The Liechtenstein law provides for foundations of two kinds: private law (privatrechtliche) and public law (öffentlichrechtliche). The present overview is confined to family foundations established under private law.
The following definitions may be found in law and literature:
Art. 552.1 of Liechtenstein's Law concerning Persons and Companies (hereinafter "PGR"): "For a foundation to be formed by natural persons or legal entities or firms, it is necessary for an endowment (the foundation assets) to be made for a certain specific purpose.
Definitions of the foundation in legal scholarship include the following: "The foundation is a legal entity without members and with its own organisation, the object of which is to achieve a certain specific purpose by means of the endowment made."
A foundation must be understood as a legal entity embodying an endowment fund. The endowment made for a given purpose becomes an independent legal person with its own rights and obligations.
The provisions of the PGR concerning foundations derive largely from the Swiss Civil Law, having been freely adapted to the circumstances of Liechtenstein as long ago as 1926.
Austria incorporated the private foundation into its law a few years ago too, an example followed by Panama and the Dutch Antilles and no doubt others.
The foundation acts through its governing bodies, which are bound by the wishes of the founder.
Family foundations are versatile instruments which can be used:
- for separation of assets (to increase anonymity);
- for protection of the foundation’s assets in general;
- for asset transmission and management covering of several generations;
- for protection of separate family members;
- for protection against the claims of creditors (segregation);
- for tax planning.
With regard to succession planning, for example, the family foundation offers a number of advantages as compared to a bank account held directly by a natural person. If the account-holder dies, his heirs can dispose of the assets held on the account in Switzerland, Liechtenstein and elsewhere collectively, whilst the bank requiring the production of death certificate, plus an inheritance certificate, executor's certificate and other succession documentation. The use of a foundation for holding assets (cash, securities) at a bank avoids disclosure and allows immediate access to funds with the foundation council having only to satisfy itself as to the death or conditions having been met. If the first beneficiary passes away, the big advantage would be the continuity in the business relation with the bank and ready access to the foundation assets. The foundation will remain the contracting party of the bank. The foundation assets at the bank are not transferred to any succeeding heirs/next beneficiaries, they simply stay in the foundation.
In a case brought before the Liechtenstein Supreme Court a few years ago, there is a useful example of how Liechtenstein protects the foundation objects, whilst taking into consideration foreign laws and mutual assistance.
In this specific case, a foreign person living in a country outside of Liechtenstein considered she had an interest in the funds of the foundation, set up by her father where he was the first beneficiary until he passed away, and where his daughter was a minor second beneficiary together with other family members and others, as part of the father’s estate, and wanted that all foundation documents were sent to the foreign country in order to be submitted to court in her respective country of domicile (same country as that where her father passed away).
The case was opened in that respective country, and the foreign court/prosecutor sought for legal assistance in Liechtenstein (relating to criminal law matters for non disclosure of assets to heirs). During the procedure, the bank account of the foundation was blocked.
The Liechtenstein judge argued that one of the essential rules to grant legal assistance to a foreign court/prosecutor was the requirement for it to be a criminal law matter in both countries for that specific situation. The wilful non disclosure of assets at the disadvantage of certain heirs benefiting from forced heirship rights – here according to their nationality – is also punishable in Liechtenstein, and therefore the basis of legal assistance is principally given. If the documents and information available in Liechtenstein are sufficient and do render any service to the foreign court/prosecutor in order to punish a person or stop any foreign criminal case, the foreign court shall have jurisdiction, and not the Liechtenstein court which is responsible for granting legal assistance in criminal law cases. According to the permanent legal practice of the Supreme Court, the Liechtenstein authority, having received such a foreign request, has to adhere to the information given in the request for legal assistance (relying on the foreign court order for requesting legal assistance in criminal cases). The Liechtenstein court will not request a complete set of information giving full details as to any specific questions, and therefore the Liechtenstein court’s provisions for providing information on the grounds for this request are limited. A short summarised presentation of the case and the situation, with a certain grade of details and logic/explanation of the case is normally sufficient. The request by the foreign court/prosecutor serves to close missing elements of a case and to provide for further proofs in order to help this respective court/prosecutor to have the conclusive documents and information to continue the criminal case. It is not the duty of the Liechtenstein court to investigate the case in detail in order to determine and therefore to run the case on behalf of the foreign court.
