Trust or foundation fund
How Entrepreneurs Protect Their Assets from Personal Liability and Debts
Both a trust fund and a foundation fund can separate your assets from personal liability, keeping them out of reach of creditors in bankruptcy or enforcement proceedings – but they work differently, and a poorly drafted founding deed can easily undo the protection. Find out how they differ and which option fits your situation.
What Exactly is a Trust Fund and How Does It Work
A trust fund (or simply a trust) is a legal structure that allows you to entrust assets to the care of a trustee, with the effect that these assets are no longer part of your personal property. Under Czech legislation, the trust fund is governed, among other things, by Act No. 89/2012 Coll., the Civil Code, which defines it as a set of assets without legal personality, which has been segregated from the founder's property and which the trustee manages for the benefit of a beneficiary. Since a trust fund does not have legal personality, the assets within it become so-called property without an owner.
The main principle of its operation is that you (the founder) place assets into the fund. The trustee manages these assets according to your instructions contained in the founder's deed or the fund's statute. At the same time, however, you also have the option to be a beneficiary (recipient) of the fund's proceeds.
The decisive factor is that the assets in the fund no longer legally belong to the founder or the trustee personally but are legally separate from their property—and this has enormous legal consequences. If you later face bankruptcy, court-ordered enforcement proceedings, or become part of insolvency proceedings, creditors cannot touch the assets held in an actively managed trust fund.
These assets are no longer part of your personal property and are not subject to the execution of judgments or insolvency proceedings against you. A creditor cannot, by court order, compel the trustee to release assets from the fund for your benefit so that they can be monetized.
A practical example: An entrepreneur in the construction industry owns a lucrative property in the city center. At the same time, he runs a company involved in high-risk projects. To protect himself from potential enforcement against the property (e.g., if his company is later declared insolvent), he places the property into a trust fund. The trustee manages it, and the entrepreneur receives income from it (as a beneficiary).
If the company later becomes insolvent, creditors cannot seize the property—it remains part of the fund. If the assets in the trust fund are linked to a business (e.g., through shares in a company), it also makes sense to address the setup of the ownership structure and company management within the framework of corporate law, holdings, and structures.
How a Trust Fund Protects Assets – The Legal Mechanism
The protection of assets by a trust fund works on the principle of legal separation. The process is as follows:
Assets in a trust fund are legally independent and are not part of your estate for inheritance purposes. This means that upon your death, the contents of the fund are not treated as your property and are not included in the division of the inheritance—they pass into the fund's administration and remain managed according to the instructions in the founder's deed.
Protection from creditors works because creditors have the right to be repaid for your personal debts from your personal property. However, by placing assets into a trust fund, these assets become property under trust administration.
Creditors cannot make a claim against the fund because the assets in the fund are legally separate from your property and do not belong to the trustee either.
A trustee has legally defined duties. They cannot act without adhering to the conditions of the founder's deed. This means that even you cannot simply tell the trustee, "Take five million CZK out of the fund for me now because I'm in debt." On the question of how liability in managing third-party assets is assessed in practice and what the implications of a claim for damages might be, the summary in the article Have you received a claim for damages for a breach of the duty of due managerial care? may also be useful. The trustee must stick to the original plan and the conditions for making distributions to beneficiaries.
The lawyers at ARROWS law firm will advise you that it all depends on how the fund is legally structured. If the founder's deed contains wording such as "the founder reserves the right to withdraw anything from the fund at any time and without limitation," then the fund fails as a protective mechanism.
A creditor can demand that the court rule that the fund is merely a formal shell without any real definition of rights and obligations. In the event of a dispute over the validity or effects of the fund's setup (including the voidability of transfers or claims of it being a "formal shell"), a procedural strategy in the area of commercial and court disputes is often necessary. There are also conditions for drawing distributions from the fund—special provisions that determine how the assets from the fund can be used. If these conditions do not exist or are vague, there is a risk that a court will challenge the fund.
If you have retained (or have as a beneficiary) the right to withdraw a distribution under certain conditions, you can collect the money—but by doing so, it returns to your personal sphere of assets and thus becomes subject to potential claims from creditors. However, the trustee is obliged to act according to the deed, not according to your new wishes outside the scope of the deed.
