the kind of Trust, you can also consider the possibility of seeking the opinion of the beneficiaries. Generally speaking, if all the beneficiaries are in agreement with what you plan to do, you should be protected.

Any Questions?

We have the Czech Republic’s leading Trust administrators and we have many years of experience in dealing with issues such as this.  Please contact us if you require assistance on 2112 245 872 or at info@trusty.cz

The Importance of Good Administration.

The importance of keeping proper records for trusts including an accurate and up to date minute book was recently highlighted in a decision of  Royal Court of Guernsey in the matter of the [AAA] Children’s Trust.

Without going into the detail of the case, the key issue was the validity of a decision made by the trustees that was later contested by beneficiaries of the Trust.

Generally speaking, there is no obligation on trustees to do what beneficiaries want them to do.   Instead, trustees have an obligation to act in accordance with the terms of the trust and in the best interests of those beneficiaries, Sometimes that does mean ignoring beneficiaries’ wishes.  A very simple and obvious example would be a request from a beneficiary with a gambling addiction for a distribution – the beneficiary wants something that is not actually in his best interests. In this case the trustees should probably not make the distribution.  Remember also that in most trust instruments, many of the trustee’s powers are discretionary.  That means that the trustees should do what they think is best and cannot be forced to act.

In the Guernsey case, the trustees had made a decision to sell assets which comprised a significant part of the trust fund.  Despite the fact that they had the power to do this, as explained above, the court overturned the transaction.

Why?

A major factor in the Court’s decision was that was that the trustee’s decision-making process was not properly documented. Indeed the Court was not even able to see evidence that the trustees has made a definite decision to sell the assets.  The trustees did not have detailed minutes of the meeting where the decision had been made. They did submit some minutes but in these minutes the asset sale was not a specific agenda item.  The minutes also failed to provide any evidence of the trustee’s deliberations.

There was evidence of some telephone conversions and emails on the topic of the sale, but the Court found that it was impossible to pinpoint a meeting in which the trustees had actually made the decision.

That means that, even though it seems from the facts that the trustees made a decision, the fact that they didn’t document it means that it was overturned.

Why is a decision of a court in Guernsey relevant to Czech Trusts?

At first glance it doesn’t seem to be directly relevant because Czech Trusts are established under and governed by the Czech Civil code not common law.  Having said that, there are many areas on which the Civil Code is silent, including, to a large extent, the basis on which beneficiaries can challenge trustees’ decision-making.

If we look at Quebec, the jurisdiction that inspired the Czech Code, we see that where their Civil Code is silent on a point, the Courts can, and do, look to internationally accepted principles of trust law.  This means that even though both Quebec and Czech are civil law jurisdictions, precedents set by common law courts are applied in Canada, and a likely to be applied here too.

That is the reason why a good understanding of common law principles is important when setting up Czech Trusts.  We don’t know with certainty that they will be applied in Czech, but it would be extremely foolish to assume that they won’t.

What does this mean for Trustees?

• Every trust must have a minute book and that minute book should be compete and up to date
• When trustees make decisions, they must always document those decisions and unless it’s blatantly obvious, then they should also set out in writing the factors that they considered and their reasoning
• If the decision is very significant or potentially controversial, the trustees should consider seeking independent professional advice and, if they decide not to, set out in the minutes the reasons why such advice was not sought
• If the decision is very significant or potentially controversial the Trustees should convene a separate meeting specifically to consider that decision
• Detailed minutes should be taken at the meeting, with specific focus on the decision making process, the trustees’ deliberations and the decision taken at the meeting;

We are happy to assist trustees with administration for trusts, even if those trusts were not originally established by us.  For more information, please contact us

Svěřenské fondy a trusty s.r.o. is very proud to have worked, together with Barlens law office, on the creation of the Zemský akciový pivovar Supplier Trust.

This unique concept is a great example of one of the many innovative uses to which svěřenské fondy can be put. Zemský akciový pivovar’s structure uses a trust to help build their business by enabling the publicans that sell their beer to become beneficiaries of a trust that holds Zemsky shares for them at a nominal value.