In the case in question, the foundation as a separate legal entity did not pass over assets to any other person merely because the sole first beneficiary passed away, nor did any assets belonging to the foundation fall into the estate of the person who passed away. Therefore the alleged criminal offence of non-disclosure was not demonstrated, and any person alleging of not having received his or her forced heirship portion - according to his own law (of nationality or eventually domicile) - of assets held by the foundation should have opened the case at the Liechtenstein court and not in the foreign court. The Liechtenstein court rejected the request as there were no assets falling into any estate.
If the relevant person had started proceedings before the Liechtenstein court, i.e. to attack the foundation to restore his or her privileged forced heirship rights, the Liechtenstein court would have analysed the foundation’s structure, and above all the matrimonial situation when assets were or are given to the foundation by the founder and/ or donator, and the overall family assets worldwide of the founder (being the sole first beneficiary) passed away, in order to determine if the foundation should restore a certain portion of its assets. It is not a foregone conclusion that a foundation would in the circumstances be cancelled/revoked. It may only be forced to distribute a certain amount of the assets until the privileged forced heirship rights of a certain family member are fulfilled. This means that if the overall estate of the testator is not established and the distribution of the estate in the respective foreign country has not started, the Liechtenstein court will not be in a position to estimate the overall assets and make any judgement in favour or against the foundation.
It is also important to realise that an heir could open a case against a foundation in Liechtenstein or at the location of its bank account which is eventually not in Liechtenstein, and it is therefore highly recommendable that the domicile of the foundation is located in a country with a legal system similar to that of the country where the bank account is held, such as a Liechtenstein foundation having its bank account in Liechtenstein, Switzerland, Austria or Luxembourg.
With respect to creditor claims, the following should be pointed out:
In accordance with Art. 560.1 PGR the heirs or creditors of the founder may challenge the validity of a foundation in the same way as a donation. The founder and his heirs may challenge the foundation by reason of lack of intent in accordance with the same provisions as for defects in contractual agreements, even after the establishment of the foundation.
Creditors may claim only against the assets of the foundation (Art. 563.1 PGR ). Except for the extensive provisions in the case of family foundations, the income which a person receives from a foundation, without valuable consideration, may be withdrawn by injunction, levy of execution and writ or bankruptcy proceedings only where the said income is not required for the defrayal of the essential living expenses of the beneficiary, his spouse and his children without means of support (Art. 563.2 PGR ).
In the case of a family foundation, the founder may also determine in the statutes that the creditors of specifically designated beneficiaries shall not be able to withdraw from them the beneficial interest acquired, without valuable consideration, by means of injunction, levy of execution and writ or bankruptcy proceedings (Art. 567.3 PGR ).
If the founder makes donations, the creditors may demand that the funds be restored. An action to this effect is time-barred after five years. In most cases, however, an action to dispute a donation must be brought within one year.
The Liechtenstein law on rescission (Art. 75 RSO) establishes international private law provisions which must be heeded (applicable law, admissibility of the rescission, application of milder provisions in the event of a diversity of applicable law, material ruling of the legal action, possibility of dismissal). In practice, the judge will in most cases have to deal with foreign rules on rescission (subject to application of the milder law for the challenging petitioner).
The foundation should therefore be established at a time where no potential or possible creditor claims exist and the standard of living of the donor is unaffected by the donation to the foundation.
Family foundations may be used for other additional objects such as charitable purposes or to care for an ailing family member or to receive and hold assets in special terms.
- Family foundations are considered to be legal persons with respect to the EU savings tax directive, and therefore they are not affected by the reporting requirements nor by withholding principles.
- Family foundations are separated from the founder and/or first beneficiary. It does not matter where the custodian or the bank account is located.
- French reporting requirements for holding 5 % or less of shares of French companies do not foresee that the first beneficiary of a foundation be disclosed to the French custodian. The eventual disclosure of the foundation as account holder is sufficient. (There are specific reasons where such a request may arrive.)
- Liechtenstein foundations do normally have bank accounts in civil law countries such as Liechtenstein, Switzerland, Luxembourg or Austria. These countries have similar legal provisions when judging infringements of matrimonial or forced heirship rights, or considering a foundation as a sham because of too many rights of intervention reserved by the founder. Using a Liechtenstein foundation correctly can prevent such negative consequences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.