Trusts or family foundations are often used abroad to manage assets, allowing the owners of the assets to manage the family wealth, ensuring its long-term integrity, covering the involvement of individual family members and ensuring the distribution of funds according to predetermined rules.

The legal environment in the Czech Republic is unique in this respect, as both trusts (which are based on Anglo-Saxon trusts) and family-type endowment funds (which are similar to family foundations) can be used for these purposes.

Trust

A trust allows to entrust the property to a selected person who manages it and guarantees performance to the beneficiaries according to predetermined rules. Although the trust does not have legal personality (i.e. it is not a legal entity), it may manage any assets, such as real estate, funds, works of art or shares in companies, where the exercise of the rights and obligations of the shareholders or other administration is carried out by a trustee on behalf of the trust. Beneficiaries may be both living family members (without the requirement of legal age) and next generations or persons outside the family.

Family-type endowment fund

In contrast, a family-type endowment fund is a legal entity, but the contributor to the endowment fund does not receive a share in the endowment fund as consideration for the assets contributed, nor does the contributor automatically receive any other benefit from the fund. The management of the assets and payments to the persons selected according to predetermined rules are governed by a board of trustees, which may only have one member and that may be the founder themselves. As in the case of a trust fund, any assets can be contributed to the endowment fund and it is also possible to flexibly set which persons are entitled to receive benefits from the fund and under what conditions.

The structure and selection of the governing persons/bodies for both these institutes is largely determined by the founder. In addition to those required by law (i.e., a trustee for the trust fund, a board of trustees and a supervisory board/endowment fund controller), a family council, for example, may also be included in which members of the extended family may be represented to ensure sufficient control and comfort in managing the family estate. At the same time, however, non-family members (such as professional trustees) may also be part of the body to ensure continuity in the management of the assets and the performance to the beneficiaries in the event of sudden events such as illness or death.

This article is part of a series prepared by our experts from the Deloitte Private team, which provides services to private owners and private companies of various sizes.

Read the first part in which we introduced the family constitution and explained what it is used for and what it can contain.

Tax and accounting rules

From an accounting and tax perspective, the operation of trusts and endowment funds is very close to that of standard business corporations. Both trusts and endowment funds are required to keep accounting records, are subject to corporate income tax at a rate of 19%, and withholding tax is levied on the profits of both trusts and endowment funds (at a rate of 15% in the case of beneficiaries who are natural persons and Czech tax residents). However, in contrast to corporations, there is a possibility of income tax exemption for family members (natural persons) with regard to the performance from the assets of trust and endowment funds for family purposes, provided that the statutory conditions are met. If the conditions are not met, the performance from the trust assets are taxed as gifts (i.e. as part of the beneficiaries’ general tax base on their tax returns).

Establishing a trust or endowment fund for family purposes can thus be a way to ensure the integrity of family assets and an opportunity to organise the property relations within the family for present and future generations. Please contact us and we will be happy to guide you through the process.