Author: Svěřenské fondy a trusty

We are all in favour of taking steps to prevent Money Laundering and Terrorism, and we strongly support any sensible steps taken by the State to present the misuse of the financial system for these purposes.

Unfortunately, over recent years, the EU has started to go far beyond what is sensible, imposing a range of measures which in our opinion, have zero impact on criminals, but have a hugely negative effect on innocent individuals and families as they seek to go about their legitimate business.

It is also interesting to keep in mind the protections provided to us all by the GDPR and the European Convention on Human Rights.  The Convention says:

Article 8 – Right to respect for private and family life

1. Everyone has the right to respect for his private and family life, his home and his correspondence.
2. There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country

Despite these basic protections, the EU and the Czech State have imposed a number of rules around the Register of Beneficial Ownership which seem to directly conflict with those important rights.  They argued that this interference with our fundamental rights was justified because it was proportionate and necessary.

We support the existence of a UBO register.  It is important in preventing abuse of the system.  The State, banks, and contractual parties have a logical interest in knowing who is behind companies and who they are really dealing with. Criminals must not be allowed to use companies to mask their criminal activities.

What we strongly disagree with is the extension of this system so that the private details of company shareholders and in some cases also trusts and foundations are exposed to public view, available not just to those with a legitimate interest, but to anyone at all.

Anyone at all includes your nosey next-door neighbours and people with ill intent including gold diggers, blackmailers and scam artists.  Thus, the state has been taking steps with the stated objective of preventing crime which have the actual effect of assisting criminals.  That’s not proportionate and nor is it necessary.

Thankfully, common sense has finally prevailed!

Last week, the Court of Justice of the European Union (CJEU) decided that the measures in the EU Fifth Anti-Money Laundering Directive (5AMLD) which require EU Member States to give the public unlimited access to their UBO registers are invalid because they breach privacy and data protection rights.

The CJEU said that the measures in 5AMLD go beyond what is necessary and proportionate. Making the register public enables a potentially unlimited number of persons to find out about the material and financial situation of a beneficial owner, and that information can never be recalled from the register. Making the register fully open to the public thus violates individuals’ privacy, it said, concluding that Member States must put appropriate safeguards in place to protect privacy in accordance with articles 7 and 8 of the Charter of Fundamental Rights of the European Union.

As a result of the judgment, Luxembourg and Holland have already suspended public access to their registers

We suppose Czech will follow soon (as the Czech State is now in effect in breach of GDPR!) and we hope that a renewed sense of common sense will apply to future AML measures.

For most families, establishing a trust is an important decision. Quite a lot of money can be involved, and you will be stuck with the results of your decision for a long time. In this way, trusts are like cars. Buying a car is also a relatively big decision and you also have to live with the results of your decision.

But that is where the similarity ends.

You can see a car and you can touch it

When you go shopping for a car, you can look at the car in the showroom, you can sit in it, you can feel the quality of the interior. You can close the door and listen to hear if you get a “clunk” or a “clink”. Looking at the car, even before you take it for a test drive, you can form some opinions about whether you like it and whether it is the right car for your family. Is it big enough? Is it too big? Is it strong enough? Is it comfortable enough? Is it practical?

Sometimes it is easy to recognise that a particular model is not suitable for you.

This one is very economical but not the ideal family car

In contrast, all trusts look like this:

The good ones look like this, the bad ones, the deluxe ones and even the ones that don’t work at all, they all look like this.

 

The price of cars correlates (at least to some extent) to their quality

People understand that as a general rule, better cars are more expensive. Thus, a Skoda Superb costs more than an Octavia, which in turn costs more than a Fabia.

Based on our experience, this rule doesn’t apply to trusts. It is true that a very ‘cheap’ trust is more likely to be a bad one but spending a lot of money is also no guarantee of quality. Some of the worst trusts we have seen have also been some of the most expensive.

 

Most people understand at least something about cars.

You don’t have to be a mechanic or a motoring expert to recognise some basic issues that a car might have. For example if your car is missing wheels, or some other fundamental part which will prevent it from working, you won’t buy it. If the car has bad rust it might fall apart. You can see that and so you won’t buy the car. And if your car isn’t working, then you know it isn’t.

Sadly there are many people out there who have trusts that simply don’t work. They are missing the legal equivalent of wheels, brakes, or steering. But because of the nature of trusts, those same people don’t even realise that they have a problem, and by the time they do realise, it is too late.

Some of these ‘bad trusts’ are so bad that they are far worse than having no trust at all.

 

You can take a car for a test drive

With a car, you can try before you buy. With a trust there is no way of doing that. As we said above the only real way to ‘road test’ your trust is to wait for something to go wrong and then see what happens. But of course by then, it’s too late!