As the publicans reach pre-agreed targets, the shareholdings are transferred to them from the Trust, allowing them to grow with, and share in the success of the brewery.

It was a pleasure for us to work with the team from Zemský akciový pivovar, and we enjoyed tasting their excellent product in lieu of the standard tea or coffee offered at most business meetings!

For more information about Zemský akciový pivovar and their excellent products, visit their website at http://www.zemskypivovar.cz/

As many of you know, for every new trust we establish, we provide funding to Nadace Partnerství to improve our childrens’ world by planting and protecting trees in the Czech Republic. Eva Polakova, our client Services Manager visited Nadace Partnerství at their offices in Brno on Monday to present them with our first donation. Our gift this year is being used to fund the “Healthy Trees for Tomorrow” project, which professionally treats dozens of old trees every year and aims to educate the owners of these beautiful and historical important trees.

We are proud to be able to give something back in this way, and we look forward to repeat visits with larger donations as our business prospers in the future.  You can learn more about Nadace Partnerství on their website

Why is business succession a hot topic?

 

74%
of Czech Family business do not have a succession plan.

70% 
of those businesses will fail, and

85%
of those families will experience ‘serious family conflict’

For well run and successful businesses throughout the world, having a up to date business succession plan is a key part of their strategic planning process – as important, perhaps even more important, than plans for business development, marketing and new products.  The best business owners are aware of the key statistic; that 70% of businesses do not survive into the second generation.

In other words, if you fail to implement a business succession plan, then your business will probably fail. So the consequences of a bad business succession strategy are far worse than a bad marketing strategy; put simply, your factories will close and your assets will be sold at ‘fire sale’ prices, your employees will lose their jobs and the enterprise you have spent so many years building and developing will be gone – along with a good part of your accumulated family wealth.

Successful business owners abroad know that, but at this stage it seems that most Czech entrepreneurs do not.  Only 26% have even thought about a plan, let alone implemented one.  That’s hardly surprising. Until the beginning of last year, the Czech legal system made effective business planning very difficult, if not impossible. However since then business owners have had most of the same options available to them as their offshore compatriots.

Eva Polakova of Svěřenské fondy a trusty speaking at the Zivnostnik Roku competition in Liberec

 

Like all good business plans, your succession plan needs to be written, communicated well to all those involved and updated regularly.

It’s not that difficult

The first, and by far the most critical step is simply simply to think.  Of course, the big question is what do you want to happen to your business after you are no longer able, or no longer want to run it.

This question gives rise to a lot of ‘secondary’ questions including:

• When do I want to retire?
• Do I want to retire gradually?
• After I retire, who should own my business,?
• Who should control it?  Should it be sold?
• If it is to be sold, what happens if I am over by a bus before it has been sold?
• If I want my children to take control of the business, are they ready?
• If they are not, what educational and experience do they need to be ready?
• What happens if I die before they are ready?
• What do I do if I want control to go to just one of my children?
• How can I compensate the others?
• Who should then be the owners of the business?
• What about management?  What should be their role in the company?
• Should they receive a shareholding? If so, how is this to be paid for?
• What steps do I need to take to develop management so they are ready?
• Are there any ‘ground rules’ I would like to set for future management of the company?
• Do I want the business to stay in the family in the long term?

Once you have considered these issues, then in most cases it makes sense to have a preliminary  talk to your family and to management – at the very least to make sure that, if you plan to pass control to them, that they actually want it. Once of the key objectives of a good succession plan is to avoid family conflict.  According to recent statistics from the US, around 85% of unplanned business successions result in ‘serious family conflict’  Once of the best ways to avoid conflict is obviously to communicate well.  But there will of course be some situations where communication isn’t going to help – where those involved are completely at odds with the plan – a good example would be an incompetent or irresponsible child who nevertheless believes that they should inherit control of the family firm.

