Czech Trust Funds

How a trust fund works in practice

In its basic form, a trust fund is a separated pool of assets without legal personality, administered by a person appointed by the founder (the trustee). The founder draws up the deed—a legal document in the form of a notarial deed—which contains all the rules on how the assets are managed and who benefits from them.

The key legal effect is simple: by transferring assets into the fund, the founder ceases to be their owner. The assets become autonomous—they cannot be seized by the founder’s personal creditors and are not part of the founder’s estate. Ownership rights are exercised by the trustee “for the benefit” of certain persons (beneficiaries, also referred to as the entitled persons), in accordance with the deed determined in advance by the founder.

In a family business, this can mean the following: the owner of a company cannot imagine their life’s work falling apart after their death among five adult children with different views. They therefore place the business interest into a trust fund with a deed stating: “The assets will be administered by one trustee, profits will be distributed according to a specified key, the interest will not be sold without the consent of the protector, who will be the eldest child, and upon the death of any child, their share will not pass to their descendants but will return to the fund for redistribution among the remaining ones.”

This approach prevents an outsider from forcing the company to be liquidated, while also avoiding lengthy and costly inheritance disputes. In a family business in the Czech Republic, a trust fund typically serves precisely to maintain continuity of management and keep assets together—even if circumstances genuinely trigger changes. When setting up who and how will exercise the rights associated with a business interest held in a trust fund, the broader group arrangement and corporate governance are often addressed as well, for which an overview within corporate law, holdings and structures may be helpful.

Key benefits for the family and the business

Once assets are transferred into a trust fund, they cease to be part of the personal property of the founder, the trustee, or the beneficiary. This means that if the founder later faces debts, insolvency, or enforcement proceedings, their personal creditors cannot claim the separated assets. A company or assets held by the fund therefore cannot, without more, be sold or encumbered by the founder’s personal creditor.

This protection is particularly valued by entrepreneurs, where personal and business risks overlap. By separating family wealth into a trust fund, you protect it in advance—regardless of what happens to your business in the future.

However, it is essential to understand that this protection applies only prospectively and must not be misused to prejudice creditors. If you already have due debts or enforcement is underway, transferring assets into a fund may be assessed as a legal act prejudicing creditors. The article Transfer of a business interest in a family business: How to set the legal steps correctly and avoid tax and asset risks also follows on from the practical impacts of transferring an interest and the related asset and tax risks in family businesses.

Such conduct may be declared ineffective under Section 589 of Act No. 89/2012 Coll., the Civil Code, as amended, which means the assets could still be subject to enforcement. In addition, in such a case the founder may also face criminal liability for the offence of harming a creditor under Section 222 of Act No. 40/2009 Coll., the Criminal Code, as amended. In situations where, alongside civil-law impacts, potential criminal-law consequences of asset transfers are also being addressed, it is advisable to consult the approach with experts in criminal law.

Anticipating inheritance and preventing family disputes

In traditional inheritance, assets are divided under the law or a will among all heirs, often in equal shares. This means that a family business founded by one person is suddenly split, for example, among three children with different interests and ideas. One is satisfied with the returns, the second wants to play manager, the third wants to sell the company. The result is often a conflict that can last for years. For dispute prevention within interconnected companies and for setting contractual relationships within a group, the additional article Dispute prevention in a holding: Setting contractual relationships between connected companies may be useful.

A trust fund bypasses this problematic division. The company remains under the trustee’s control and only profits are distributed—not a share in the fund’s assets. In the deed, you can specify exactly how profits are distributed, who has the right to participate in decision-making, and under what conditions.

Continuity of management without interruption after the founder’s death

When a founder dies, their assets usually become part of the estate and the “clock” for probate proceedings starts running. During these months or years, decision-making in the company is often paralysed—no one is sure who is legally authorised to act in respect of assets that have not yet been distributed.

A trust fund prevents such delays. The company carved out into the fund remains under the management of the trustee without any abrupt interruption. This helps avoid lengthy inheritance disputes that could otherwise paralyse the business—the trustee continues managing the company in accordance with the deed.

