Author: Eva

Probably you know the fantastic 1983 hit single by German band Nena called 99 Luftballons

If you read the lyrics of the song, you will see that 99 ballons are metaphors for peace.

Imagine that, inspired by this, you decide that you would like to establish a trust to launch 99 ballons into the sky every Tuesday as a symbol of peace.

Can you?

Czech Trusts are great for Czech people.

On the other hand, they are not normally considered as ‘export’ products. That’s because for people who live outside the Czech Republic there are other jurisdictions that offer more attractive alternatives.

But there is one, not very well known, exception to that rule. It’s an area in which Czech Trusts excel, and in which they are able to deliver outcomes that other countries cannot match. That’s the area of non-charitable purpose trusts

Before we explain what a non-purpose charitable trust is, we need to explain what a purpose trust is. To do that, we need to take a brief look at some important legal theory. We usually try to avoid talking about legal theory in these articles, basically because it is mostly quite boring. But in this case, I think the theory is interesting and it is helpful because it helps us understand the special problem that Czech Trusts can solve.

The piece of theory in question is the Three Certainties.

According to the law in most countries, the three certainties are the three essential things that you need if you want to create a valid trust. If you create something which does not have all three of these things, then you may have created a legally valid thing, but it probably isn’t a trust.

The first certainty is the certainty of intention.

The second certainty, certainty of subject matter.

The third certainty is the certainty of objects

The first certainly, the certainty of intention, means that it must be clear that the person who created the trust actually intended to do that (and not intend to do something else). Sometimes this a question of mistake or misunderstanding, but more often this issue comes up in the area of asset protection. Was the founder’s goal to really take care of his family? Or perhaps their real intention was to defraud their creditors, rather than to create a real trust for the benefit of future generations?

The second certainty, the certainty of subject matter, means that we need to know what is actually in the trust. If you put a house in your trust, then that is clear enough. However, if you say “All my good stuff”, it’s not clear to the trustees what’s good and what’s not good. If the trustees do not clearly know what is in the trust (and what is not), then it’s not valid.

But it is the third certainty, the certainty of objects, that is the most interesting one for today’s article.

This certainty means that we have to know who the trust exists for. For most trusts, that’s easy to answer. The trust is for the people who will get the benefit, in other words, the beneficiaries. So for a trust to be valid we need to know who the beneficiaries are, or at least have some clear system for working out who they are.

So, to recap, a trust needs intention, it needs some things to be in the trust, and it needs some people who will get the benefit.

And that’s where the idea of a trust for a purpose starts to get interesting.

 

What is a Purpose?

A purpose is limited only by your imagination.

The Royal Society for the Prevention of Cruelty to Animals (the RSPCA) was founded in 1824 and is the oldest and largest animal welfare charity in the world. According to its website its purpose is:

to inspire everyone to create a better world for every animal.

That’s a fantastic purpose. Here is another purpose:

to hold an annual hockey competition to find the champion team in the Dominion of Canada

Perhaps you know the Stanley Cup? It was established in 1892 as a trust and that was its original purpose

Here are some more purposes:

To award an annual prize to the best female economist in France

To maintain the village tennis court

To encourage the playing of tiddlywinks in Mexico

To support the election of Jára Cimrman as President

To look after my cat Tiddles after I die

To send the President a new pair of socks every Friday

To inflate and release 99 ballons every Tuesday

There really is no limit on what a purpose can be. Some purposes are positive and useful, others are not. Some purposes can be silly. Some of them have a great public benefit, but other purposes can be ‘private’

But we have a problem. Remember the three certainties? Certainty 3 says that a trust must be for someone. A purpose is not someone. (Even though he is lovely, Mr Tiddles is a cat, and he’s also not a person either).

So can you make a trust like this – which benefits a purpose rather than a person?

 

International Problems

The short answer in many countries is: no, you cannot. Judges in these countries do not like purpose trusts.

There was a quite famous case from 1882 called Brown v. Burdett. In that case the purpose was that a lady wanted her house to be boarded up with “good long nails to be bent down on the inside”, but for some reason with her clock remaining inside, for twenty years.