The Most Common Risks in Protecting Assets with a Fund
Potential Problems | How ARROWS Helps (consultation@arws.cz) |
Invalidity of the fund due to a flawed legal structure – especially if the deed is unclear, unrealistic, or violates the law. | We will structure the founder's deed to meet all legal requirements and ensure your assets are truly protected; we will ensure the fund will be recognized by the courts. |
Creditors or the tax authority challenge the fund as a "purposeful transfer of assets" – insisting that it is an act intended to defraud creditors. | We will provide a legal opinion on the fund's legitimacy; in the event of a court dispute, we will represent you and defend the fund's purpose in accordance with the law. |
The trustee's duties are unclear, leading to misunderstandings – withdrawing money takes a long time, the trustee acts contrary to the deed. | We will prepare detailed instructions for the trustee; we will ensure a clear definition of rights and obligations; we will ensure the trustee is familiar with the legal framework. |
Tax implications – assets in the fund are taxed incorrectly, posing a risk of additional tax penalties. | We will provide guidance for the fund even after its establishment; we will advise on how to correctly declare income and assets; we will ensure coordination with tax advisory services. |
Legal disputes regarding the validity or effectiveness of the fund – various authorities or courts challenge the fund's existence or its legal effects. | If a dispute arises, we will represent you in the proceedings; we will ensure a unified approach and defense of the fund in accordance with legal precedent. |
Foundation – An Alternative or a Completely Different Tool?
A foundation is often confused with a trust fund, but it serves different legal and strategic purposes.
The definition of a foundation is as follows: it is a legal entity (an organization) that you establish with the aim of supporting a specific public benefit activity. Typical examples are foundations dedicated to education, healthcare, social services, or cultural activities.
However, the Civil Code allows a foundation to be established not only in the public interest (e.g., for charity) but also for a private purpose, such as so-called family foundations. A foundation can be established for any economically or socially useful purpose, including supporting the founder or their family.
A foundation has legal personality—it is a legal entity that can own property, enter into legal relationships, and is registered in the Register of Foundations.
With a foundation today, you can be the recipient of its proceeds – the law explicitly allows the foundation to provide contributions to the founder, members of its bodies, or employees. However, a crucial difference compared to a trust fund is that with a trust fund, an additional co-trustee, who must be an independent third party, must be appointed.
The protective function of a foundation: Yes, assets in a foundation are protected from your personal creditors. Not, however, to bring you income, but because you are setting them aside for a specific purpose.
So, if you place assets into a foundation and later go bankrupt, creditors cannot force the assets to be paid back to you from the foundation. Assets in a foundation serve exclusively to fulfill its purpose.
A practical example: The owner of a pharmaceutical company wants to protect part of his assets while also building his public benefit reputation. He establishes a foundation focused on rare diseases. He contributes 50 million CZK to it.
This 50 million CZK becomes the property of the foundation and will be used to finance research. If the company later becomes insolvent, creditors cannot claim the funds in the foundation—they belong to the public and the purpose they serve.
Practical Situations – When and How to Establish a Fund
An entrepreneur in a high-risk industry faces a high litigation burden—for example, in construction, healthcare, or insurance. In such a case, the risk of a lawsuit and high damages is not theoretical, and it is therefore advisable to protect your personal assets.
A trust fund or a foundation is ideal for you. You place real estate that is not part of your business assets, or reserves or financial resources, into it. The trustee or founder manages them according to your founder's deed, and if a legal conflict later arises and you have to pay high damages, the creditor cannot touch the assets in the fund.
Secure a legal consultation with ARROWS law firm; prepare a founder's deed with clear rules; choose a trustee (it can be a legal entity, e.g., a law firm or a trust company); formally place the assets into the fund; declare the fund with the tax authority.
The owner of multiple properties and mortgage debts owns three properties encumbered by mortgages but still has other assets. At the same time, he has personal debts (for example, from an older business transaction that did not work out). Creditors are complaining and threatening enforcement.
