Giving Assets To A Trust
In order for a family trust to be properly constituted, some form of asset must be transferred to the trustees to hold on trust for the benefit of the beneficiaries.
The family home, a cottage, a family business, and artworks are all examples of assets that are put into a trust. In this article, we look at how giving works and some of the things that it’s important to think about.
Getting Started
At the beginning, when you create your trust, it is important to start with some initial asset. This initial transfer is normally done as part of the trust contract.
For a variety of reasons, we normally recommend that this initial transfer should be just 1,000 CZK. One of the main reasons is a legal requirement to verify that this initial amount is the property of the founder of the trust. This can create problems determining if the asset is matrimonial property, but these questions do not apply to small amounts of cash.
This rule does not apply to later transfers to the trust.
Putting the Main Assets in the trust
This is normally done by a separate contract (or contracts) of contribution between the person who is transferring the asset and the trustees.
There is no rule that says this all has to be done at once, or that it has to be done at any particular time. Sometimes we see trusts that are established by left empty for some years. This is not a problem.
Assets can also be put into a trust via a will.
Who makes the transfer?
The initial transfer must be made by the founder. Subsequent transfers can be made by anyone. For example, we often see one spouse as the founder, but additional transfers being made by the other spouse or another family member.
Tax, Gift Duty and Real Estate Transfer tax
We are not tax advisers, but we have written advice from a Tax Adviser that in normal circumstances, transfers into a trust do not create a liability for any kind of tax – either for the person transferring or for the trust.
We always recommend that clients get appropriate tax advice, and this is especially important if there is any ‘unusual’ aspect to the trust – for example if the assets or any of the people involved with the trust is non-Czech resident.
Considerations for Trustees
If you are a trustee, you must be very careful of the implications of accepting a gift and take into consideration any potential consequences. You must also ensure that the nature of the gift is clear. For example, if a gift of cash is given to a trustee, it is important that the gift is clearly documented as a gift in order to avoid any future claims that the gift was actually a repayable loan to the trust.
Some gifts are not all they seem. Trustees should always ask themselves if the asset in question really benefits the trust, and be sure that if the asset carries with it any potential liabilities, that the trust is able to pay them.
For example, a derelict building could require the expenditure of significant amount of money for maintenance and improvements – without any prospect of rental income.
Trustees are under no obligation to accept a transfer to the trust, and there are times when it is best to refuse. Other reasons for refusing are set out below.
Solvency / Intention to Defraud
In some circumstances, a transfer to a trust may be voided if it is found that the settlor/donor was insolvent at the time of making the gift.
In addition, a gift to a trust may be set aside by the courts if it is discovered that the settlor made the gift with the intention of hindering or defrauding creditors or tax authorities.
This creates an important issue for trustees. It is important for the trustees to be assured that at the time of making a gift, the person giving the asset is solvent and able to pay their debts and that they have legitimate reasons for making the gift. If the transfer is cancelled by the courts but the trustees have already paid the money on to a third person, then this would be likely to result in personal liability for the trustees.
Again, remember, there is no obligation for trustees to accept such gifts.
Transfer of Ownership
It is crucial that trustees ensure that the appropriate formalities to transfer the asset to the ownership of the trustee are complete. These formalities will vary depending on the asset being transferred to the trustee.
If you are adding real estate to the trust, the transfer needs to be in a form that is acceptable to the land registry (and the signatures need to be notarised). The requirements for other assets are generally less strict but for larger assets we always recommend that signatures are notarised.
We can help you prepare these contracts as part of our trust administration service.
Conclusion
Family trusts and associated property transfers can be quite complex. To ensure you achieve the outcome you want, always use a professional trust administrator such as Svěřenské fondy a trusty s.r.o.to help you.
