Svěřenský nebo nadační fond

What exactly a trust fund is and how it works

A trust fund (in Czech, svěřenský fond; in English, a trust) is a legal structure that allows you to place assets under the care of a trustee, with the result that those assets are no longer part of your personal property. In the Czech legal tradition, a trust fund is governed, among other things, by Act No. 89/2012 Coll., the Civil Code, which defines it as a pool of assets without legal personality that has been separated from the founder’s assets and is administered by the trustee for the benefit of the beneficiary.

The main operating principle is that you (the founder) contribute assets to the fund. The trustee then administers those assets in accordance with your instructions set out in the trust deed. At the same time, you may also be the beneficiary (recipient) of income from the fund.

The decisive factor is that the assets in the fund no longer legally belong to the founder or the trustee personally, but are legally separated from their assets – and this has major legal consequences. If you are later affected by bankruptcy, enforcement proceedings, or become part of insolvency proceedings, creditors cannot reach assets placed in an actively administered trust fund. 

These assets are no longer part of your personal property and are not subject to enforcement of a judgment or insolvency proceedings brought against you. A creditor cannot, by court order, compel the trustee to release assets from the fund for your benefit so that the creditor can monetize them.

A practical example: A construction entrepreneur owns a lucrative property in the city center. At the same time, they run a company involved in high-risk projects. To protect against potential enforcement against the property (e.g., if the company later enters insolvency), they transfer the property into a trust fund. The trustee administers it and the entrepreneur receives income from it (as the 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 the business (e.g., through shareholdings in a company), it also makes sense to address the ownership structure and corporate governance setup within corporate law, holdings and structures.

How a trust fund protects assets – the legal mechanism

Asset protection through 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. This means that upon your death, the contents of the fund do not behave as your property and are not part of the inheritance distribution – they pass into the administration of the fund and remain administered according to the instructions in the trust deed.

Protection against creditors works as follows: creditors are entitled to repayment of your personal debts from your assets. However, by transferring assets into a trust fund, those assets become assets held in trust administration. 

Creditors cannot assert claims against the fund because the assets in the fund are legally separated from your assets and do not belong to the trustee either.

The trustee has legally defined duties and must not act without complying with the conditions of the trust 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 how liability is assessed in practice when administering another person’s assets and what impact a demand for compensation for damage may have, you may also find the summary in the article Have you received a demand for compensation for damage due to a breach of the duty of due managerial care? useful. The trustee must adhere to the original plan and the conditions for distributions to beneficiaries.

Our attorneys in Prague at ARROWS will point out that it depends on how the fund is legally structured. If the trust deed contains wording such as “the founder retains the right to withdraw anything from the fund at any time and without limitation,” then the fund fails as a protective mechanism. 

A creditor may seek a court decision that the fund is merely a formal оболка without real delineation of rights and obligations. In the event of a dispute over the validity or effects of the fund’s setup (including avoidance of transfers or allegations of a “formal shell”), procedural strategy in the area of commercial and litigation disputes is often required. There are also conditions for drawing benefits from the fund – special provisions that determine how assets from the fund may 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 distributions under certain conditions, you can take the money – but it then returns to your personal asset sphere and becomes subject to potential creditor claims. However, the trustee is obliged to proceed according to the deed, not according to your newly expressed wishes outside the framework of the deed.

Most common risks when protecting assets through a fund

Endowment fund – an alternative or a completely different instrument?

An endowment fund is often confused with a trust fund, but it serves different legal and strategic purposes.

The definition of an endowment fund is as follows: it is a legal entity (organisation) established to support a specific public-benefit activity. Typical examples include funds dedicated to education, healthcare, social services, or cultural activities.

An endowment fund has legal personality – it is a legal entity that can own assets, enter into legal relationships, and is registered in the endowment register.

The key difference compared to a trust fund is that with an endowment fund you cannot be the beneficiary of the proceeds yourself – the assets are designated to support a public-benefit purpose. If you contribute one million CZK to an endowment fund, that million is no longer “yours” in the sense that it cannot be withdrawn back at any time. An endowment fund is recognised as a legal entity, and its assets therefore are not counted as part of your personal assets.

The protective function of an endowment fund: Yes, assets in an endowment fund are protected from your personal creditors. However, not in order to generate income for you, but because you dedicate them to a public-benefit purpose.

If you contribute assets to an endowment fund and later go bankrupt, creditors cannot achieve having the assets paid back to you from the fund. Assets in an endowment fund serve exclusively to fulfil its public-benefit purpose.

Practical example: The owner of a pharmaceutical company wants to protect part of their assets while also building a public-benefit reputation. They establish an endowment fund focused on rare diseases. They contribute CZK 50 million to it. 

Those CZK 50 million become the property of the endowment fund and will be used to finance research. If the company later becomes insolvent, creditors cannot claim the funds in the endowment fund – they belong to the public and to the purpose they serve.

