Liechtenstein foundations and trusts for asset protection and wealth preservation

Liechtenstein foundations and trusts for asset protection and wealth preservation

What benefits do Liechtenstein foundations and trusts offer for asset protection and wealth preservation?

Some of us are in a fortunate position where asset protection and wealth preservation are not much of a concern because we live in countries where corruption is rare, governments are relatively stable and creditworthy, courts and governmental authorities are efficient, crime rates are low and chances that illegitimate claims will be enforced against our assets are remote.

For people living in a country where one or more of these factors are missing, however, the danger to their assets may be real and the fear that their wealth may fall into the hands of others without justification may be well-founded. For those who are legitimately concerned about asset protection and wealth preservation, Liechtenstein foundations and trusts offer distinct advantages which will be described below.

Liechtenstein foundations

Let there be no mistake: Liechtenstein provides legal assistance in criminal matters to other countries and has entered into treaties allowing the exchange of information in tax matters with an increasing number of jurisdictions. Furthermore, the creditors of a founder or settlor of a Liechtenstein foundations or trust are not without protection under Liechtenstein law: any gratuitous transfers to a trust or foundation may be challenged by creditors of the founder/settlor within one year from the transfer. If such creditors can prove intent of the founder/settlor to defraud creditors, the statute of limitations is five years.

However, for those who are looking for a safe haven for their assets without any pressure from existing creditors and want to structure their wealth in a tax-compliant way, Liechtenstein foundations and trusts offer the following advantages:

(1) Protection of privacy

In case of Liechtenstein (private) foundations, registration in the trade registry is voluntary. Even if a private foundation is registered, the identity of the founder or the beneficiaries is not disclosed. The names of the foundation council, however, are mentioned.

In case of Liechtenstein trusts, there is a registration requirement (mainly to ensure the payment of the annual tax of CHF 1,200), but this registration does not include the names of the settlor or beneficiaries.

(2) No pre-trial discovery proceedings

In contrast to a number of jurisdictions, in case of pending or threatened litigation there is no duty to disclose documents to the adversary. The only documents that may need to be disclosed upon a court order in the course of litigation are documents so-called “common documents” of the plaintiff and defendant, such as written contracts between them, or other contracts where there is a preexisting obligation to disclose them.

(3) No enforcement of foreign judgments

Liechtenstein does not enforce foreign judgments without a re-litigation on the merits unless there is an enforcement treaty (or other binding declaration) in place with the country whose courts rendered the judgment. This distinguishes Liechtenstein from a large number of jurisdictions, in particular those influenced by common-law, which often enforce foreign judgments if they were rendered in fair proceedings. Other jurisdictions only enforce foreign judgments if the other country would do the same, but have a presumption of such reciprocity.

So far Liechtenstein has only concluded enforcement treaties with Switzerland and Austria and a multilateral convention on the mutual enforcement of certain child support judgments. Liechtenstein is not a member to the Lugano Convention on Jurisdiction and the Enforcement of Judgments, and EC Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments does not apply.

In the absence of an enforcement treaty, foreign judgments may be used by a plaintiff to obtain a preliminary court order in Liechtenstein. However, the defendant may bring legal action against such a preliminary order so that the dispute will need to be re-litigated in Liechtenstein in any event.

(4) Short statute of limitations for a challenge of the transfer of assets to the foundation

In order to protect creditors, any gratuitous transfers to a trust or foundation may be challenged by creditors of the founder/settlor within one year from the transfer. The statute of limitations for transfers to the foundation/trust is five years from the transfer of assets to the trust or foundation if creditors can prove intent of the founder/settlor to defraud them.

After the expiry of these deadlines, no challenges of the transfer of assets to the foundation or trust are possible under Liechtenstein law, provided that the Liechtenstein foundation/trust is structured appropriately. In particular, decisions must be taken by the foundation council/trustee, and the foundation should not be seen as the alter ego of the settlor/founder or the beneficiaries.

(5) No attachment of the interest of beneficiaries

Both, Liechtenstein foundation and trust law, grant considerable flexibility when it comes to the determination of the rights of the beneficiaries in the trust or foundation documents. However, when asset protection is a concern, in many cases a discretionary structure with several possible beneficiaries is preferable where distributions of the capital or income of the foundation or trust are left to the discretion of the foundation council/trustee. This will ensure that there are no legal claims of the beneficiaries that can be attached by third parties.

Taxation of Liechtenstein trusts and foundations

Liechtenstein trusts are subject to an annual tax of CHF 1,200. Liechtenstein foundations may apply for the tax status of a “Private Asset Structure”, provided that they only hold private wealth and do not engage in economic activities. A foundation taxes as such a Private Asset Structure is only liable to pay the minimum annual profit tax of CHF 1,200, and no tax filing needs to be made.

However, even without this special tax status, certain types of income, including all dividends and capital gains from participations and any revenue from foreign real estate are exempt from the otherwise applicable 12.5% profit tax. In case of a foundation which only holds the shares of a holding company, it may therefore not be worthwhile to seek the status of a Private Asset Structure because any dividends and capital gains from the participation will be tax exempt even under regular taxation.