Unlike some of the purposes above, this one is perhaps not quite so positive and constructive. The judge in that case decided that the trust was not valid – because it was ‘useless’

There are two other reasons that courts don’t like purpose trusts. First, in the case of a normal trust with beneficiaries, we have somebody (the beneficiaries) who can keep an eye on the trustees and make sure that they are doing a good job. With a purpose trust, that person is missing

But more fundamentally, WHO is it actually for? In the opinion of the courts, you can’t just take money and put it in a bucket forever, with no person at the end of the line. And that is the reason that in most of the world, trusts need, in the end. to be for people.

Trusts without people do not satisfy that third certainty – and so, even though they might be fantastically useful – they are not valid.

 

Exception and Solutions

As you may have noticed, the RSPCA does actually exist. It’s an example of the first exception: charities. In many countries, charities are established as trusts, because a trust is a fantastic structure for running something like a charity, and charities generally, by definition, are established for purposes.

In the UK, for example, there is a list of purposes set out in law, and if your charitable purpose trust complies, then you can establish your trust. However, this is very strictly regulated, controlled and supervised by the Charity’s Commissioner. That means that it’s expensive and complicated and beyond the reach of ordinary people. It also only works for charitable purposes.

But what if your purpose is not charitable?

There a couple of additional exceptions in many counties including looking after pets and maintaining graves.

But otherwise, you are out of luck, and I am sorry to inform you that your plan to launch 99 ballons every Tuesday will not come to fruition.

Czech to the Rescue

But that’s where the Czech Republic comes to the rescue.

Your balloon plan won’t work in most countries, but it will work in the Czech Republic

That’s because section Section 1448 of the Civil Code says:

A trust fund is created by setting aside assets from the founder’s ownership in such a way that the founder entrusts the asset to the administrator for a specific purpose

There is no rule in Czech law that says there needs to be a beneficiary and the three certainties do not apply in Czech, so there is nothing to stop you from realising your plan.

Not only that, but we think such a trust could actually be quite tax efficient. It would not make any profit and, because there is nobody who gets the money, there is presumably also nobody who would need to pay tax.¹

So this is something that is handy, not just for Czech people, but for everyone else in the world who cares about ballons and world peace.

There is no reason either why the ballons need to be released in Czech either. You might live in Albania and you might want to release the balloons there. There is nothing we can think of to stop you setting up a Czech Trust to do this.

So this could even be the Czech Republic’s next great export program!

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Take Jimi Hendrix as an example:

In 1970 he had just $20,000 in his bank account. But he also had lots of debts and unpaid taxes. So while he wasn’t exactly poor, he was not a wealthy person either.

Plus, he was young. That’s another reason you don’t need an estate plan. If you are young you don’t need to worry about dying.

Unfortunately for Jimi, even though I am sure he didn’t plan to die, that’s exactly what happened. On 18 September he joined what is now known as the ‘27 Club’ – whose celebrity members all died at that age. (Some other members of the club include Kurt Cobain, Brian Jones, Jim Morrison, Amy Winehouse, and Janis Joplin. There are quite a few interesting estate planning lessons to be learned from this group, but for now, let us return to Jimi).

Jimi did not have that much money, and he did not have a will. He was not married, and he had no children, so when he died, 100% of his estate went to his father, Al Hendrix. Jimi apparently had a close relationship with his brother Leon, so it may be that he would have preferred his estate to go to Leon rather than his father. Whether that’s true or not, we will never know.

But the story does not end there. When he died, Jimi was not a rich man. But he (or his estate) is very rich now. The estate currently has assets of around 4 billion CZK and makes 146 million CZK a year from royalties.

Leon, perhaps understandably, was not happy that none of the wealth was headed in his direction and sued to try to get some of the money. The main outcome of that seems to be that estate spent a lot of money on legal fees.

But perhaps you are thinking “never mind, everything will be all right in the end, because Leon will inherit when the father dies”. Sadly, that also didn’t work out. When Al Hendrix died in 2003, his estate left all of his rights in the Hendrix estate to his adopted stepdaughter, Janie – and completely excluded Hendrix only blood-related sibling, Leon

Not surprisingly Leon kept trying, but the main winners from that were the lawyers.

This argument and the resulting family conflict is still continuing today.

All of this could have been avoided if only Jimi had made a simple plan for his inheritance. Not only would that have avoided all these problems, but more importantly Jimi would have achieved the result he actually wanted

 

Here are the lessons from this:

Lesson 1 – Even if you are not rich, you need an estate plan.

