Wealth structuring and regulation
The main Liechtenstein vehicles used for wealth structuring and estate planning are trusts and foundations. The following have recently been the subject of discussions or legislative efforts:
- the checks and balances that can be incorporated in the structure of a Liechtenstein foundation to prevent any abuse (often referred to as foundation governance);
- asset protection and the protection of creditors in connection with Liechtenstein trusts and foundations; and
- the use of a Liechtenstein foundation as a private trust company instead of a trustee company owned by a financial service provider.
In the course of the implementation of the AIFMD in Liechtenstein, a special investment vehicle was created for families. If the investor circle only consists of members of a single family then a 'Smart Fund' can be set up. A Liechtenstein Smart Fund is an alternative investment fund in the meaning of the Liechtenstein AIFM Act and the AIFM Ordinance. It provides an opportunity for families to create a tax-neutral, internationally recognised investment vehicle for family members only (i.e., all family members who are or have been related by marriage or registered partnership, by direct or collateral line or by inheritance).i Foundation governanceFoundation types
The Liechtenstein foundation is a legally and economically independent special-purpose fund, which is formed as a legal entity through a unilateral declaration of will by the founder. Assets transferred to a foundation become independent from the personal assets of its founder. The latest reform of the Liechtenstein Foundation Law has led to remarkable amendments. In this chapter we are focusing on the area of foundation governance as one area notably affected by this reform.
For foundation governance purposes, it is necessary to distinguish between common-benefit and private-benefit foundations. For instance, a common-benefit foundation requires a registration in the Commercial Register to acquire legal capacity. By contrast, private-benefit foundations acquire legal capacity by the declaration of establishment. While a common-benefit foundation serves entirely or predominantly common-benefit purposes, a private-benefit foundation serves entirely or predominantly private or personal purposes. If this is unclear, the foundation is treated as a common-benefit foundation.External foundation governance
Common-benefit foundations are subject to supervision by the foundation supervisory authority (i.e., the Office of Justice). This authority must ex officio ensure that the foundation assets are managed in accordance with the purpose of the foundation. The law grants certain information rights to the authority; for example, inspection of the foundation's books and right to information in relation to the foundation. Furthermore, the authority may apply to court to control or remove foundation bodies, to carry out special audits or to cancel resolutions of the foundation council. Such measures are available for all foundation participants, including the founder, the beneficiaries, the foundation bodies and the members of these bodies.
As a rule, private-benefit foundations are not subject to supervision by the foundation supervisory authority. This can be changed if the articles of the foundation (voluntarily) provide for supervision.Internal foundation governance
All foundations that are subject to supervision by the foundation supervisory authority require an auditor. The auditor that is appointed by the court must be independent from the foundation. As foundation body, the auditor is obliged to annually review the management and the use of the foundation's assets to ascertain that they are in conformity with the purpose of the foundation, and must report to the foundation council, as well as to the foundation supervisory authority.
External foundation governance of private-benefit foundations is constrained because they are not subject to supervision by the foundation supervisory authority. For this reason mechanisms of internal foundation governance, particularly the rights granted to the beneficiaries, are of paramount importance. Beneficiaries of the foundation are entitled to inspect the foundation documents as far as their rights are concerned. Beneficiaries are also entitled to information, to reporting and accounts. Again, such rights are only available if the beneficiary's rights are affected. The law restricts the rights of the beneficiaries, for instance, in the event of abuse of such rights. Moreover, the rights may not be exercised in a manner conflicting with the interests of the foundation or other beneficiaries. In this respect, carefully balancing different interests is necessary. The above-mentioned rights are also restricted insofar as they can be denied for important reasons to protect the beneficiary.
To some extent, the interests of the founder can also be considered within the internal foundation governance: if the right of revocation has been reserved by the founder and if the founder is the ultimate beneficiary, the beneficiaries are not entitled to the information rights above.
Adjustments of the internal foundation governance can also result from the founder's right to provide for other supervisory bodies. This will have the consequence that beneficiaries may only demand disclosure of information about the purpose and organisation of the foundation and with regard to their own rights in relation to the foundation, and may verify the accuracy of this information by inspecting the foundation deed, the supplementary foundation deed and the regulations. Obviously, this leads to restrictions for the beneficiary to get information about the foundation. In practice, the beneficiary will not be able to get the names of other beneficiaries, for example. The beneficiary will therefore also not know what distributions other beneficiaries received.
In summary, it can be stated that the Liechtenstein legislator has implemented various checks and balances. Because of a lack of mandatory supervision of private-benefit foundations by the foundation supervisory authority, information rights particularly granted to the beneficiaries are necessary to guarantee a control mechanism. On the other hand, the interests of the founder are also safeguarded by allowing several ways to exclude or limit the information rights of beneficiaries in certain cases.ii Asset protection and protection of creditors
Asset protection and protection of creditors obviously reflect opposing interests. Needless to say, the settlor of a Liechtenstein trust or foundation seeks to protect the trust or foundation assets against third parties, but the interests of the founder or settlor are generally in conflict with the demands of third parties.Creditors of the founder or settlor
Creditors may consider different options to enforce their claims towards the founder of a foundation or trust. First, creditors may dispute contributions of assets to the foundation in the same way as they would a gift. As a rule, every creditor having an enforceable claim is entitled to do so if full compensation could not be achieved by enforcement of the claim against the founder or settlor, or this could be assumed at the time of approval of the enforcement.
Under Article 75 of the Legal Remedy Code, the challenge of a transfer of assets to a foundation or trust by a creditor must be possible under both the laws of the country of residence of the debtor and the law governing the transfer. As a result, if the transfer of assets to a Liechtenstein foundation or trust is made subject to Liechtenstein law, the challenge must be permissible not only under the laws of the country of residence of a foreign settlor or founder, but also under Liechtenstein law.
Under Liechtenstein law, the dispute of the transfer of assets must refer to actions made within a period of one year before approval of the enforcement. The one-year period will not be required if the creditor is able to prove that the debtor's (in the case of foundations, the founder's) actions are based on intent to defraud creditors, in which case a five-year limitation period from the transfer of the assets applies.
Under exceptional circumstances creditors may refer to the general principle of the ban on abuse of legal right enshrined in Liechtenstein company law.
Furthermore, in the case of rights of revocation and amendment of the purpose reserved by the founder or settlor, creditors may attempt to attach such rights.Creditors of the beneficiaries
Another instrument for asset protection is stipulated in Article 552, Section 36, Paragraph 1 of the PGR, which contains an enforcement privilege for family foundations providing that creditors of beneficiaries will not be permitted to deprive the beneficiaries of their entitlement to a beneficial interest acquired without valuable consideration by way of enforcement or bankruptcy proceedings. Such an enforcement privilege must be included in the foundation articles. In the case of mixed family foundations, such a privilege can only be implemented to the extent it serves the purpose of the foundation. It is, however, questionable whether a beneficiary who simultaneously is also the founder will be entitled to such a privilege because in the case of the founder, the beneficial interest was arguably not acquired 'without valuable consideration' since the founder contributed the assets.
In practice, however, the meaning of the aforementioned enforcement restriction is limited. The reason is that it applies only if the beneficiaries have a sufficiently specified claim at all that could potentially be attached by the beneficiaries' creditors. In the event that discretionary beneficiaries of a foundation or trust are merely members of a class of several beneficiaries without any rights to a certain share in the trust or foundation fund, there are no enforceable claims and therefore the beneficiaries' creditors cannot attach their rights, a fact that has been confirmed by the Liechtenstein Supreme Court.