Month: October 2014

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.

Beware of Badly Drawn Documents

With the new trust law now ten months old, we are starting to see trusts being used, not just to test the concept, but to actively help clients solve their problems. This is a really positive development. The new Czech law is a good one and it helps solves many real problems for ordinary Czech people.

What’s not so good news is that due to inexperience, many (perhaps even most?) of the Czech Trusts established so far are fatally flawed.

Sometimes things can go wrong with trusts. No Trustee wants to end up in court facing claims from beneficiaries or others who are seeking to challenge the validity of a trust. Another difficulty can be when a problem comes up and the Trustee doesn’t know how to respond. Again, in this situation, a trip to court is often the only solution.

Thankfully in most common-law countries these experiences are few and far between! They do happen though and, based on our experience, they almost always happen because of badly-written trust documents. In the Czech Republic the potential for disaster is much much higher and so far many of the practitioners who have been preparing trusts seem entirely unaware if it.

In common-law countries we have hundreds of years of accumulated history and experience with trusts. More importantly, we also have extensive case law which sets out the guiding principles of trusts. In other words, the law of trusts is very detailed and comprehensive. One example is the current edition of The Law of Trusts and Equitable Obligations, a leading legal textbook on trusts written by Robert Pearce, John Stevens, and Warren Barr. This book has 1072 pages, and of course, that’s really just a summary of the key points of the law. Yet despite having access to this depth of detailed law, most common law trust professionals would not dream of establishing a trust with a trust deed shorter than twenty pages or so, and many are much longer.

This paper mountain isn’t simply based on lawyers’ built-in desire to produce long documents (long documents look more impressive and help justify higher legal fees!) Instead, all these pages of legalese are actually necessary. Even with 1072 pages of law to refer to, there are still very many ‘What if’ questions that need to be answered: What if a trustee dies? What if two trustees disagree? What if all the beneficiaries are killed in a plane crash? What if all the Trustees resign at the same time? What if a Trustee starts to act inappropriately? What if a trustee goes bankrupt? What if a beneficiary is bankrupt? What if all the trustees die in a plane crash? What if a beneficiary disagrees with a decision of a trustee? What if the founder changes his mind and wants some or all of the money back? What if the tax laws in the Czech Republic make having a trust too expensive etc etc etc.

Compare this with the situation in the Czech Republic where we have only 27 paragraphs of the Civil Code, and don’t have access to the 1072 pages of common law.

Reading the Civil Code tells us that it is possible to establish a Svěřensky fond with just two documents, a Trust Statue and a Contract, and both of these can be written on a single piece of A4 paper, and that’s the way that most Czech Trusts so far have been set up so far. But two pages of A4 is not enough to answer any of the ‘What if’ questions. In fact, the truth is that, in this country, because the Civil Code is so brief and because we have no case law to rely on, you need even more pages of documentation than in other countries.

Unfortunately that in turn means that many of the Trusts established so far are doomed to disaster. As soon as a ‘what if’ question becomes reality, these two-page trusts will end up in court. While this is probably actually good news, as it means that the Czech courts will rapidly gain some knowledge and experience with this new instrument, but it’s obviously not good news for the clients concerned.

Another factor that is critical in maintaining the integrity of trusts once they are set up it to ensure that the trust is properly and professionally administered – including the need for a Trust minute book, proper resolutions and processes for Trustee decisions. Any trust that’s run as some sort of offshoot of the Founder’s personal financial affairs is also probably doomed to fail.

There are some companies in the Czech Republic, ours included, that can prepare the documents properly. If you are considering setting up a trust, then be sure that your legal adviser knows what they are doing and if they present you with a two page document, then say ‘No Thank you”.