By now, the general concept should be clear in your mind, so the next step, the third step, is to contact us.  Since the law changes in 2014, it is now almost always possible for us to give effect to your plans, whatever they are.  We can also usually make suggestions that will help you improve and fine tune your plan

There are two important points to know.  First, whatever plan you decide on does not have to mean any practical change to the way the business runs now – and that you will always keep full control over everything for as long as you want it,  Second, there is no reason why ownership and control of your business needs to stay in the same hands.  You can now, quite easily, pass ownership to your family, but leave control in your own hands or in the hands of whoever else you choose.

The final step is implementation. In most cases this will require some legal documents, and some communication with your family and staff so that thy understand and buy into your plan.

Don’t forget to review and refresh your plan regularly. We recommend that this should be done at least annually or when there is any significant change to the business or within your family.

Živnostník roku and Firma roku

This year we are very proud to announce that we are partnering with Živnostník roku and Firma roku.

One of the focus points of this year’s competition is business succession planing, and together with pwc, we will be contributing to a panel of experts which will assess businesses on their preparedness in this regard.

A survey conducted by ourselves together with Babinet at the beginning of this year tells us that only a quarter of family owned business in CZ have any sort of plan dealing with what happens to the business when the founder is no longer willing, or able, to run it.

Internationally, statistics also tell us that only 30% of family business survive this transition. Put another way, that means that 70% of businesses fail, resulting in enormous damage: The loss of jobs, closure of facilities, family conflict and very often huge destruction of wealth that have been carefully accumulated over many years.

Many (but not all) good business succession strategies involve the use of Svěřenské fondy. We are delighted to be able to contribute our expertise in helping the Czech Republic’s top family businesses take the very simple steps they need to ensure that they are properly protected.

We will be participating in the regional rounds of the competition in:

• Hradec Kralove – 16 September
• Pardubice – 17 September
• Usti nad Labem – 24 September
• Ceske Budejovice -29 September
• Liberec – 1 October
• Plzen – 7 October
• Olomouc – 8 October
• Brno – 13 October
• Ostrava – 15 October
• Prague – 22 October

The other reason for mentioning this is that we will obviously be in the cities above on the dates mentioned. If you would like to meet with us, if you would like us to prepare a presentation for you, your colleagues or your clients, please don’t hesitate to contact us.

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

As you may know, Svěřenské fondy a trusty s.r.o. is a co-founding member of the APRSF – Asociace pro podporu a rozvoj svěřenských fondů, z. s (in English: The Association for the Support and Development of Trusts).  The Association was officially launched on the 23rd of April.

We know that many of you attended the launch function.  For those that did, (and for those that didn’t. but are interested), a gallery of photos of the evening can be found here.

The launch was also very successful in generating considerable positive media coverage of the Association and of trusts more generally.  Some of these articles can be accessed via links on the APRSF website:

A Tale of Castles and Cottages

 

In this article, we continue our series on the positive uses of svěřenské fondy.

If you walk around Prague or any Czech city it’s easy to see derelict buildings – sometimes well located, formerly beautiful, buildings – slowly crumbling, seemingly uncared for and unowned.

The derelict Government House (Eric Jones) / CC BY-SA 2.0

 

Have you ever wondered about the reasons they have been abandoned? I am sure that each house has a different story, some of them very sad. But many of them will be in the state they are as a result of disintegration of ownership caused by poor inheritance planning.

Let’s take two, very different, families as examples of the problem – a problem which svěřenské fondy can solve

Family 1 – Von Bambus

The von Bambus family are a (fictitious) aristocratic family who can trace their noble roots back for hundreds of years.

Following the velvet revolution, their family castle and lands were returned to them. But now they have a new problem.

In the past, before communism, according to the doctrine of primogeniture, the family castle and lands always passed down from father to oldest son, who also inherited the aristocratic title. The other brothers and sisters never received any entitlement to the land although they were usually taken care of, at least to some extent, by their older brother.

Of course in the 21st Century we consider the doctrine of primogeniture as not just anachronistic, but also extremely sexist and generally unfair. However we also have to recognise that it did achieve one very important positive thing – it kept the family wealth and the castle intact in a single unit though the generations, which in turn preserved the strength and influence of the family.