Practical situations – when and how to establish a fund

An entrepreneur in a high-risk sector faces a heavy 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 appropriate to protect your personal assets.

A trust fund is ideal for you. You contribute real estate that is not part of your business assets, or advances or financial funds. The trustee manages them according to your trust deed, and if a legal conflict later arises and you have to pay high damages, the creditor cannot reach the assets in the fund.

Arrange a legal consultation with ARROWS, a Prague-based law firm; prepare a trust deed with clear rules; choose a trustee (it may be a legal entity, e.g., a law firm or a trust company); formally contribute the assets to the fund; declare the fund to the tax authority.

An owner of multiple properties and mortgage debt owns three mortgaged properties, but still has remaining assets. At the same time, they have personal debts (for example from an older business transaction that did not work out). Creditors complain and threaten enforcement.

Here it is necessary to assess which properties can be contributed to the fund. Mortgaged properties cannot simply be transferred without the consent of the mortgage lender – the lender has security over those properties. In such a case, it would rather involve future assets, or only those properties or parts of the assets that are unencumbered. The attorneys at ARROWS, a Prague-based law firm, will help you choose the right strategy.

Carry out a legal audit of your assets and debts; find out which properties can be contributed without breaching mortgage agreements; establish the fund; gradually contribute those properties that can be transferred.

Preparation for generational succession and tax planning: You own a portfolio of securities and inheritance shares that you want to pass on to your children, while also maintaining control and protecting the assets. You do not want the assets to become part of your children’s personal assets, where they could be exposed to their creditors or court proceedings.

A trust fund can become a bridge. You contribute the shares to it, the fund manages them, and the proceeds can finance your children’s needs. After your death, the assets in the fund continue to be managed for the children in accordance with the trust deed.

Transferring assets into a fund and subsequent distributions from the fund to beneficiaries have specific tax implications that must be assessed. While inheritance of assets in the direct line is exempt from income tax in the Czech Republic, distributions from a trust fund are subject to different tax rules.

Consult the attorneys and tax experts at ARROWS advokátní kancelář; prepare the deed of foundation with a long-term perspective; choose a suitable trustee/administrator (this may be a legal entity or a specialised trust company); formally contribute the assets.

Most common mistakes when establishing and administering a fund

Mistake 1: A vague deed of foundation. Many entrepreneurs set up a fund with provisions in the deed of foundation such as: “The fund is intended to support my standard of living and to address all my needs.” Such a fund is not legally workable.

A creditor or a court may argue that this is merely a description of a personal need rather than a legitimate definition of the fund’s purpose. As a result, the fund fails in its protective function.

How we address it: The attorneys at ARROWS advokátní kancelář will prepare a deed of foundation with clear criteria for distributions (e.g., “part of the proceeds is used to finance the education of the beneficiaries”, “the assets are used to maintain real estate intended for lease”, etc.). Such a fund is legally defensible.

Mistake 2: Withdrawing assets from the fund without legal consideration. An entrepreneur contributes assets to the fund that they later need for their business and simply takes them back out. This breaches the deed of foundation and undermines the protection.

A creditor may later seek a court decision that the fund was never valid, or that it was an act intended to prejudice creditors.

How we address it: When establishing a fund, you must be confident that you are contributing the assets with the intention of leaving them there for a longer period. If you know you will need them again soon, a fund is not the right solution.

Mistake 3: Failure to take tax obligations into account. The fund is established, but the assets in it are taxed incorrectly. This triggers a penalty from the tax authority and may call the fund’s legitimacy into question.

How we address it: The attorneys at ARROWS advokátní kancelář will coordinate with tax advisors from the outset; we will ensure that the assets are declared correctly; we will oversee all tax obligations associated with the fund.

Final summary

Trust funds and foundation funds are powerful legal tools for separating assets from personal liability, but their effectiveness depends on proper legal structuring. A trust fund is suitable if you want to protect your assets while still drawing returns from them. A foundation fund is intended more for long-term public benefit and is not designed for personal protection with the founder drawing income.

A key point that entrepreneurs and high-net-worth individuals often overlook: a fund without expert legal advice often provides no protection at all. Creditors, the tax authority or a judge may challenge the fund if it is not constructed correctly under Czech law. This can result in assets you believed were protected becoming exposed to risk.

If you are considering establishing a fund and want to be sure it will truly work, contact the attorneys at ARROWS advokátní kancelář. We will provide comprehensive legal advice from start to finish, set up the fund to give you genuine protection, and guide you even after it has been established. Contact us at consultation@arws.cz – we will help you protect your assets properly and without unnecessary risks.

Read also:

• Holding Structures, Foundations, and Trust Funds in the Czech Republic for Slovak Nationals
• How to Set Up a Holding Structure for Asset Protection and Tax Efficiency
• Provisions in a Business Owner’s Will: How the Testator’s Instructions Can Affect the Distribution of Assets
• How to Respond to a Damages Claim for Breach of Due Managerial Care
• Defending Managers and Owners in Economic and Tax Crime Investigations