I recently joined a webinar on trusts in Quebec. This was an interesting topic for me as there is a close connection between Quebec trusts and Czech trusts due to the fact that our trust law is heavily inspired by the Civil Code of Quebec.
One point that stood out was that in Quebec, the client and the founder of a trust are not always the same person. This led me to think about how the situation works in the Czech Republic, where the same observation can apply.
In most countries, the person who establishes a trust is also the person who adds the assets. That person is called the settlor. However, it sometimes happens that one person starts the trust by contributing some assets, and then someone else later adds more assets. In such a case, both the people are then settlors, since it is the act of contributing the assets that makes you a settlor, irrespective of what the documents might say.
In Czech and Quebec it’s a bit different. We don’t use the word settlor here, but rather the word founder (in Czech zakladatel). There is a good reason for this difference in vocabulary. The founder is the person who establishes the trust. Czech law then allows for another person who contributes assets to the trust.
The Czech Civil Code says at § 1468 that “A person who increases the assets of a trust . . . is not its founder . . “ So in Czech we have two people – the founder (zakladatel) and the contributor (vkladatel).
That’s all very interesting, but at this point you might be asking “So what?”
As I said above, most of the time, the founder and the contributor are the same person. But sometimes not. The reasons and consequences are varied, and in some cases a little problematic. Here are some examples:
Example 1 – Public Benefit
If I establish a trust with the purpose of achieving some publicly beneficial purpose, then it makes sense that I would want to encourage other people, people who also share my interest in the purpose, to contribute to my trust.
In such a case it makes a lot of sense that I am the founder, and the other people do not also become founders simply by virtue of making a contribution.
If they did you might end up with tens, or even hundreds of founders, which would make no sense.
Example 2 – Husbands and Wives
This is probably the most common situation in which the founder and the contributor don’t match. In these cases, one spouse alone, usually for practical reasons, establishes the trust, but it is then the spouses, together, who contribute their matrimonial property to the trust.
Even though this is quite a common scenario, it is worth noting that there are some disadvantages of doing things this way. In particular, the founder has certain rights (supervisory rights, rights to information, and in many cases the right to dismiss the trustees). If only one of the spouses has those rights, then it doesn’t matter . . .until they get divorced . . . when it suddenly matters a lot.
It is also important to mention the founder’s position as default beneficiary of last resort. If a trust is badly constructed, and if there are no remaining beneficiaries, then the founder gets all the money. And if there is no living founder, then the money goes to the state. Again imagine a situation where the spouses are divorced, but one of them gets all the money, or even worse, if the founding spouse is dead, all the money might go to the state.
These things are not necessarily a problem because they can all be solved by good documentation, but they are important to think about.
Example 3 – the Straw Man or White Horse
In Czech, a “bílý kůň” (a white horse) means a “front man” or “stooge” — a person whose name is used for shady business deals, while someone else secretly controls things. Interestingly, there is no direct equivalent in English. The closest I can think of is ‘straw man’
The way Czech law works right now, I can get someone else – it does not matter who – to establish my trust. It might be a family member or a friend. It might even be some random person I find on the street. I can then write lots of rules into the documentation to ensure that I keep complete control, but what’s important is that I will not be recorded on the trust statute or on the register of trusts as the founder. I can then, in a separate transaction, contribute the assets.
This matters because the founder’s name is entered into the Czech register of trusts, but the contributor’s name is not .
Why might I do this?
- I might simply want a higher level of personal privacy than the standard method. This is not always a bad thing. Privacy is very important to many wealthy people who are rightly concerned about financial attacks, and in extreme cases, physical threats, including kidnapping.
- I might be creating my trust for asset protection purposes, and want to make it harder for my future creditors to attack me, or
- I might be a criminal
In my experience, I have not seen criminals using trusts in this way. I certainly wouldn’t work with anyone wanting to use a trust for criminal objectives, (but so far nobody has asked me).
But if you are a criminal – be careful. If you build your trust badly, it might happen that your white horse actually ends up with all the money!
