Following our earlier series of articles on family business, we will now discuss one of the other closely related planned legal reforms: the issue of trust funds. We will focus primarily on analyzing this legal institution and its significance for legal practice. Trust funds were briefly touched upon in the article on the Family Business Action Plan, as the creation of a legal institution for managing family assets and ensuring the indivisibility of assets during generational transfers is one of the proposed measures under the Action Plan for the Development of Family Businesses in Slovakia.
Trusts represent one of the models of asset management that is particularly popular abroad and has a firm place in foreign legal systems, where they are generally referred to as “trusts.”
A characteristic feature of trust funds is that the owner of the assets, primarily the founder of a family business, has the ability to determine how their assets, including the family business, will be managed in the future. It is important to emphasize that current legislation does not provide for the possibility of establishing conditions for asset management in the event of the settlor’s death; therefore, the settlor has no legal means to ensure that his wishes and vision are upheld even after his death.
The use of trust funds is primarily associated with intergenerational transfers (for example, in the case of inheritance), which result in ownership being gradually fragmented into a larger number of smaller shares, while it is also necessary to take into account subsequent generations, following which the shares would likewise be divided into increasingly smaller and smaller portions. In the case of inheritance by direct descendants, the business share may not fragment to the extent that it prevents the effective management of the family business; however, a different situation may arise in the case of subsequent generations, when it is reasonable to expect the original share to be divided into several smaller shares, which may number in the dozens. The fragmentation of ownership into smaller shares raises several issues, particularly regarding the management of the business or the distribution of profit shares. Another issue may arise, for example, when a minor descendant acquires a share in the family business through inheritance. Since a minor heir lacks sufficient experience to manage the business and is also not fully legally competent, it is impermissible for them to manage the family business independently.
Abroad, these issues are often addressed by establishing trust funds, which ensure the indivisibility of assets and facilitate their transfer to subsequent generations. Currently, however, such a legal framework does not exist in the Slovak Republic; therefore, it can only be discussed in terms of de lege ferenda. It is precisely the creation of the institution of trust funds—provided their legal framework is properly designed and adopted through the legislative process—that could provide simpler solutions to these situations within our business environment as well.
Although we refer to a “trust fund” in the context of trust funds, it is important to emphasize that, unlike investment funds, trust funds are not considered separate legal entities even abroad; thus, they lack legal personality.
A trust fund represents a set of assets, such as business shares in a family business, that is set aside for a specific purpose and managed by a third party (the trustee) for the benefit of a predetermined person (the beneficiary). It allows the owner of the assets, such as the founder of a family business, to determine how their assets will be managed in the future, thereby preserving the unity of the assets and preventing their division, while also ensuring that such assets are not subject to inheritance. The rules governing the management of assets in a trust fund are defined in the trust fund charter, which is binding on the trust fund administrator; the administrator is obligated to manage the assets exclusively in accordance with the trust fund charter. The charter can therefore clearly define who, in what manner, and to what extent will participate in the family business and enjoy the benefits arising from it. The charter can therefore be described as the most important document when establishing a trust fund; we therefore recommend consulting with experts regarding its drafting, or entrusting it directly to them, particularly to eliminate any risks that could arise from an improperly or inadequately drafted charter.
The conditions for appointment to the position of trust fund administrator are determined by national regulations. This may be either an external individual, such as a professional manager who is sufficiently capable and experienced to manage the family business, or, under certain circumstances, a family member may also be appointed to the position of administrator, provided that the nature and function of the trust fund are consistently maintained; thus, the role of trustee cannot be equated with the outright acquisition of a business interest in the family business. Abroad, it is not uncommon to have multiple trustees, for example, in the form of a combination of a family member and a professional manager, which preserves both expertise in asset management and a personal connection to the family as such.
If we wish to examine the use and legal regulation of trust funds in greater detail, we can refer, for example, to the existing Czech legal framework. During the recodification of private law, the Czech Republic incorporated trust funds into Act No. 89/2012 Coll. of the Civil Code (hereinafter the “Czech Civil Code”), which classifies them under property rights, specifically in the section on administration of third-party assets. Such classification is logical, as the administration of third-party property is the very essence of trust funds. The Czech legal regulation of trust funds is relatively extensive, with nearly 30 provisions dedicated to them, which legally regulate the very nature of trust funds, their functions, asset management, and their dissolution.
Under Czech law, a trust fund is created by separating assets from the founder’s ownership such that the separated assets are entrusted, pursuant to a contract, to a trustee who is obligated to manage them properly. It is important to note that the establishment of a trust fund simultaneously creates separate and independent ownership of the assets thus set aside. However, the assets in a trust fund are not owned by the founder, the trustee, or the beneficiaries. The Czech Civil Code also establishes minimum content requirements for the trust deed, stipulating that it must include at least a description of the assets constituting the trust fund, the purpose and conditions for distributions from the trust fund, as well as information regarding the duration of the trust fund and its trustees. The administrator may be any natural person who is fully capable of performing legal acts. If so provided by law, a legal entity may also be designated as the administrator. After the establishment of the trust, its founder retains the right to exercise oversight over it; for example, the founder has the right to challenge the validity of a legal act performed by the trustee or to request the court to remove the trustee and appoint a new one. The trust ceases to exist upon the expiration of the term for which it was established or upon the achievement of its specified purpose. Another cause of termination is an agreement among the beneficiaries to dissolve it. Last but not least, a trust fund may be dissolved by a court decision. Upon the dissolution of the trust fund, the assets held therein vest in the beneficiary. If there is no beneficiary, the assets revert to the founder. The ultima ratio solution is to transfer the assets to state ownership in cases where the assets cannot be transferred to either the beneficiary or the founder of the trust, for example because they are no longer alive.
Although the institution of trust funds is most commonly used in practice in connection with family businesses, its other practical applications should not be overlooked. The legal prerequisite for establishing a trust is not that its settlor be engaged in business; thus, this institution can also be used by families who are not in business, or who have never been in business, but who wish to have clearly defined rules for the use of their assets, which can be an effective way to eliminate conflicts that often arise, for example, in inheritance matters and which cannot currently be effectively resolved. The trust fund’s charter will therefore specify who, when, how, and in what proportion may use, for example, real estate after the death of its original owner.
Since the legal framework for trust funds and family businesses is still in the process of being drafted, it is possible that certain changes will occur in the proposed legislation during the legislative process. However, we will continue to monitor the entire legislative process and will keep you informed in a timely manner of any developments regarding trust funds and family businesses.
