An endowment fund is a very intriguing instrument for the management and protection of private and family assets. It has its own legal personality, offers more flexible administration compared to some other structures, and allows for a high level of discretion while still maintaining full control over its operation through the administrative board.
Assets managed by an endowment fund cease to be a part of the founder’s personal property and are thus protected from creditors, enforcement proceedings, and the consequences of the founder’s insolvency. However, this applies only if the fund is established in time, under proper circumstances, and based on a carefully prepared foundation deed. As with a trust fund, its content sets the rules of the game for the long term.
If you want to protect family assets, actively manage them without interference from other parties, ensure their intergenerational transfer, and at the same time retain control over who receives benefits and under what conditions, an endowment fund is definitely worthy of your attention.
Case Study: A Businesswoman Facing Retirement with a Desire to Maintain Control
The founder and majority owner of a manufacturing company with a turnover exceeding CZK 200 million is considering a gradual exit from operational management over a horizon of five to ten years. Throughout this transition period, she wishes to retain decisive influence over the management of the assets, continuously adjust the rules for their distribution between her two children, and concurrently ensure that the assets remain protected from potential claims by third parties, be they creditors or future spouses of her children.
A will does not address the situation in this case, as it postpones the moment of transfer; the assets would become subject to inheritance proceedings, leaving the founder with no mechanism to manage the transfer process during her lifetime.
A holding structure leaves the business shares within the founder’s personal estate, and thus within the reach of potential creditors.
A trust appears to be a natural alternative but faces a fundamental hurdle: the founder wishes to remain a beneficiary of the trust. In such instances, the law requires that an additional independent third party from outside the family be appointed as a co-trustee. Introducing such a third party and entrusting them with the management of the family wealth is unacceptable to her. Furthermore, the founder’s planned five-year exit horizon assumes repeated adjustments to the management rules and distribution conditions, whereas a trust does not offer such flexibility within its establishing document.
The solution to this situation may be an endowment fund where the founder becomes a member of the management board (initially alone, later joined by her children), retains direct influence over asset management and distribution decisions, and can continuously adapt the foundation deed and the fund’s statutes to the changing circumstances of her gradual exit.
What is an Endowment Fund and How Does it Differ from a Foundation?
An endowment fund belongs to the category of so-called foundations/endowments, which are legal entities established by setting aside assets for a specific purpose. An endowment fund is a distinct legal entity. Unlike a trust, the subject of the first part of this series, which lacks legal personality, an endowment fund acts in legal relationships in its own name, possesses its own identification number (IČO), is registered in the Endowment Register, and is the sole owner of the contributed assets.
The protective effect is similar: assets transferred to an endowment fund cease to be the personal property of the founder, meaning that, in principle, they cannot be reached by their creditors, bailiffs, or insolvency administrators. However, this protection is not absolute. The legal system provides tools to protect creditors against fraudulent behaviour, for example, if assets were transferred to the fund with the intent to defraud creditors or at a time when the founder was effectively insolvent, creditors can defend themselves using the concept of relative ineffectiveness or via bankruptcy law provisions.
An endowment fund unlike a foundation (the second type of foundation/endowment), does not create an endowment core or endowment capital, does not have to serve a publicly beneficial purpose (it can be used for purely private and family goals), and does not have any significant restrictions on providing contributions to members of the endowment fund’s bodies or persons close to them. The administrative board of an endowment fund can have a single member (whereas a foundation requires at least three), the fund is not restricted by a prohibition on the alienation of assets forming the endowment core (the invested assets can be managed more freely), and overall, the management and administration are simpler than in the case of a foundation (for example, an endowment fund has no statutory obligation to audit its financial statements, which the law imposes on a foundation when specified limits are exceeded).
The Foundation Deed: The Document on Which Everything Rests
An endowment fund is typically established by a foundation deed or alternatively by a testament. In addition to standard details (name, registered office, identity of the founder, contribution amount, etc.), the deed must contain provisions that directly dictate the rules for the functioning of the fund, its purpose, the conditions for providing distributions, and the designation of the administrative board and its decision-making process. The foundation deed is filed into the collection of deeds of the Endowment Register and is publicly accessible. In practice, detailed rules for asset management, conditions and methods of providing contributions, or the internal organization of the fund are therefore not regulated directly in the foundation deed, but rather in the statute, an internal document that is not publicly accessible, allowing for a more detailed and flexible setup.
The fund comes into existence as a legal entity only upon its registration in the Endowment Register, which is maintained by the registry courts.