You might not be rich today, but by the time you die you might be. Your plan does not need to be complicated, and it can be as simple as a will – but you do need a plan

Lesson 2 – Even if you are young, you need an estate plan

Because you never know . . .

Lesson 3 – Don’t assume everything will work out well in the end

It usually doesn’t

Sources:

Doane & Doane: https://www.doaneanddoane.com/the-late-jimi-hendrix-a-cautionary-tale-for-estate-planning

The McVey Law Firm: https://mcveylawfirm.com/jimi-hendrix-20000-estate-turned-into-a-decade-of-nightmares/

CNN: https://edition.cnn.com/2004/LAW/07/13/hendrix/index.html

In our work we spend most of our time helping families to protect their family businesses and wealth.
That means that we spend most of our time focusing on ‘big assets’ – shares in family companies and real estate; houses, apartments, commercial property and farms.

The structures we create protect those ‘big assets’. However, they are often also used to protect otherimportant assets: Cottages, Jewelry,  Classic cars, Fine art collections, safety deposit boxes and IP rights. Of course, each of these different types of assets require slightly different approaches and skill sets – sometimes including the involvement of outside experts and advisers. With this focus on physical things, it is very easy to overlook another category of assets that is perhaps just as important – digital assets.

Think about your online footprint, and the various accounts that need a password to log in. Your online footprint includes social media sites, online photo storage, data clouds, digital currencies, online banking access, credit card points, and more.

Some of these things – for example the online banking – are obviously important. Others, such as online photos, perhaps less so? On the other hand, perhaps that collection of photos is in some ways the most important asset of all? If you are gone (and if you take the password with you) then those photos and memories are gone too. What about your email address? What happens to your emails when you are
gone?

Another problem can be the devices themselves. For example, without the password, some Apple and other devices become ‘bricks’. Perhaps not such a big deal, but the information, photos, and other files on the device (including your novel manuscript) might be.

Other things that seem even less important can also have financial value.

Famous chef Anthony Bourdain left his frequent flyer points to his wife in his will. He did on awful lot of flying and we imagine he had a lot of those points. Leaving them in his will ensured that his wife got the benefit of them – if he had done nothing the points (and their value) would have died with him [1] . And of course, there are some digital assets that have obvious value – especially digital currencies and NFTs.

What should you do?

For starters, make a list of your digital assets, along with usernames and passwords. Think very carefully about what you do with this  list. Even making the list can in theory be a breach of some providers’ business terms and so you need to be very sure that the list never falls into the wrong hands! The list is not just to help access the assets after you are gone – but also to let your family know that the assets exist.

When making your list, it is easy to forget things, so we would recommend using some sort of checklist. The best one we know of is from the Society of Estate and Trust Practitioners. It is 30 pages long and includes far more detail than most people need, but it is a great prompt to remind you of the things you need to think about. (Unfortunately, it is only in English).

Next, check the terms-of-service on the important sites and services you use. If you are a google/android user check out Google’s “Inactive Account Manager.” If there are other important sites you use, look for the equivalents [2] . Finally, for the assets with high financial value, make sure they are included in as part of your succession plan. This is especially important for cryptocurrency and NFTs.

Trusts and Cryptocurrency

People ask us if it is possible to put something in a trust. For example, is it possible to put a gun in a trust, or a kiss? The answer is simple – if it the thing an asset that can be owned by someone, then it can be put in trust. So guns are fine, kisses not. Cryptocurrency is an asset and so there is no reason it cannot be put in trust. However, it is important that the trust includes specific rules regarding digital assets, which can otherwise be problematic for trustees.

There are endless horror stories about assets vanishing on death. For example, in order to access Bitcoin, you need to know the password or private key — a 256-bit long string of alphanumeric characters. If you die and your loved ones cannot find the key, then the money is gone forever. This is a frustrating but also surprisingly common problem.

But that’s not the only reason trusts can be a great choice for cryptocurrency, especially as these assets come under increasing regulatory scrutiny.  Tax is also another important consideration. So if you own cryptocurrency, adding it to an existing trust or even creating a dedicated trust specifically to hold it can make a lot of sense.

If you would like more information about using trusts to secure you cyber currency and other valuable digital assets, please contact us.

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[1] Not every frequent flier points program allows the transfer of points on death, but some do.  If you have a lot of points, it is worth checking.

[2] Sadly, they don’t always exist. (As far as we know there are no Microsoft or Apple equivalents)