And that’s the problem. If we apply normal inheritance rules to the von Bambus family, in the future in the first generation the castle has perhaps three owners, in the second generation, nine, in the third generation 27, and by that time the land will probably have all been sold and the castle will be a crumbling ruin, after all, who’s going to look after it? Who’s responsible for the costs of its upkeep? Who makes all the decisions? In theory, everybody does, but in practice 27 people will never agree on anything, so the end result is that nobody can do anything.

Another problem is that the assets won’t stay in the family. Due to bankruptcy, divorce etc. ‘outsiders’ will increasingly become owners of the estate.

The end result of the modern law will be the loss of the property to the family and the loss of the tradition and history of which the von Bambus family is so justifiability proud.

In order to solve this problem, families such as the von Bambus are looking at svěřenské fondy as a way to keep the concept and positive traditions of primogeniture alive, and as tools to keep the newly restored family estates intact, but without the negative aspects of the past.

The von Bambus family set up a trust, and appoint the oldest son (the one who would now be the Count, if the aristocracy still existed) as trustee. The trust deed provides that the role of trustee is passed down through the generations in exactly the way the noble title would have been in the past, except that, like the British royal family, they have removed the sexist element by allowing the oldest child (son or daughter) to inherit. However, unlike in the past the trust contains provisions that specify that the assets are held by the oldest child not as absolute owner, but as trustee for the benefit of all members of the family.

This structure allows the family to keep the family estates intact. It allows them to ensure that all members or the family benefit and are treated fairly. It also centralises the management of those estates into the hands of a single person the ‘Count’ (or ‘Countess’) so that important decisions can be made easily and quickly. This structure also means that the trustee has a clearly defined responsibility towards the other members of the family.

This is a fair and workable structure that gives the family ‘the best of both worlds’.

 

Family 2 – the Novaks

The Novaks, (also fictitious), are not aristocrats – they can’t trace their family history back much further than their grandparents. The Novaks are ordinary Czechs.

Even so, they can benefit from the same concept as the von Bambus. Mr and Mrs Novak live in Prague but own a valuable cottage in Jizerské hory. They have three adult children who grew up going to the cottage – which is full of strong family memories. Two of the children use the cottage regularly. The third child does not like the mountains, and never goes there. He would like his parents to sell the cottage.

Of the two children who use the cottage, one is a successful businessman who already contributes almost all the maintenance and repair costs. His family visits the cottage on average once a month. The other has a factory job, but he and his family love the mountains and he works hard to keep the grass cut etc. They visit most weekends.

Each of the three children has three children of their own, meaning that in the next generation, the cottage could potentially have nine owners

Mrs and Mrs Novak can see the obvious potential for family conflict on the horizon. They also want to ensure the cottage stays in the family, and to avoid future potential family conflict

Mr and Mrs Novak can set up a Trust in almost exactly the same way as the von Bambus family. Instead of the eldest son, they would typically appoint an uncle or other independent and trusted persons to manage the cottage for the benefit of all the family over the generations ahead. Such a structure can allow the family to ‘buy out’ those who wish to sell, and can make important decisions about maintenance and how the costs are to be paid. What’s also important is that, even if children get divorced, or become bankrupt, a trust will keep the cottage within the family, and available for the benefit of all family members

The structuring of such a trust can be quite complex, and professional help is required. But once the trust is in place, it typically runs very smoothly and for as long as it is needed.

Positive uses of Czech Trusts – Example 3: Immortality

This is a picture of a person who you might not recognise, but who most of you will know.

Nothing so far?

Perhaps his name will help? He’s the Rt. Hon. Frederick Arthur Stanley, 16th Earl of Derby KG GCB GCVO PC

No?

Another clue then: He was the sixth Governor General of Canada – from 1888 to 1893

Obviously a great man, but also one whose great achievements, and indeed very existence have been lost in the pages of history. Forgotten.

But actually, not.

You see in 1892, Lord Stanley set up a trust. His trustees purchased a decorative punch bowl, made in Sheffield, England, and had the words “Dominion Hockey Challenge Cup” engraved on one side of the outside rim, and “From Stanley of Preston” on the other side.