Governing Organs: Who Manages and Who Supervises
By law, an endowment fund must have two mandatory organs. Administrative Board is the statutory body that represents the fund externally and manages its assets. A single member is sufficient, and this position can be held by the founder themselves, as well as by a person entitled to receive contributions from the fund. The management board decides on specific contributions from the fund in accordance with its purpose and the foundation deed.
The Inspector or a Supervisory Board is the supervisory organ. It oversees the performance of the management board and reviews the financial management of the fund. A member of the supervisory organ cannot simultaneously be a member of the management board.
The foundation deed may also establish an optional organ, such as a family council. The family council primarily performs a safeguarding function: if the founder passes away, suffers a restriction in legal capacity, or is otherwise unable to exercise their rights, the family council takes over their powers and becomes the supreme organ of the fund. This ensures the fund can operate continuously even without the founder, without key decision-making (especially amendments to the foundation deed or the election of management board members) becoming impeded. The composition, procedural rules, and scope of powers of the family council are defined by the foundation deed or the statutes.
The practical advantage is substantial: the founder can be a member of the administrative board and directly participate in managing the fund’s assets. They retain control over financial and operational decisions without the assets remaining in their personal ownership, avoiding all associated risks. At the same time, nothing prevents them from being one of the beneficiaries entitled to distributions from the fund.
Financial Management: What the Fund Can and Cannot Do
An endowment fund manages its assets in accordance with its purpose and foundation deed. The prevailing legal opinion is that a fund may engage in business operations only as a secondary activity to support its main purpose, generating profit should not be the primary purpose of the fund itself. In practice, however, this does not pose an obstacle: for specific business projects, separate limited liability companies, so-called SPVs (Special Purpose Vehicles), are established. These SPVs can fully engage in business, and their 100% business shares are owned by the endowment fund.
This does not mean the fund cannot generate returns. Real estate rentals, dividends from shares in subsidiaries, or returns from a financial portfolio are all permissible, provided they serve to fund the purpose of the fund. The limitation lies in the fact that profit generation must not be the sole raison d’être of the fund.
Distributions from the fund can take both monetary and non-monetary forms: regular payments or lump-sum contributions, settlement of educational expenses, providing real estate for personal use. The person to whom the distribution has been provided is obliged to use it in accordance with the conditions (if any are set) under which it was received; otherwise, the fund can demand its return.
Furthermore, it must be taken into account that the assets of the fund generally cannot be pledged or otherwise used to secure a debt. For example, it is not possible to pledge a share in a subsidiary (SPV) owned by the endowment fund. For banks and other financing institutions, which routinely require security for a loan via a pledge over the debtor’s assets or shares in their companies, this restriction can represent a hurdle. However, the situation is resolvable at the level of the SPV itself: a pledge can be created over assets owned by the subsidiary (typically real estate, receivables, or other assets of the SPV), but not over the corporate share itself. It is advisable to account for this limitation when designing the asset structure and during negotiations with financing institutions.
Publicity and Discretion
The endowment fund must be registered in the Endowment Register, which is open to the public. Basic data about the fund and the members of its organs are accessible in the register. The foundation deed is filed in the collection of deeds, as are the annual financial statements of the endowment fund.
However, the law offers one crucial exception: upon request, certain data registered in the Endowment Register, as well as documents filed in the collection of deeds for a family fund, can be hidden from the public.
In addition to the Endowment Register, the fund must also be registered in the Register of Beneficial Owners. However, this register is not publicly accessible (access is granted primarily to public authorities and designated entities within AML procedures).
Dissolution of the Fund
An endowment fund can be established for a definite or indefinite period. The fund is dissolved upon the expiry of the period for which it was established, the achievement of its purpose, or the impossibility of fulfilling its purpose. The foundation deed may further specify under what conditions and in what manner the fund can be dissolved.
Following dissolution, the liquidation phase begins: the liquidator settles the fund’s debts, potentially liquidates the assets, and distributes the liquidation remainder in accordance with the foundation deed, which usually designates the recipient of the liquidation remainder at the time of the fund’s inception. The fund ceases to exist upon its removal from the Endowment Register.
Conclusion
An endowment fund is not a universal solution for everyone. However, it can be a highly suitable tool for entrepreneurs, investors, and holdings looking for a structure that combines legal personality, flexible management, robust asset protection, and the ability to retain control over governance without the interference of an outside party. It is undoubtedly an instrument that deserves attention.
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Are you considering an endowment fund as a tool for asset protection or intergenerational wealth transfer? Contact us.
Should you require further information, please contact Jiří Absolon or your designated contact person at our office.
This document is a general communication only and does not constitute legal advice in any specific matter.
