The introduction of the trust concept into Czech law

On 1 January 2014 a new Civil Code came into effect in the Czech Republic. The new Code has re-codified the old civil law, and introduced amendments reflecting the values of modern democratic society. A new chapter on trusts, under the generic heading ‘Administration of third parties’ assets’ has been inserted.

The Civil Code divides the administration of third party assets (the ‘trust’) into two basic types: the simple trust and the comprehensive trust.¹ In the first scenario, the simple trust, the trustee’s only responsibility is to ensure that the nature and purpose of the trust assets are preserved. The trustee cannot change the nature or purpose of the trust assets without the consent of the beneficiaries. On the other hand, the comprehensive trust gives the trustee much broader powers as he or she can manage and administer the trust assets in the way that is necessary in order to preserve, enhance and indeed increase their value.

The rules for administration of trust assets are set out in the new chapter.² The fundamental duty of the trustee is to manage the trust assets with the due care of a good pater familias; in other words, honestly, faithfully and prudently and ultimately with the highest regard for the purposes of the trust assets. Where there are more beneficiaries, the trustee must always act independently and fairly between all beneficiaries, including situations where the trustee is also one of the beneficiaries. Linked to this fundamental duty, is a requirement that the trustee must not mix his or her own assets with the trust assets and the trustee must endeavour to avoid any conflict of interest as between him and the beneficiaries. If the trustee is unable to avoid conflict of interest his duty is to notify the beneficiaries of such a conflict.

The trustee manages the trust assets as an agent for the beneficiary therefore there is specific protection for the beneficiaries in situations where the trustee is able to acquire part of the trust assets in his or her personal capacity or may be able to personally enjoy certain trust assets. In these scenarios specific consent of the beneficiaries is required.

There is no automatic liability of the trustee for any damage or loss to the trust assets as a result of their management of the trust fund. The law details instances where there is presumption that the trustee is not liable, such as damage caused by vis major or depreciation by usual wear and tear. The ability to seek the court’s assistance to mitigate the trustee’s liability for loss of trust assets in circumstances where, for example, the trustee accepts the trusteeship on the basis of an invalid contract, is set out in the new Code.

It is important to note that the trustee is considered by law to be the beneficiaries’ agent when dealing with third parties regarding the trust assets. Therefore any rights or obligations accrued as a result of the actions of the trustee in respect of the trust assets not only bind the trustee but also the beneficiaries. However, if the trustee acted ultra vires then any rights of third parties acquired in good faith are not infringed.

The Civil Code requires the trustee to create an inventory of the trust assets if it is required under the trust contract, trust rules or by law.³ When the trustee is required to create an inventory he or she is obliged to deliver the inventory to the beneficiaries.

Rules regarding prudent investment by the trustee are set out in the Code.⁴ The trustee is prohibited from investing more than 5% of the trust fund into the shares of one company. The trustee is also allowed to place the trust fund on a current or fixed deposit account with a local or foreign bank, but only if there is a possibility for the trustee to withdraw the funds on demand or within 30 days of the demand.

The Code also deals with termination of trusteeship and in particular describes situations when normally the trusteeship comes to an end.⁵ Interestingly, the law stipulates that if the trustee, who is a legal person, ceases to exist, then the person who has the responsibility to manage the trustee’s affairs will also be responsible for notifying the fact of cessation of the trustee to the beneficiaries. The law is however silent on who the person with the responsibility to manage the trustee’s affairs is or can be.

The model legislation for the new trust law was taken from the Civil Code of Quebec.⁶ Quebec is, strictly speaking, not a common-law jurisdiction, indicating that the Czech legislators were careful not to introduce a concept totally alien to the civil-law tradition.

The introduction of the trust concept into the Civil Code will hopefully help Czech private client practitioners and their clients to better grasp the trust concept which in turn may lead to greater use of offshore trusts by Czech high-net-worth individuals.