 

Optional Extras cost more.

With a car, there is a base price. For example here is the entry-level Skoda Octavia:

With most new cars it is possible to add ‘optional extras’ for some additional cost

This Octavia includes a lot of features that are not optional at all (wheels, seats, steering, brakes, windows etc). But the standard model also includes quite a few things that are not really essential, but nice to have. For example, air conditioning, cruise control, and central locking. Skoda considers these as standard features, which are included automatically in the price: 519,000 CZK.

But if you want, you can play with the configurator on the Skoda website and add a few optional features. I did that. I chose a different engine, metallic paint, a towbar, heated seats and so on. In no time my price increased to 731,000 CZK

Do I really need these extras? Perhaps I don’t. But even so, they would all certainly be nice to have.

For example, I don’t plan to tow a trailer, but who knows? One day, having a towbar might be useful. On the other hand, is it worth the extra 25,000 CZK for something I might never use? Perhaps not.

Trusts are a bit different.

For example, your trust could include the possibility for you to make changes your trust, the ability for the trustees to borrow money or own cybercurrency. It could include the possibility for you to appoint a supervisor. It could include the possibility for you to relocate the trust to a different country.

Many people really don’t need these extra things just as I don’t really need a towbar. It is very important to point out that you cannot do these things unless your trust has clauses that allow them – just as I cannot tow a trailer if I don’t have a towbar.

But unlike the towbar, the ‘optional extras’ for your trust are normally free. They are not pieces of metal but rather (standard) words printed on paper. It may be that you have no plan to buy bitcoin or appoint a supervisor, just as I have no plan to tow a trailer. But because there is no additional cost, the basic starting point for good trust should always include:

• • The basic things (wheels, brakes)
  • The non-optional extras (air conditioning), AND
  • The optional extras (a towbar) that you will probably never use, but might one day

Of course once you start to ask for truly unique features (a jacuzzi built into the back seat, machine gun mounts) then those things will need to be tailor made for you, and that will of course cost more. Likewise, if your trust is not standard (not a car at all but rather a bus, a truck, or a tank) then different rules will apply.

But we see too many people paying the deluxe price for a basic car, and sometimes they don’t even get all the essential standard features – let alone the full set of optional extras.

 

Goodness! This is complicated. What should I do?

We have some simple tips to help you avoid these pitfalls:

1. NEVER try to make a trust without professional help. This is an almost certain recipe for disaster
2. Make sure the professional who is helping you knows what he or she is doing. The Czech Republic is full of so called and self-proclaimed ‘trust experts’. Most of these people are not experts at all. We estimate that in the CR there are around 10-15 people who are truly experts in this area. Did you strike it lucky? Probably not.
3. Count the pages. Optional extras take up space. If your total package of documents (Statute and contract) is less than 20 pages, it will be missing important things
4.  If you are not 100% sure your expert really is an expert then get a second opinion before you sign anything. This won’t be free, but can potentially repay the cost many times over
5. If you are paying more than 100,000 CZK for a standard trust, then you are probably paying too much. Of course if you trust is non-standard, then the costs will be (and should be) higher.

If you would like a second opinion of your proposed or existing trust, please just contact us.

It was nice to learn that the first edition of our book, Svěřenské fondy – krok za krokem, has been successful; so successful it seems that it has sold out.

Next week we expect the second edition to arrive from the printers

Many ordinary Czech people already know something about trusts, and they are increasingly interested in knowing more. They are interested not just in how trusts can help the wealthy, but also how they can help their own families.  We suppose this is the main reason behind the success of our book.  Before our book came out there was no easily accessible source of this information.

Our book is aimed at these ordinary Czech people and is written in language that they can understand. Our aim was that the book would not be dry and boring, but rather as fun and entertaining as possible. We wanted to provide practical rather than theoretical information. Lots of great positive feedback from readers tells us we have succeeded in these goals

The second edition is updated with the latest information on the Register of Beneficial Ownership and includes two new chapters.

So if you have not already read it, now is a great time to order a copy of the second edition.  To order please contact us by email. The book costs 379 CZK plus 49 CZ postage and handling (a total of 428 Czech Crowns).

Planning is important.  Putting those plans into action is even more important. But when you do implement your plans, you need to make sure the job is done correctly.

This is especially the case in the area of trusts, where a badly implemented plan can sometimes be even worse than no plan at all.

In this month’s article, I illustrate this point by highlighting the story of Philip Macalister from New Zealand.  It is an interesting and also slightly sad story made more powerful by the fact that I know Philip personally.

Philip lives in New Zealand As we have mentioned in the past, and as the box to the right illustrates, unlike the Czech Republic, New Zealand is a country of trusts.

