The Liechtenstein Foundation: a Living Will

(Published summer/autumn 1994)

The Liechtenstein Foundation is an ideal portfolio investment vehicle from the management of numbered accounts to the structuring of complicated estates. Investors wishing to shelter their assets from high taxes, to maximize asset protection and at the same time to maintain personal control over their assets as well as provide for the orderly devolution of their worldly goods upon their death, are well advised to consider the Liechtenstein foundation.

Liechtenstein foundations which manage offshore funds pay practically no taxes in Liechtenstein and are free from official supervision. All information concerning the foundation is inaccessible to the public and to all authorities.

Concept: An Incorporated Estate

A foundation is an incorporated estate which has been set up for specified purposes. The estate has the status of a legal person and exists entirely separate from the founder?s personal assets. The formation of the foundation makes possible the severance of certain assets from the personal estate of the founder and assures the legal autonomy of assets so severed. The assets must be exclusively administered so as to realize the intentions of the founder.

Simple and Discrete Formation

The founder may be a natural person or a legal entity of any nationality or residence. The formation of the foundation is achieved by means of an endowment either in the form of a deed or by testamentary disposition. The foundation deed must state the name and residence of the foundation, its objects, the foundation assets, the method of designating the foundation executive and the use to be made of the foundation assets, should the foundation be liquidated.

As a general rule a foundation may not be revoked, nor may its purpose be altered unless the foundation deed expressly so provides.

No Registration Requirements for Family Foundations

Normally the foundation only acquires legal personality when entered in the Public Register. However, certain types of foundations, depending upon their purpose, may acquire legal personality upon formation and need not be registered. These include ecclesiastical foundations, family and mixed family foundations, being foundations created for the purpose of maintaining and educating the members of one or more families, as well as foundations whose beneficiaries are specifically designated or ascertainable. If, however, such foundations engage in commercial activities they must nevertheless be registered. Such foundations as do not require registration must deposit the deed (but not the by-law) of the foundation with the Public Register Office. Deeds so deposited are not accessible to the public. Any information whatsoever concerning the foundation, including the foundation name, the founder, the executive and so forth, are not available to the public.

The existence of the non-registered foundation and the assets owned by it, is held absolutely confidential. Therefore, the foundation is an excellent vehicle for maintaining investor anonymity.

Investor Control over a Professional Administration

The foundation assets are administered by an executive consisting of one or more members, one of whom must be a qualified Liechtenstein attorney-at-law or fiduciary. The foundation executive must realize the founder?s wishes as stated in the constitutive foundation documents.

The founder may make special arrangements in order to retain full control over the foundation during his lifetime. A protector may be appointed to supervise the activities of the foundation executive after the decease of the founder.

Foundation Assets

At the time of formation the foundation requires a minimum paid-up capital of 30.000,- CHF. It may, at the time of its formation or at any time thereafter, receive further assets from the founder or third parties.

Limited Liability and Unlimited Structuring Possibilities

Only the foundation assets are available to creditors in satisfaction of the foundation debts. The foundation has neither members nor shareholders.

If the constitutive documents provide accordingly, the foundation may have beneficiaries who may be named in the foundation deed or the deed may describe the manner of naming beneficiaries at a later date, possibly by means of a separate by-law. In this way the identity of the beneficiary will never be revealed to the Public Register with whom a copy of the foundation deed, but not of the by-laws, must be deposited.

Foundations may also be set up for charitable or ecclesiastical purposes. Many employers form a foundation which manages employee pension and benefit funds.

The foundation may not be formed to pursue commercial objects unless such activities are ancillary or necessary to the pursuit of the non-commercial foundation objects.

The law places practically no limits whatsoever upon the structuring of beneficial interests which may be absolute, conditional or entirely discretionary.

The founder may designate himself as a beneficiary for life and provide successive generations with successive life interests in the foundation assets. Liechtenstein law does not have a rule against perpetuities or accumulations. The beneficial entitlements may be conditional or unconditional, discretionary or vested, subject to time limitations or to positive or negative obligations. Inasmuch as the foundation assets will not form part of the founder?s testamentary estate, the legal norms of his personal law cannot restrict the structuring of the rights of heirs and remaindermen. The constitutive instruments may provide that any person who challenges the same is to be automatically deprived of any entitlement from the foundation. These possibilities are very important for founders who live in countries where a fidei commis is not possible or may only be limited to one or two generations. It is of a major importance to founders living in jurisdictions having high succession taxes which considerably reduce the share which each successive generation may inherit. Foundation assets are not subject to succession taxes.

Legally Recognized Asset-Protection Vehicle

A founder can judgement-proof the rights of his beneficiaries.

In the case of family foundations, the founder may specify that the creditors of specifically designated beneficiaries may not deprive such beneficiaries of any gratuitously acquired benefits, whether by means of injunction, execution or bankruptcy proceedings.

Through the implementation of a foundation, the founder has a maximum range of possibilities in settling his estate. He can for example circumvent future problems posed by a spendthrift child by providing the child with a non-assignable, non-attachable monthly pension for life and leaving the corpus of the estate to his grandchildren.

The wishes of the founder are executed by the foundation executive without the knowledge or interference of public authorities.

No Book-Keeping and Filings

Unless the foundation carries on business or a trade, the law does not require it to keep accounts, nor to submit financial statements of any sort to authorities.

What Taxes are Payable by the Foundation?

