Trust Fund vs Foundation Fund in the Czech Republic

How do a trust fund and an endowment fund differ?

When you decide to protect your assets, attorneys will usually mention two main options: a trust fund and an endowment fund. They may seem similar—both structures separate assets from your personal ownership and protect them from creditors. The reality, however, is more complex.

A trust fund is not a legal entity. This means it is not the owner of assets in the sense we know from an individual or a company.

Assets in a trust fund exist as so-called “ownerless assets”—you carve them out of your ownership and entrust them to a trustee, who then administers them according to the rules you set out in the fund’s statute. The trustee is recorded in the Register of Trust Funds as the trustee, but does not have the right to handle the assets at their discretion; they must strictly follow your instructions set out in the documents.

An endowment fund, by contrast, is a legal entity—it can have its own bank account, sign contracts, and becomes the owner of the assets you contribute to it. It must have a board of directors and a supervisory body (a supervisory board or an auditor). Simply put: an endowment fund is an entity that exists as an independent subject of law.

This fundamental difference leads to a number of practical implications that show up in day-to-day operation. If you are focused on simplicity and do not want unnecessary administrative hassle, a trust fund may seem attractive.

But if you expect that you may want to change the structure in the future, an endowment fund gives you greater freedom. Our Prague-based attorneys at ARROWS can help you assess the situation for your specific circumstances.

Legal personality and its significance

The difference between an entity without legal personality (a trust fund) and a legal entity (an endowment fund) affects how you will be able to work with the assets in practice.

A trust fund does not act externally on its own. When you need to sell real estate held in the fund, enter into an agreement with a bank, or invest money, the trustee acts. The trustee acts in their own name, but on the fund’s account. This means the bank must be informed that the trustee is acting as a trustee—otherwise it might not properly treat the assets as fund assets, and legal ambiguities could arise. In practice, this means every contract requires transparent identification of the fund.

An endowment fund communicates in its own name. When an endowment fund signs a contract, it does so through its board of directors, but legally it means the endowment fund itself undertakes the obligation and can also be sued. This simplifies a number of practical matters—for example, leasing real estate owned by the fund is much easier, because it is sufficient for the contractual counterparty that the fund is a legal entity.

From an asset-protection perspective, this also means a difference: a trust fund protects assets by carving them out and making them unavailable to the founder’s personal creditor. An endowment fund protects assets by making them the property of a legal entity that does not have the founder’s personal creditors (it only has its own creditors, if it were to incur debt as an entity).

Flexibility and options for changes

This is where many disputes and planning mistakes arise. The principle is simple: a trust fund is intended to be unchangeable; an endowment fund can be changeable.

When you create a trust fund, the founder and the trustee draw up a statute defining how the fund is administered, who the beneficiaries are, and under what conditions they receive distributions. This statute must be formally executed as a notarial deed. Once the fund is entered in the register, it is very difficult to amend the statute. Czech law allows changes only if a court decides they are necessary—and that is expensive, time-consuming, and uncertain.

Why? Because the law aims for a trust fund to be stable and for the founder not to be able to simply change the rules they created. If it were easy, we could “tinker” with the statute and thereby weaken asset protection. Mandatory immutability is therefore a feature, not a bug.

An endowment fund is more flexible in this respect. The founding deed of an endowment fund may include rules for its potential amendment, which the founder reserves. The fund’s board of directors can then, within the limits of those rules, adapt the fund’s operation to changing circumstances. If the deed reserves that the founder retains the right to change the content, then the founder has that right—of course within the meaning and purpose of the foundation.

In practical terms, this means: If you establish a trust fund and five years later find that your heirs have fallen into financial hardship and need significantly more money from the fund than you originally planned, you are out of luck. You would need a court. With an endowment fund, you could—if you reserved that power—approve the change faster and more easily.

Asset protection: What really prevents enforcement?

Both instruments offer protection, but with important caveats that many people overlook.

The principle of protection is the same for both: once you set aside assets into a fund (whether a trust fund or a foundation fund), they cease to be part of your personal assets. A creditor to whom you owe money cannot simply come and “seize” assets from the fund. The assets are not listed among your property, and therefore cannot be subject to enforcement.

But watch out for three important exceptions:

First, assets that are already subject to enforcement at the moment you want to contribute them to the fund cannot be contributed at all. If your house is already under enforcement, you cannot “save” it by setting it aside into a fund. Such a legal act would be invalid and, if done with the intent to prejudice creditors, may also lead to criminal liability.

The attorneys at ARROWS, a Prague-based law firm, have hands-on experience in structuring funds—knowing when it is legitimate planning and when it is fraud that will not stand up in court.

