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Trusts – Stranger than Bacon and Eggs?

As many of you will be aware, the Czech Republic introduced a new Civil Code on 1 January this year.  One significant change included in the new law is the ability, for the first time, for Czechs to set up trusts (or svěřenské fondy as they are known in Czech).

For those of us who come from English-speaking countries the trust concept is pretty well-known.  Many expats already have trusts and even those that don't have a good understanding of what Trusts are and how they work.  In contrast, in the Czech Republic, trusts are an entirely new concept, ranking on the weirdness scale up there with unicorns and eating bacon and eggs for breakfast.  Many Czech lawyers are having trouble getting their heads around trusts. So if you are an expat you have an inbuilt advantage over many Czechs (and even a lot of Czech lawyers) because you probably already know what these magical things are and how they work.  Feel free to flaunt your new-found expertise at your next dinner party.

And Trusts really are a hot topic at dinner parties.  There has been a lot of media coverage of the new law, most of it negative and focused on the perceived (but in reality almost entirely imaginary) potential for trusts to be used by money launders, corrupt politicians and those favourites of the Czech media; 'tunnellers'

In fact the new law is a very positive development and opens up a wide range of possibilities to do useful things.  It is also relevant to expats in a number of respects, especially if they have a business here, are married to a Czech and/or considering taking out Czech citizenship.

One thing that's important to know is that in the Czech Republic there are 'forced inheritance' laws.  These are laws that restrict the ability of people to leave their assets on death to those they want to.  If you are a citizen of a foreign country, these laws don't apply to you, but if your spouse is Czech, or if you decide to become Czech yourself, then they will apply.

Problems can arise in a number of areas.  Here's one example:

Let's take Jana, a wealthy grandmother of nine grandchildren who she loves very much   In contrast to her angelic grandchildren her three adult children are 'problematic'.  Petr, the oldest, is a successful lawyer, is married and has three children.  But Petr's marriage is on rocky ground and Jana is not fond of his wife.  Jana's daughter, Lenka, is a lovely person and also has three children.  As a solo mother her financial situation is challenging and she has had problems in the past with creditors, including a period in execution.  Marek, the black sheep of the family, also has three children from a previous relationship, but is now experiencing serious problems with addiction, including periods of homelessness.

Jana really wants to help her grandchildren, and to ensure they have stable financial futures.  Yet under the old Czech law, Jana was effectively forced to leave the majority of her wealth equally to Petr, Lenka and Marek.  Of course the problem with that is the possibility that her hard-earned money will end up in the hands of divorce lawyers, Petr's ex wife, the bankruptcy executor, and local drug dealers.  Even if this doesn't happen, there's nothing to stop the children from simply spending the money rather than passing it on to the grandchildren.

But that's obviously not what Jana really wants.  The new law now provides a simple way for her to put some of her money in a trust which will 'skip a generation' and make sure that it benefits the grandchildren more directly, perhaps paying for their education, and ultimately being given to them when they reach an appropriate age (in this case 25).

Another common use of Trusts is going to be to manage family-owned cottages.  Using a trust avoids what these days seems to be almost inevitable family conflict, and prevents the ownership of land becoming fragmented in future generations.  A cottage where 16 people each own a one sixteenth share never ends up being looked after properly and is impossible to sell or repair (because 16 people never all agree on anything.)  A simple and cheap trust solves all these problems.

There are of course many other possible uses of trusts including business succession planing, charitable giving and in wills to balance the interests of spouses and children from earlier marriages.   All these things, many of which were impossible to do before, can now be done using the 'magic' of trusts.

It will be some time yet before Trusts are well-known and accepted in the Czech Republic, so in the meantime feel free to flaunt your knowledge!

About the Author: James Turnbull of Uplift has had more than 20 years of legal and financial services experience.  He is currently establishing the Czech Republic's first Trust Administration business.


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