Here, it is necessary to assess which properties can be placed into the fund. Mortgaged properties cannot simply be transferred without the consent of the mortgage lender—the lender has security on these properties. In such a case, it would be more about future assets, or only those properties or parts of assets that are not encumbered. The lawyers at ARROWS law firm will help you choose the right strategy.
Conduct a legal audit of your assets and debts; determine which properties can be transferred without violating mortgage agreements; establish the fund; gradually place the transferable properties into it.
Preparation for succession planning and tax planning: You are the owner of a portfolio of securities and inheritance shares that you want to pass on to your children, but at the same time, you want to maintain control and protection of the assets. You do not want the assets to become part of your children's personal property, where they would be at risk from their creditors or lawsuits.
A trust fund can serve as a bridge. You place the shares into it, the fund manages them, and the proceeds can be used to finance your children's needs. After your death, the assets in the fund continue to be managed for the children in accordance with the founder's deed.
The transfer of assets into the fund and subsequent distributions from the fund to beneficiaries have specific tax implications that need to be assessed. While inheritance of assets in a direct line is exempt from income tax, distributions from a trust fund are subject to different tax rules.
Consult with the legal and tax experts at ARROWS law firm; prepare a founder's deed with a long-term perspective; choose a suitable trustee (it could be a legal entity or a specialized trust company); formally place the assets.
The Most Common Mistakes in Establishing and Managing a Fund
Mistake 1: A vague founder's deed. Many entrepreneurs set up a fund with provisions in the founder's deed like: "The fund is intended to support my standard of living and address all my needs." Such a fund is not legally sound.
A creditor or court can argue that this is merely a description of personal need, not a legitimate definition of the fund. The consequence is that the fund fails in its protective function.
How we solve it: The lawyers at ARROWS law firm will prepare a founder's deed with clear criteria for distributions (e.g., "proceeds include financing the education of beneficiaries," "assets are used for the maintenance of properties intended for rent," etc.). Such a fund is legally defensible.
Mistake 2: Withdrawing assets from the fund without legal consideration. An entrepreneur places assets into a fund, which he later needs for his business, and simply takes them back. This violates the founder's deed and undermines the protection.
A creditor can later demand that the court rule that the fund was never legitimate, or that it was an act intended to defraud creditors.
How we solve it: When establishing a fund, you must be convinced that you are placing the assets into it with the intention of leaving them there for a longer period. If you know you will need them soon, a fund is not the right solution.
Mistake 3: Disregarding tax obligations. A fund is established, but the assets in it are taxed incorrectly. This triggers a penalty from the tax authority and can challenge the fund's legitimacy.
How we solve it: The lawyers at ARROWS law firm will coordinate with tax advisors from the very beginning; we will ensure that the assets are declared correctly; we will oversee all tax obligations associated with the fund.
Final Summary
Trust funds and foundations are powerful legal tools for separating assets from personal liability, but their effectiveness depends on a correct legal structure. The main difference is primarily that a foundation has legal personality (and bodies), while a trust fund functions as property without an owner, for which the trustee acts.
The main point that entrepreneurs and wealthy individuals often overlook: a fund without expert legal advice often provides no protection at all. Creditors, the tax authority, or a judge can challenge the fund if it is not legally structured correctly. This leads to the assets you thought were protected being put at risk.
Therefore, if you are considering establishing a fund and want to be sure that it will actually work, turn to the lawyers at ARROWS law firm. We will provide you with comprehensive legal advice from start to finish, set up the fund to provide you with real protection, and guide you even after its establishment. Contact us at consultation@arws.cz – we will help you protect your assets correctly and without unnecessary risks.
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Disclaimer:
The information contained in this article is for general informational purposes only and serves as a basic guide to the issue as of 2026. Although we strive for maximum accuracy, laws and their interpretation evolve over time. We are ARROWS Law Firm, a member of the Czech Bar Association (our supervisory authority), and for the maximum security of our clients, we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of the regulations and their application to your specific situation, it is necessary to contact ARROWS Law Firm directly (consultation@arws.cz). We are not liable for any damages arising from the independent use of the information in this article without prior individual legal consultation.