Besides the taxation in Liechtenstein, in each case the tax consequences of the establishment of the trust/foundation and any distributions from the trust/ foundation in the jurisdictions of the settlor and the beneficiaries need to be considered carefully with the assistance of local advisers. https://www.marxerpartner.com/

liechtenstein foundations

Markus Summer

Marxer & Partner
Should I use a Liechtenstein foundation as a private trust company for my family?

Should I use a Liechtenstein foundation as a private trust company for my family?

Many families use trusts as an estate planning vehicle and for wealth preservation. Increasingly, instead of using a trustee company owned by a financial service provider, a private trust company (PTC) is appointed as a trustee. The use of a Liechtenstein foundation as such a PTC offers several key advantages.

Advantages of a private trust company

However, there has been a growing trend to create a so-called private trust company (PTC) to act as a privately held trustee company only for the trusts of one family. A key advantage of using a PTC is that instead of transferring the family wealth to a company that acts as a trustee for hundreds of trusts, the family has its own trustee which is not shared with others.

This removes the risk that the trusts of a certain family are affected by problems that have nothing to do with it. In contrast, if a trustee company owned by a financial services provider is used as a trustee, there is a chance that reputational or other issues relating to a specific trust spill-over to the trusts of another family because they share the same trustee.

Moreover, in case of a PTC, the client determines who will act as the PTCs initial directors. If a trust company is owned by a financial services provider, the composition of the board of directors generally cannot be changed.

Furthermore, using a PTC facilitates the transition to another administrator of the family trusts, should this be desired. In a traditional set-up, the trust assets are registered in the name of a trust company which is owned by a financial services provider. If a new trustee is appointed, it is necessary to transfer the legal ownership of the trust assets to the new trustee.

Additionally, in most cases the outgoing trustee company will request an indemnity against any liabilities it may have from acting previously as a trustee. If a PTC is used and it is intended to exchange the administrators of the family trusts, only the directors of the PTC need to be replaced.

A common set-up of a private trust company structure

In a common set-up, the PTC is a company limited by shares. While using a PTC has several benefits, it begs the question who should act as the shareholder of the privately held trustee company. In most cases, the shareholder cannot be the settlor of the trust because then the shares of the PTC would be part of his estate which would frustrate the estate planning purpose of the trusts. A common set-up to solve this problem has been to establish a separate purpose trust whose only purpose it is to hold the shares of the PTC.

The main drawback of this approach is that again a trustee is needed for the purpose trust holding the shares of the PTC. In most cases, a trustee company owned by a financial services company is used for this purpose. This means that the reasons for not using such a company as a trustee of the family trust are still present. However, they are moved to a remoter level and are mitigated because the only assets held by the trustee company of the purpose trust are the shares in the PTC.

Using a Liechtenstein foundation as a PTC

Using a Liechtenstein foundation removes entirely the need for a trustee company owned by a financial services provider and at the same time reduces complexity. The structure then simply consists of a Liechtenstein foundation acting as trustee of one or more family trust.

A Liechtenstein foundation essentially is a fund endowed for a specific purpose which acquires the status of a legal person. It has no shareholders and therefore the question who holds the foundation does not arise. Such a foundation can be established with the sole purpose to act as the trustee of one or more trusts for the benefit of a certain family.

An illustration of this set-up:

It should be noted that when a Liechtenstein foundation acts as a private trust company, generally no special business license is necessary in Liechtenstein. This was clarified recently by a submission of the Liechtenstein government to parliament dealing with an amendment of the Trustee Act. The Liechtenstein Trustee Act deals with the regulatory framework for professional trustees and trust companies. In this submission (BuA 42/2013, p. 40 et seq.), the Liechtenstein government clarified that a PTC does not qualify as a professional trust company and does not require a license under the Trustee Act.

The government noted that a Liechtenstein PTC, like all other Liechtenstein companies without a special business license, requires a member of the board who is licensed as a professional trustee or in an employment relationship with such a professional trustee. According to the Liechtenstein government, no separate regulation of the entity acting as a PTC is necessary.

The government pointed out that the licensing requirement only applies to “professional” trustees and that a privately held trustee company typically does not meet this criterion because it is not used with the goal to create profits. The government also mentioned that the fact that the directors charge a fee to the PTC is not harmful either.

Furthermore, the government stated that even if the Liechtenstein entity charges a trustee fee to the trusts, it still does not need to be regulated because the PTC offers its services only to a closed circle of persons. The government also specifically confirmed that a Liechtenstein foundation can act as a PTC.

Conclusion

In a summary, a Liechtenstein foundation can therefore be used as a private trustee company that acts as the trustee of the trusts for a certain family. This leads to a relatively simple and cost-efficient structure and does not require a special licensing or other regulatory procedure.

The only legal requirement is the need for a local board member of the foundation who has a special business license, i.e. at least one board member of the foundation must be licensed as a Liechtenstein professional trustee or must be employed by a licensed trustee. https://www.marxerpartner.com/details-en/alias/dr-iur-markus-summer