Second, the Czech Insolvency Act allows the insolvency administrator to challenge (i.e., avoid) the founder’s legal act by which assets were set aside into a fund, if the act was carried out within the last three years before the commencement of insolvency proceedings with the intent to prejudice creditors, or if it prejudiced creditors and the counterparty knew or must have known of that intent.

For gratuitous legal acts (including the free transfer of assets into a fund), avoidance is possible for up to five years before the commencement of insolvency proceedings. If you therefore establish a fund and go bankrupt two years later, the insolvency court may “take back” the assets and distribute them to creditors.

Third, if the beneficiary of the fund is a related person (e.g., your children) and the assets were set aside gratuitously, the time limits for challenging the legal act by the insolvency administrator are extended up to five years, as stated above. The court will say: “If you set aside assets for your children precisely when the debtor had financial problems, it looks like an attempt to hide from creditors.”

Practical scenarios: When to choose a trust fund?

Scenario 1: A company owner without children, concerned about creditors

You own an s.r.o. with a billion crowns in the account. You have high business-related debts and you know that if the business failed, creditors would go after your personal assets. You want to “hide” your savings abroad and a countryside property out of creditors’ reach.

Recommendation : A trust fund. You do not need to change beneficiaries, you have no family complications, and a stable structure is your priority. A trust fund will give you protection and straightforward administration. You can choose a trusted person or a bank as trustee. ARROWS attorneys can help you with the structure and the notarial deed.

Practical scenarios: When to choose a foundation fund?

Scenario 2: A family business you want to transfer to your children gradually

You have a family company that you want to transfer to three children, but not all at once, because two of them are still young. You want a structure that will allow assets to be shifted among them in the future, and you expect the family situation to evolve (your daughter may get married, your son may take a wife, etc.).

Recommendation : A foundation fund with a private purpose. You can reserve the right to change beneficiaries and rules. The foundation fund will retain influence over the assets even after the transfer, and you can set it up so that the board of directors manages the inheritance gradually, not all at once. It is more flexible and adapts better to reality.

Tax aspects: Where can problems arise?

A trust fund and a foundation fund are taxed similarly, but with nuances.

A trust fund is considered a corporate income tax payer. It must register its tax liability within 15 days of its establishment. Profits from assets (e.g., rental income, interest, dividends) are taxed at a rate of 21%. Increases in assets (contributions) are not considered income, so they are not taxed. Distributions to beneficiaries from profits are taxed as the beneficiary’s income at a rate of 15%.

A foundation fund has similar tax obligations, but it may have a special regime if it is considered publicly beneficial. However, family foundation funds (for private purposes) usually do not have such a regime. Again, profits are taxed at the fund level, and distributions to beneficiaries are taxed at their level.

In practical terms, this means: If the fund holds real estate and you rent it out, the rental income is taxed as the fund’s income. If you then pay your daughter CZK 100,000 from that income, she must report it as income and pay tax on it.

It is important to take this into account when planning the structure. ARROWS attorneys in Prague can help you with tax optimisation so that the fund operates efficiently.

Final summary

The choice between a trust fund and a foundation fund is not trivial. Both structures protect assets from creditors and enforcement proceedings, and both separate assets from your personal ownership. But they differ in how you will be able to work with those assets in the future.

A trust fund is more stable, simpler, and cheaper to operate. However, you cannot easily change it and you must think everything through at the outset. A foundation fund is more flexible, adapts better to changes, and gives you greater control.

But this comes with more administration and higher costs. Mistakes in the choice bring real problems: If you choose the wrong instrument, you risk being unable to adapt to reality later, or having to ask the court for changes (which takes months and costs tens of thousands of Czech crowns). In the worst case, you may create a structure that a court later challenges as an attempt to fraudulently avoid creditors.

That is why it is safer to resolve the matter with experts. The attorneys at ARROWS, a Prague-based law firm, have experience with both instruments, understand their practical implications, and help clients structure assets so that the protection is truly effective and legally secure. If you are not sure which route to choose, consultation@arws.cz is the first place to turn.

Read also:

• Tax Risks and Safe Structuring of Family Foundations and Trust Funds
• How to Set Up a Czech Foundation with a Dual Structure (Governance + Strategy)
• How to Protect Yourself as a Company Executive in Czechia (Before It’s Too Late)
• How to Structure Intercompany Agreements in a Holding to Avoid Disputes and Tax Risk
• Do Your Board Minutes Pass the Test? How Courts Treat Corporate Resolutions in the Czech Republic