So in the area of trusts, New Zealand and the Czech Republic are very different.  But there are other areas of life where our two counties are very similar.  For example, many Czechs have cottages where they like to go at the weekends.  To some people, this obsession with tiny houses can seem strange, but not to New Zealanders who also enjoy spending time in their weekend houses and holiday homes, which they call the “Bach[1]”.

Philip’s story can be read in full (in English) in this article from the newspaper in New Zealand. It is a great illustration of the importance not just of setting up a trust, but of structuring it correctly so that it works as it should.

The reason that the trust was set up in the first place is that Philip’s grandfather bought a cottage in 1920, and he wanted it to stay in the family after he died in 1967, for use by future generations.  This is a very common and logical reason for setting up a trust.  Putting the cottage in the trust means that it belongs to ‘the family’ but not to any particular person, it is not subject to future inheritance proceedings and if the trust is set up correctly, then it will also fairly manage the cottage into the future, avoiding the family conflict which is otherwise almost inevitable.  It will also achieve the other goal, which is to make sure the cottage stays in the family.

So a trust was an excellent idea.  Or at least it would have been a good idea if it had been established correctly

In fairness, the trust did its job for quite a long time, but in the end, it failed to achieve its purpose because although the cottage is still in the family, some family members, including Philip, have been ‘shut out’ against their will.  At the same time, the trust caused rather than prevented family conflict.

These problems were all the result of the way the trust was designed in the first place.  A better structure design could have prevented all this.  As Philip himself says,

“You should always have an independent trustee. You need an odd number, so you could have one from either side of the family and an independent … And you need a mechanism to refresh trustees, . . . .  every three years you could retire one on rotation. And with trustees the decisions should be unanimous.”

This is a good starting point and is one of the points we made in our article in 2015 on this very topic.

There are a few more mechanisms that we would also build into something like this to make sure that it works.  If you are interested in a copy of a case study showing how a typical well-designed cottage trust looks please email us.

The moral of this story is to remind you of the need to make sure that you get professional help when setting up your trust.  A do-it-yourself approach can save money in the short term but often ends up costing a lot more in the long term.

 

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Caption:  This is a picture of a typical New Zealand batch.  If you would like to see a picture of Philip and the actual batch involved on this case you can find them in the linked article.

 

 

 

 

[1] This word is pronounced different from the name of the composer.  In Czech, it would be written Bač.*

Is Inheritance Distasteful?

Daniel Craig seems to think so.

Thinking about inheritance probably isn’t the most positive activity for many people. Nobody likes to think about their own death, and for that reason, some people avoid this topic completely.

Others take the view that, since they’ll be dead, it’s not really their problem, and their children can solve it.

And there is another group who seem to secretly hope that that they are immortal. (Because they will never actually die, inheritance is therefore not something they need to worry about).

Not surprisingly, we disagree with these three avoidance strategies. If you have not (at the very least) thought about what happens to your assets when you die, then it is highly likely you are creating a big mess for your family to clean up. Not only that, but unplanned inheritances very often result in serious family conflict. They also deliver results that are not actually what you would have wanted (if only you had actually thought about it).

So we strongly recommend investing a little time in this task – because doing so is likely to save a lot of money and stress in the future.

But, back to Mr Craig. Unlike some, he has actually thought about his inheritance.

Perhaps that’s not surprising. He has two very good reasons to consider this topic;

• Together with his wife he has assets estimated to be worth 3.8 billion CZK.
• He has a complicated family situation. He has two children, one with his ex-wife, Fiona Loudon and the second with his current wife, Rachel Weisz. Ms. Weisz also has a son from a previous relationship.

So it’s great that he has turned his mind to this topic. Perhaps that’s not surprising.

What’s more interesting is the conclusion he has reached. In an interview with Candis magazine, Mr Craig revealed he will not be leaving much to his children.

“I don’t want to leave great sums to the next generation. I think inheritance is quite distasteful. My philosophy is get rid of it or give it away before you go.”

Mr Craig is not alone in sharing such sentiments, and while his future heirs might not be very enthusiastic about these plans, it is his money to do what he likes with.

. . . but . . .

If he wants to do this, he is going to need a very good plan.

For example, If Mr Craig lived in the Czech Republic he would have to deal with Title III of the Czech Civil code, which gives Ms Weisz and both of his children (and maybe also his stepson) a fixed right to inherit part of his estate.

In the UK, where Mr Craig actually lives, his children have similar although less clearly defined rights. Another factor in the UK is inheritance tax which – at a top rate of 40% – will also eat up quite a bit of the 3.8 billion.

It is possible to solve these problems, but only if a properly planned strategy is used – often (but not always) involving a trust.
We hope that Mr Craig has a good adviser and a good plan.