If the foundation qualifies as an offshore company, it is not subject to income tax or capital gains tax in Liechtenstein. It must merely remit an annual tax on capital which is currently the greater of one per mille of the foundation equity or CHF 1.000,-. This tax is reduced to three quarters per mille for foundations with equity in excess of CHF 2.000.000,- and to one-half per mille for those with equity in excess of CHF 10.000.000,-. Payments to beneficiaries residing outside of Liechtenstein are not subject to any Liechtenstein taxes.

Conclusion

A unique combination of factors, being the practical non-existence of taxes and filing requirements, the guarantee of investor anonymity and a wide range of structuring possibilities enables the Liechtenstein attorney to structure a foundation which optimally meets individual requirements.



The Liechtenstein Persons and Companies Code

Art. 552

In order for a foundation to be formed by natural persons, legal entities or firms, it is necessary for assets to be endowed (foundation property) for a certain specific purpose. Ecclesiastical, family and non-profit making purposes may be given particular consideration. Commercial activities may only be undertaken by a foundation provided such activity serves its non-commercial purpose or the type and scope of the participations held require the facilities of a commercial business.

Art. 567 (3)

The founder of a family foundation may determine that the creditors of specifically designated third party beneficiaries may not deprive them whether by way of injunction, levy of execution, writ or bankruptcy proceedings of such beneficial interests as have been acquired for no valuable consideration.



BY - LAW OF F.L. FOUNDATION, VADUZ

By virtue of article 8 of the deed of F.L. Foundation, Vaduz, the Council of the Foundation (Council) unanimously adopts the following

BY - LAW:

1. The Founder is designated as first beneficiary of the Foundation for life and shall be entitled to all of the income with power to encroach upon the capital of the Foundation for life.

2. After the decease of the Founder, his/her spouse is designated as second beneficiary for life.

The Founder?s spouse has a right to the net income of the foundation for life.

Such income as the second beneficiary has not drawn effectively prior to his/her death shall remain in the Foundation and at the disposal of the third beneficiaries according to the terms of the by-law.

3. After the decease of the second beneficiary, he/she shall be succeeded by the children of the Founder (the children).

4. After the decease of the first and second beneficiaries, the Council of the Foundation must use the income of the Foundation, and if necessary its capital as well, for the better care, maintenance and education of the children, who can be granted loans or advance payments out the assets of the Foundation by the Council of the Foundation e.g. for business activities, purchase of furnishing of a home. The Protector shall determine and instruct the Council as to how and to what extent the income and capital of the Foundation is to be applied in order to care for the children. All sums thus expended must first be approved by the Protector. The determinations made by the Protector shall be binding for the Foundation. It is left to the discretion of the Protector to determine the interest rates of loans or advance payments.

5. In the event of the death of any of the children prior to or during their enjoyment of the beneficial rights of the Foundation, the direct descendants of such deceased beneficiary shall replace the deceased child and assume his/her rights in equal shares per stirpes. In the event that a child dies without leaving surviving direct descendants, his/her rights shall pass to the remaining children or their descendants in equal shares per stirpes.

6. As soon as the youngest child is 35 years old, and provided always that both the first and second beneficiaries are dead, the Foundation shall be liquidated.

7. The proceeds of liquidation shall be distributed to the children in equal parts per stirpes.

Should the descendants of any deceased child be a minor at the time of a final distribution, the Foundation shall continue to exist for the purpose of managing the assets of such minor beneficiary according to the terms hereof until such beneficiary shall have attained the age of majority at which time his/her share of the assets shall be distributed to him/her.

8. No beneficial entitlement hereunder shall form part of any matrimonial property regime, in particular community of property to which any beneficiary may be subject, nor shall the spouse of any beneficiary, save as specifically provided, acquire any rights whatsoever, whether legal or equitable, whether a right of administration or otherwise, in the beneficiary?s entitlement hereunder.

9. No beneficiary shall be entitled to transfer, sell, assign, pledge, encumber, anticipate or hypothecate his/her interest hereunder.

10. The Founder may direct the Council of the Foundation to change these regulations at any time.

11. After the death of the Founder the Council of the Foundation may only make such modifications as shall not violate the essential provisions hereof. In no way shall the Council be entitled to substitute, add or remove beneficiaries, nor to vary the conditions concerning the right to benefit, nor the size of the share to which each beneficiary shall be entitled.

Vaduz, The Council of the Foundation



F.L. BULLETIN

In 1993 Liechtenstein?s banks had a balance sheet total of approximately 22 Billion Fr. Combined, the Liechtenstein banks would be equivalent to the seventh largest bank in the Swiss Liechtenstein economic region.

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The financial services sector is assuming an increasingly dominate role in the Liechtenstein treasury. According to the recently published study prepared by the St. Galler Center for Future Research, in 1991 this sector generated approximately one half of the 291,8 Mio. Fr. in tax revenues. The greatest portion was 72,6 Mio. Fr. attributed to the special corporate tax for offshore companies.

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This sector is also becoming increasingly important for the employment market. In 1992 banks, lawyers, trustees and finance companies together employed approximately 2,800 persons. This represents 14 percent of the total of 20,000 jobs held in Liechtenstein.

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At this time the Liechtenstein government is in the process of enacting a law regulating the management of investment funds. Combined with the Liechtensteins Persons and Companies Law, the new law will create interesting new investment possibilities.

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The material contained in this publication is not intended to be advice on any particular matter. No reader should act on the basis of any matter contained in this publication without considering appropriate professional advice. The publisher, the author and editor expressly disclaim all and any liability to any person in respect of anything and of the consequences of anything done or omitted to be done by any such person in reliance upon the contents of this publication.