Category: Uncategorized

We are a member of Asociace pro podporu a rozvoj svěřenských fondů, z.s. (APRSF).

Due to the recent activities of some non-members, the Association has felt it necessary to issue this consumer warning. (Note – the English version is on Page 2).

This reemphasises the importance, when setting up your trust, of choosing a knowledgeable and experienced partner such as Svěřenské fondy a trusty s.r.o.

A few photos of this months’ APRSF Trust Training in Prague:

A Thank You from our Charitable Partners

As you may be aware, we support Nadace Partnerství by providing a grant of 500 CZK for every trust we establish which they use to support the planning of trees.

We have a tree in our company logo and we think a tree is an excellent metaphor for what we do.
If you want to grow a strong tree you first need to plant a seed.  When you plant a seed, you give a gift to the future.

Some patience is then required as is some careful gardening.  A new seedling needs care and attention but with that care and attention it will grow strong enough to withstand strong winds and will provide shade and fruit to our children and grandchildren and for generations to come.

But for a tree to grow strong and straight, you need a great gardener.  We are the gardeners of your personal family tree.

If you would like to see a report setting out how Nadace Partnerství has spent these donations, please click here. (Unfortunately it is available in Czech only)

There have been some important and positive changes to the tax treatment of Czech Trusts.  These are especially helpful for clients who would like their trust to own shares in their family business, or indeed any other company.

A Major Positive Tax Change

25 April 2017

As many of you will be aware, there is a significant change to the tax rules relating to trusts currently awaiting signature by the President of the Czech Republic.

We are not tax advisers, so we are happy to provide a summary of the relevant changes prepared by PwC Czech Republic for APRSF – The Association for the Support and Development of Trust Funds.  A copy of the summary is available here.

Why is this important?

It is important for a member of reasons, but the most significant is the fact that Trusts can now be used as the holding structure for companies and especially for family businesses.

We know from our own research that 74% of Czech Family business do not have a succession plan.  And based on overseas data we expect that

• 70% of those businesses will fail to survive into the next generation (source Family Business Institute US), and
• 85% of those families will experience ‘serious family conflict’

This is a big problem, not just for those families, but also for the Czech economy and society as a whole.

When the founder of a business dies, the consequences are as follows:

• The business is owned by normally a group of family members.  Normally these people have different priorities.  In some cases they want the business to continue, but lack the majority shareholding they need to make sure this happens.  More often, people just want the money.  In a few cases, people who are not qualified to run the business will try to do so, and fail.
• The end result of this is usually that the business finishes, either through its sale or through its destruction
• Factories close.  The staff lose their jobs. The wealth that has been accumulated over many years is destroyed.

For many family businesses in the rest of the world, Succession Planning is an integral part of their overall strategy – ranking in importance alongside their strategic and sales plans.
Such plans offer many positives:

• Family wealth is preserved,
• There is no ‘crisis’ in the business if something happens to the owner
• Senior management can be involved in the process and feel empowered
• They provide a pathway and plan to develop the skills of family members (or others) to the point that they are ready to take over control of the business
• Ownership can be passed on to the family, but control can be given to a separate group who have to follow rules and guidelines set by the business founder – even after his death
• Incompetent and or greedy family members can be prevented from attempting to run or destroy the business.  Instead it is kept intact for the benefit of future generations
• Factories stay open and jobs are saved

The current tax changes give us a powerful tool.  Now it is possible for a family trust to own a family businesses without negative tax consequences.

This means that, during his lifetime, the founder of the business can maintain complete control – nothing is affected in relation to the day to day operation of the business, but when something happens to the founder, or he retires, control is handed to the person or persons chosen by the founder – to manage the business in the best possible way, subject to the rules set by the founder, for the best interest of the family and for the business itself.

For more information on this new opportunity, please don’t hesitate to contact us.

Guidance for Trustees – When to Notarise.

 

One of the most common questions we are asked by clients in relation to the administration of their trusts is: “Which documents should be notarised?”

The answer is simple but also important.

We should begin by briefly recapping what notaries do in relation to documents. According to law, some documents need to be executed as a public or notarial deed in order to be valid. One example of this is your Trust Statute. Notaries charge for this as a percentage based on the value of the assets involved and, as a result, it can sometimes be quite expensive. In order to reduce these costs, this is one of a number of reasons we recommend clients establish trusts with an initial sum of 1,000 CZK

In addition, notaries can also verify signatures. This second procedure is less complex than the first and basically involves the notary checking the identity of the person signing and then recording that verification in a register. This removes any doubt as to who signed the document, and also as to when it was signed. This service is very cheap.

In both cases, you will receive lots of excellent looking stamps and stickers on your documents.

The only document associated with your trust that absolutely must be notarised in the Trust Statute, which, as mentioned above is executed as a public or notarial deed.

There is strictly speaking no need for any other trust documents to be notarised, but in practice some of them should be. There are three reasons for this.:

• If you plan to use documents for registration at the Land Registry or Commercial Registry (i.e. if you are transferring shares or real estate) then verified signatures will be required.
• The second reason for verification is to remove any future doubt about whether the documents were validly signed and importantly also WHEN they were signed. As we mentioned in a previous article, some decisions that trustees make are considered to be ‘momentous’. These are important decisions which could significantly affect the Trust and/or its beneficiaries. As we explained in our earlier article, like all trustee decisions, ‘momentous decisions’ must be recorded in writing, and in the case of momentous decisions, the trustees should also provide detailed written justification for their decision.
• As also mentioned in a previous article, when the validity of a trust is challenged in court, one of the arguments which can be used to defeat the trust is that it was not administered correctly. The fact that at least some of the Trustee’s decisions have been verified is good evidence that the trust was being correctly administered at the relevant time.