Practical steps to establish a trust fund

1. Precise preparation and defining the purpose

Establishing a trust fund “just because” is a mistake. First, you need to be clear about what exactly you want to achieve. Is your goal to protect the company in the event of your premature death or disability? A gradual transfer of the business to the next generation? Separating personal assets from business risks? Preventing family conflicts?

Each of these objectives affects how you draft the deed. If the primary aim is to protect the company in difficult life situations, you will focus on very strict limits on what the trustee may and may not do. If you want a gradual handover, you will instead set conditions under which the beneficiaries progressively become involved in decision-making.

The attorneys of ARROWS advokátní kancelář assist you at this stage in identifying what you truly want and, based on that, propose a deed structure that will be effective and secure under Czech law.

2. Selecting the trustee – a crucial decision

The trustee is the person or institution that actually manages the fund’s assets. They are not the owner, but they exercise ownership rights—for example, voting as a shareholder, deciding on sales or acquisitions, and managing finances.

In practice, common mistakes are made when choosing a trustee:

• A spouse or adult child without instructions. The family may think it will be easier, but without clear rules and experience, the administration becomes chaotic and can lead to confrontation within the family.
• A single trustee without safeguards. If you have only one trustee and they resign or fail, the fund becomes paralysed. It is better to appoint multiple trustees or include a mechanism for replacement.
• A legal entity without a tax analysis. Some families choose a bank or a professional trustee company, which can be a solid option, but costs and tax implications must be considered.

Experienced attorneys at ARROWS advokátní kancelář can help you select the trustee and at the same time ensure they are suitable and have the necessary guidance on how to proceed.

3. Drafting the deed – the most common mistakes

The deed is a notarial deed that describes the rules in detail. It is not only a legal formality, but also your key document for managing future relationships within the family and in relation to the assets.

Typical mistakes include:

• Vague conditions. If you write “the child will receive income if they behave properly”, a court later will not know what you meant, and a dispute will arise.
• Unclear designation of beneficiaries. If you do not identify the beneficiaries clearly in the deed, someone may later claim they should have been included and challenge the entire structure, which can even lead to the fund being invalid.
• Missing dispute-resolution mechanisms. The deed does not describe what happens if the trustee fails, or how decisions are made when beneficiaries disagree.
• Lack of oversight. If no one has the right to monitor what the trustee is doing, the trustee may abuse their position and no one will detect it.

The attorneys at ARROWS advokátní kancelář will draft the deed precisely to your needs and help you avoid legal pitfalls under the Czech legal system.

4. Registration in the Register of Trust Funds

A trust fund is created only upon registration in the Register of Trust Funds maintained by the Ministry of Justice of the Czech Republic. Without this registration, the fund is legally ineffective and the assets “contributed” to it are not actually segregated.

The registration is carried out by a notary or the trustee by filing an application. In practice, this is usually handled by the notary who drafted the deed, but it is important to know that:

• Without registration, the fund does not exist.
• The register is only partially public—information about the founder and beneficiaries is protected.
• The fund is automatically assigned an identification number (IČO) and must register for corporate income tax.

Tax aspects of a trust fund in a family business

For income tax purposes, a trust fund is treated as a fictitious taxpayer—a legal entity without legal personality—under Act No. 586/1992 Coll., on Income Taxes, as amended. This means that:

• Contributing assets is not subject to income tax.
• The fund’s profit is taxed at the 21% corporate income tax rate (valid as of 2026).
• Distributions to beneficiaries are subject to a 15% withholding tax.

In practice, it is more complex, especially when the fund holds ownership interests or shares. There are situations (for example, where the fund holds at least a 10% stake in a subsidiary for 12 months) in which the gain on the sale of such interests is fully exempt from tax. However, this requires correct legal and tax structuring from the outset.

Important note: As a separate corporate income tax taxpayer, a trust fund must register with the tax authority and comply with all tax and record-keeping obligations. If you plan to contribute foreign assets to the fund or intend to operate the fund cross-border, you should consult tax specialists. 