And by doing this, his name became immortal. You might not recognise Lord Stanley, but I am sure you recognise the punchbowl. It’s the small bowl part on top of this trophy:

. . . which is of course, the Stanley Cup – through which the name of Lord Stanley lives on to this day.

Of course you don’t need to be an Earl to do the same thing.

If you have money you’d like to give, perhaps to a cause that’s important to you, you can of course simply choose a charity that works in that field and give them the money. However if you do that, you lose all control over how that money is spent and how much goes on administration. Sometimes it can also be hard to find a charity that does exactly what you want.

Instead, since January this year, it has been possible for you to set up a svěřensky fond (A Czech trust). Such a trust can bear your name and can be dedicated exactly to the purpose you want to achieve. Examples could include:

• A sporting cup or scholarship
• An educational scholarship or prize
• Encouraging things that are important to you. If for example, you are a successful female lion-tamer, you might establish a trust to award an annual prize to the Czech Republic’s best female lion-tamer
• The restoration or preservation of a historical monument, building or church
• Building a concert hall
• Buying musical instruments for school children,
• etc., etc., etc., the possibilities are almost limitless.

 

Once the trust is in place, you can ‘open it’ allowing others who share your passion to contribute funds of their own.

Children from previous relationships, or The ‘Karel Gott Scenario’

Many of you will know who Karel Gott is. He’s one of the great Czech singers and has had a long and distinguished career. A true Czech celebrity. That makes him a very special person, but in at least one respect, he’s not that unique. Like Mr Gott, many Czechs have ‘complicated’ family situations. In case you are not already familiar with his family history, Mr Gott has two older daughters from earlier relationships, (Dominika and Lucie) but is now married to Ivana. Together, they have two more younger daughters (Charlotte and Nelly).

Under current Czech law, if Karel does not have a will, when he dies, his estate will be divided equally between Mrs Gott and all four daughters. This seems entirely fair and reasonable. The new Civil Code does give him a greater opportunity to adjust these shares, but it is still impossible for him to ‘cut anyone out’ of his will entirely.

That creates two problems.

The first problem arises when you consider the position this puts his wife in. She will already be emotionally stressed by the death of her husband. The last thing she needs at this time is additional financial stress. The two adult daughters will now own a share of everything – and that probably means that she’ll have to, somehow, come up with the money to pay them out.

The second thing to consider is that Mrs Gott is still young. There is presumably every chance that she would remarry, and perhaps even have more children with a future new husband. So that means that in the future, when she passes away, her new husband, and also the children of the second marriage could be the ultimate beneficiaries of her part of Mr Gott’s wealth. Dominika and Lucie would get nothing at this point.

Is that what Mr Gott would like to happen with his money after his death? I have no idea, but I suspect not. In this situation the old law was not flexible enough to meet Mr Gott’s needs and he potentially ended up with an outcome that he did not want.

This is where Svěřenské fondy a trusty (Czech Trusts) come in. Since January, they have offered Mr Gott a solution to these problems.

He does two things.: First, he establishes what we call a ‘pre-testamentary’ trust. Into this Trust he puts his share of the non-liquid family assets. This could include his family home, his holiday home, and in his case, at least some of the royalty rights to his songs. By doing this, he removes these assets from his estate when he dies, which means that forced inheritance does not apply to them. Then, in his will he adds a provision that further money should go to the trust. He cannot of course completely ‘cut anyone out’ of the will, but if this is structured correctly the situation can be made manageable and fair to all concerned.

The Trust will make sure Mrs Gott has everything she needs to live in comfort during her lifetime, but then on her death passes the money, not to her new husband, but instead, equally, to the four daughters (or otherwise, as Mr Gott wants). A secondary benefit is that once assets are placed in the Trust they are protected from claims,- whether from executors, legal cases, or matrimonial property claims

In reality, I expect that Mr Gott has probably already implemented a plan that deals with this situation – but since January these kind of solutions have been be reserved not only to millionaires, but are now also within the reach of ordinary people – because they can be implemented at a minimal cost.