Of course leaving nothing at all to your children is at the extreme end of the scale – but there are often very good reasons for leaving children less than they might otherwise have expected. Perhaps the best-known example of this is American billionaire Warren Buffett who is quoted as saying that;

“[t]he perfect inheritance is enough money so that [children] feel they can do anything, but not so much that they could do nothing.”

This is a good philosophy and one that is very popular amongst our wealthier clients – but again it is not a result that you can achieve just by wishing it. You need to make and implement a plan.

A few photos from last week’s succesful seminar; „Seven Years of the Trust Law in the Czech Republic” at which we were delighted to present.

We have published another installment in our series of educational videos.  This on is on the topic “Czech Trusts and their Uses”.

You can watch the video (in Czech language only) here:

We are delighted to be presenting at this prestigious event which is jointly organised by APRSF, STEP, and the Czech Bar Association.

The seminar takes place on 13 November and will be presented in English.

Click here for the full program and registration details

We are pleased to announce that we are continuing with the regular seminars for trustees and trust advisers that we run in conjunction with Deloitte and J & T Family Office for the APRSF.

After successfully completing the course, participants will understand the structure, history, and practical uses of trusts in the Czech Republic. At the same time, the seminar will cover in detail the duties and obligations of trustees. The seminar is especially suitable for lawyers, private bankers, and other professionals who provide advice to clients in the field.

The seminar is for:

• Anyone who has, or is considering accepting appointment as a trustee.
• Lawyers, notaries, and others interested in a more in-depth knowledge of trust funds – appropriate to providing advice to clients.
• Private bankers and financial advisers who want to provide comprehensive financial planning advice.
• Anyone else who wants to deepen their knowledge and understanding of trusts in the Czech Republic.

After the successful completion of the seminar, including the final exam, participants will receive a certificate of completion.

The next seminar will take place on 24-25 November 2021 in Prague.

If you are interested in more information about the seminar, pricing and registration, please download a detailed syllabus here (in Czech) or send an e-mail to info@trusty.cz

Most of our readers are not as wealthy as the Samsung family, and we do not have inheritance tax in the Czech Republic (yet).

However, this article illustrates the importance of being ready for every eventuality.

One way to protect yourself from any future inheritance tax is to set up a Czech trust or a trust in another jurisdiction – but of course, you need to do that BEFORE any new tax arrives.

It is not always easy to open a bank account for a Czech Trust.

In the past, one of the best choices was Waldviertler Sparkasse Bank AG (WSPK) and we successfully directed a number of our clients to that bank.

Unfortunately, WSPK was recently taken over by Česká spořitelna, a. s. (CS). Following the takeover, CS has begun unilaterally closing trust accounts. This is a very disappointing approach as they are doing this without any attempt at consultation or discussion with clients and seem to be prioritising internal policies over common sense and good customer service.

If you are affected by this change, please contact us. We can recommend alternative banking providers who will be able to meet your needs.

Farewell WSPK.  You will be missed.

As you may know the law in this area has changed.

There has been some interesting media coverage of these changes – especially on the impact that they have on Mr Babis and his trusts.

The new law was finally passed as 37/2021 Sb. Zákon o evidenci skutečných majitelů (Law on the Register of Beneficial Owners) and takes effect on 1 June 2021.

As we have mentioned previously, one of the promised benefits of the new law was that it can automatically extract all the necessary data from the Evidence SF. Our hope was that this would mean that most clients do not need to do anything.

Unfortunately, for most trustees, the reality does not live up to these hopes.  The reason is that the definition of Beneficial Owner in the new act has been changed to include two additional groups of people:

• Beneficiaries
• Anyone else (including Eligible Persons) in whose “main interest” the trust has been established.

 

As a result the data on the Evidence SF rarely includes all the needed information.  In other cases, the information on the Evidence is ‘not good enough’ for the automatic extraction.  For example, if the beneficiaries of your trust are “all my children” that’s not good enough.  For the Register of Beneficial Owners it is necessary to include the names of each individual child.

Likewise, if your trust has Eligible persons, automatic extraction will also not work.

That means that almost all trustees will need to manually register their trust on the Register of Beneficial Ownership once the new law takes effect.  (This applies even if you have already registered in the past because the definition of beneficial owner has now changed).

Unlike in the case of the previous law, there are significant penalties for breaches of your obligations in this regard, so it is important that you comply with them.

The records in the Register of Beneficial Owners are not public so for most clients, this will be a bureaucratic formality rather than any real change.  The exception to this is in the case that your trust owns a larger shareholding in a Czech company – in which case your trust details will be visible indirectly (i.e. not via the trust by via the company).

If you need help with this, please contact us.