For these reasons, we recommend as follows:

1. The Trust Statute:

This must be executed as a notarial deed. (This is an any case a legal requirement).

2. The Trust Contract:

The Trust Contract is the document that (under current law) actually establishes your trust. The signatures on this document should be notarised in order to remove any possible dispute about whether and when the trust was validly established. Notarial verification of signatures on this document will also be needed if you plan to settle any company shares or real estate on the trust.

3. Contracts of Addition:

Verified signatures will be required by the Land Registry or the Commercial Register if the assets being transferred are company shares or real estate.

In other cases, verification is not required, but should be considered anyway if the value of the assets is high or if you have any reason to suspect that the transfer might be queried or challenged in the future.

4. Trustee’s Decisions / Minutes of Meetings and AGM:

These do not need to be notarised, and for most trustee decisions. verification is not necessary. However there are some situations where you should have signatures verified, including:

• When the decision is ‘momentous’ or might be challenged by someone in the future.
• If no other decisions have been verified in the preceding year, it is a good idea to have the signature the person who prepared the Minutes of the Annual Meeting verified (it is not necessary for all Trustee signatures to be verified). This helps establish a chain of constant administration if this is ever challenged in the future.

5. Memorandum of Wishes:

This is a private document and does not need to be notarised. However, it if contains anything that might be contentious in the future, notarial verification is also probably a good idea

6. “Standard’ Trustee decisions

Decisions involving relatively smaller amounts of money and or ‘mundane’ matters such as bank account establishment etc, do not need to be notarised.

Remember, signature verification by notaries is very cheap and is not very time consuming. So if in doubt, have signatures verified. This can help eliminate the possibility for disputes in the future.

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. This Christmas we are making another donation and we look forward to making even larger donations as our business prospers in the future.  You can learn more about Nadace Partnerství on their website.

For those of you who established a trust this year, here’s a note of thanks from Nadace Partnerstvi

As you are probably aware, there has been a proposal on the table for a new register of trusts for some time.  We thought we would take this opportunity to update you on what’s happening and the likely structure of the new register.

Part of the register requirements have already passed into law, and these will require all trusts (and companies) to declare who their ‘skutečný majitel’ is.  (In English we call this person the ‘Ultimate beneficial owner’).

For trusts, this person will be the one who exercises effective control over the trust.  Usually this will be either the trustees, but might in some cases be the founder.  Who exactly it is will depend on the structure of the trust.

If we are administering your trust, we will be advising you in the new year who you should declare as the ‘skutečný majitel’ and will prepare the necessary deceleration as a part of our standard Administration service.

It is important to note that this information will not be publicly accessible and will only be available to the state and to other people with a legitimate interest (eg. banks).

The second part of the register is still passing thorough the final stage of the legislative process.  However, it seems unlikely that it will change now, so we can inform you of what we expect to be required.

Essentially most Trust documents will need to be filed in the register and each trust will be allocated an Identification number. However, the public will have only very limited access to this information, being able to see only:

• The name of the trust
• Its purpose
• The date it commenced
• The trust’s IČ: (identification number)
• The number of trustees of the trust and how they act (ie, individually, by majority or unanimously)
• The date on which the trust was registered
• A little additional data only if the trust owns a large business, and
• Anything else that the trustees voluntarily wish to make public (such as the names of the Trustees)

Note that this list does not include the name of the founder, the supervisor if any, or the beneficiaries.  Also important to note is that, unlike companies, there are no fees for filing documents with the register.

In addition to this public information, you will also need to file these details – but they will be non-public:

• • The name, address and identifying details of the founder, the supervisor – if any -and any named beneficiaries and, for beneficiaries who are not specifically named, how they are defined.
  • The name address and identifying details of the ‘skutečný majitel’ – and a statement as to the basis on which he or she is identified as such.

Any trust documents which include any of the non-public information (and of course this means almost all Trust documents including the statute and contract), will also be non-public.

Is this good or bad?

For most of our clients this is a good result, striking an excellent balance between protection of your personal privacy and the need to eliminate potential misuse of trusts.  It will also help significantly build the acceptance of trusts, especially since you will now have the all important Identification number as well as the ability to provide people who ask with an extract from the register.

If you have any questions about how the new register will affect you, please don’t hesitate to contact us.

Normally our clients prefer us to keep the work we have done for them confidential, but not all. The Czech Economics Society is one such exception. We recently worked with them to establish a fund in memory of the late Kateřina Šmídková, Director of Economic Research at the Czech National Bank and Professor of Economics at Charles University, who died after a long illness at the age of 46 years.

The Kateřina Šmídková Trust now provides a regular prize to encourage the work of female economists in the Czech Republic. We were very proud to be involved on this important project.

We have added a section to our site illustrating the potential uses of trusts for endowment purposes.

If you would be interested in contributing to this very worthy cause, please contact us and we will put you in touch with the Economics Society

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/