Risks of an improperly structured trust fund

A trust as protection for a family business: practical examples

Case 1: A company with multiple owners in the family

The owner of a mid-sized manufacturing business is considering that he wants to pass the company on to his three daughters in the future. He is concerned that if it is done through a traditional inheritance, each daughter will inherit one third and all three will have to agree on every important decision. By placing the company into a trust, a trustee is appointed (for example, the eldest daughter or an external person) who will manage the company without unnecessary conflicts. The deed will specify that profits will be divided into three parts, but that the sale of the company or fundamental decisions will require the consent of at least two of the three daughters.

Case 2: Protecting assets from debts

An entrepreneur runs a company where he is personally liable for obligations. As part of his business strategy, he wants to keep the family house and certain investments as his own assets that creditors could not reach in the event of problems with the company. He places them into a trust. From that moment, they are protected from his personal creditors, provided the trust was established in time and without the intent to prejudice creditors. If the company later went bankrupt and creditors obtained authority to seize the settlor’s assets, they cannot claim the real estate or investments placed into the trust because they are no longer part of his personal property.

Case 3: Gradual transfer to the younger generation

The founder of the company is now older and wants to place the company into a trust so that it gradually passes to his son, who is young and inexperienced. The deed will provide that for the first five years the company will be managed by an external professional trustee. After that, management gradually transitions to the son, who has already gained some experience. In this way, the company is not handed over to an inexperienced heir and continuity is ensured.

How to avoid misuse of the trust by creditors or the state

Attorneys most often encounter situations where someone wants to get rid of debt by transferring their assets into a trust during enforcement proceedings or when insolvency proceedings have already been initiated. As mentioned above, such conduct is ineffective under Section 589 of Act No. 89/2012 Coll., the Civil Code (Czech Republic), and the assets may still be reached by creditors. In addition, the settlor faces the risk of criminal prosecution for the offence of harming a creditor under Section 222 of Act No. 40/2009 Coll., the Criminal Code (Czech Republic).

However, if you establish the trust before any problems arise, and if you establish it for legitimate reasons (asset protection, generational transfer, management of a family business), it is entirely legal and safe.

The attorneys of ARROWS, a Prague-based law firm, ensure that the trust is established correctly and at the right time. If you suspect it could be challenged later, they will advise you how to structure it so that it is resilient to all potential attacks.

A trust or an endowment fund – when to choose which?

In practice, owners of family businesses face the question: is a trust better, or an endowment fund?

A trust is better when:

• You want high flexibility and discretion.
• You want the assets managed primarily for a particular family.
• You want to minimise administration.
• You have plans for how to transfer the assets gradually.

An endowment fund is better when:

• You want stronger legal certainty and an institutional framework (an endowment fund has legal personality; a trust does not).
• You also have public-benefit objectives (support for culture, science, education) – this is even a basic prerequisite for an endowment fund.
• You want the fund to operate more autonomously, with more firmly defined management rules.
• You plan to cross national borders (foreign assets are handled better through an endowment fund).

The attorneys at ARROWS, a Prague-based law firm, will help you choose the right structure. In some cases, they recommend a combination of both.

Final summary

A trust is an effective and flexible tool for managing family assets and ensuring business continuity across generations. When properly structured, it protects assets from the settlor’s personal creditors, prevents inheritance disputes, and allows the settlor to clearly set out how the assets will be handled in the future.

At the same time, it is a legal instrument that entails significant risks: an error in the deed, incorrect registration, an inappropriately chosen trustee, or a lack of oversight may lead to the paralysis of the fund, lengthy legal disputes, or even the invalidity of the entire structure. The attorneys at ARROWS advokátní kancelář have gained experience with these risks and know how to prevent them.

If you want to ensure that your assets are safe, transferred to the appropriate generation without disputes, and structured in a tax-efficient way, focus on high-quality legal preparation from the very beginning. 

The attorneys at ARROWS advokátní kancelář will assist you with this complex process—from the initial consultation, through drafting the deed, to registering the fund and its subsequent administration. Contact us at consultation@arws.cz so that we can assess together what your trust fund should look like.

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