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How to achieve legitimate wealth protection and preservation

Wealth and asset protection don’t enjoy the best reputation in the eyes of the public. Far too many scandals are reported around entrepreneurs, corporate executives, and professionals hiding funds in illegitimate ways to defraud creditors.

The threats to family wealth

 

This contrasts with a steadily growing number of liability suits in the commercial and private sectors. Such lawsuits happen in various areas and are cushioned only to a certain extent by liability insurance coverage. Still, several professional categories remain highly exposed to potential liabilities and cannot ignore them due to the impact on their business, private wealth, and family.

We don’t want to join the moral and ethical discussion but focus on legitimate ways to protect private and family wealth in Switzerland and Liechtenstein.

What is asset protection?

 

Asset protection is a lawful arrangement that secures private wealth against future claims and lawsuits by creditors against the legal owner or beneficial owner of such wealth. Before any future risk or liability materializes, personal assets are separated from the professional and entrepreneurial activity's risk and liability sphere.

Entrepreneurial risks

 

Whenever a wealth owner engages in risky activities, there is a danger that they could trickle down to personal assets. In a broader context, asset protection includes wealth protection against the owners who may want to plan for unforeseeable health conditions and future owners such as profligate family members who may put wealth preservation at risk.

Risk mitigation

 

Modern legal and economic environments acknowledge the vulnerability of wealth and allow for protection measures and risk mitigation. For example, they consent any entrepreneur to run a business within a corporate structure, thus limiting potential liabilities rather than forcing them to act personally with unlimited liability.

How to achieve asset protection

 

Essentially, there are two ways to achieve asset protection. Wealth owners can dispose of their wealth or encumber its ownership so that it is no longer relevant for third parties’ enforcement claims.

When to start with asset protection

 

Asset protection is a complex process that needs to start early enough. There should be no potential claims on the horizon in a situation of sufficient liquidity to put the deserving safeguarding of creditors’ interests in the background. Laws precisely balance interests and draw sharp lines between legitimacy and criminal action. Their most potent weapon is the contestation of dispositions over relatively long periods unless they originate from protection-worthy motivations.

What to consider

 

Before we assess the structuring possibilities in Switzerland and Liechtenstein, let us emphasize one crucial thing. In principle, all debtors' assets are subject to the claims of their creditors unless the law expressly provides otherwise. And even if the law allows for specific wealth transfers to the detriment of potential creditors, it still keeps a sharp eye on the wealth owner’s motivation.

Asset protection in Switzerland

 

General principles of creditor protection

  

Under Swiss law, creditors have avoidance actions to bring to execution assets that have been deprived of it by debtors’ previous legal disposition. Except for customary occasional gifts, all gifts and gratuitous dispositions made by the debtor within the year before seizure or opening of bankruptcy proceedings are voidable. For this specific action, the creditor's liquidity and intention are not relevant at the time of disposition.

Gift contestation

 

Suppose a patient, after a successful lawsuit against a doctor for malpractice, can’t seize the doctor’s assets since the latter gifted a significant amount to family members. If the gifts were made within the year before the patient’s seizure, irrespective of the doctor’s intention and solvency at the time, they could be challenged to enforce the patient’s claim.

Insolvency

 

The following legal acts are voidable if the wealth owner performed them within the last year before seizure or bankruptcy opening and was already insolvent at the time of their performance:

  • Granting collaterals for existing debts that the debtor was not previously obligated to secure.
  • Repayment of financial debt by means other than cash or other customary means of payment.
  • Payment of a debt that is not mature.

For these specific legal acts, recipients can prove they were unaware and didn’t need to beware of the debtor’s insolvency.

Defeat of creditors

 

Finally, all legal acts performed by wealth owners within the last five years before the seizure or the opening of bankruptcy proceedings with the intent, which is apparent to the other party, to disadvantage their creditors or favor individual creditors to the detriment of others are voidable. If such an act was performed for the benefit of a related person, it must prove the unawareness of the intention to disadvantage creditors. Related persons also include the companies within a group of companies.

Avoidance actions

 

These avoidance actions have to be instigated within three years from unsuccessful seizure or opening of the bankruptcy procedure. There are further avoidance actions based on inheritance and matrimonial laws, and Switzerland also provides for measures to pierce the corporate veil of abusive corporate schemes.

Trusts for asset protection

 

A trust for asset protection is popular for wealth owners due to legal and beneficial ownership separation. Switzerland is currently discussing local substantive trust law implementation, but it also recognizes trusts governed by foreign law if local trustees administer them.

The Hague Convention on Trusts

 

Switzerland has signed the Convention of 1 July 1985 on the Law Applicable to Trusts and on their recognition regarding trusts governed by foreign law. The term trust refers to the legal relationships created - inter vivos or on death - by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.

Trust characteristics

 

A trust has the following characteristics:

  • The assets constitute a separate fund and are not a part of the trustee's estate.
  • The title to the trust assets stands in the name of the trustee.
  • The trustee has the power and duty to manage, employ or dispose of the assets under the terms of the trust and the special duties imposed by law.

A trust created under the conditions specified by the Convention will be recognized as a trust. Such recognition will imply, as a minimum, that the trust property constitutes a separate fund, that the trustee may sue and be sued in its capacity as trustee, and that it may appear or act in this capacity before a notary or any person acting in an official capacity.

Trust recognition

 

Furthermore, such recognition will imply:

  • That personal creditors of the trustee will have no recourse against the trust assets.
  • That the trust assets will not form part of the trustee's estate upon its insolvency or bankruptcy.
  • If the trustee is a natural person, the trust assets will not form part of the matrimonial property of the trustee or spouse nor part of the trustee's estate upon death.

The limits of asset protection

 

The Convention highlights that it does not prevent the application of local provisions of the imperative law relating in particular to the following matters:

  • The protection of minors and incapable parties.
  • The personal and proprietary effects of marriage.
  • Succession rights, testate and intestate, especially the indefeasible shares of spouses and relatives.
  • The transfer of title to property and security interests in property.
  • The protection of creditors in matters of insolvency.
  • The protection, in other respects, of third parties acting in good faith.

Thus the above-outlined Swiss avoidance actions remain applicable for creditor protection and tackle abusive settlements of trusts to defraud or disadvantage the settlor’s creditors. A court may also grant a liability penetration when an arrangement is considered abusive. In all licit scenarios, a trust for asset protection offers additional benefits for estate planning and a smooth generational transfer of wealth.

Life insurance policies

 

Switzerland is a substantial life insurance market in international comparison. According to the Swiss Financial Markets Supervision Authority, in 2020, the gross life insurance premiums volume was more than CHF 26 billion.

In particular, private placement life insurance is a flexible and popular vehicle to structure, protect and transfer wealth. It’s a mixed life insurance that combines death coverage with a saving and investment component.

Irrevocable designation of beneficiaries

 

Under Swiss law, the policyholder of a surrenderable life insurance policy can designate any third party as a beneficiary and freely dispose of the insurance claim. The designation of beneficiaries expires when the insurance claim is seized, or bankruptcy proceedings are instituted against the policyholder.

If the policyholder has waived the right to revoke the beneficiary status, the insurance claim created by the irrevocable beneficiary status will not be subject to execution by the policyholder's creditors. In other words, the policyholder’s creditors cannot enforce their claims if the policyholder has irrevocably designated the beneficiaries of the life insurance policy. However, creditors of the beneficiaries may still enforce their claims.

Designation of spouse and descendants as beneficiaries

 

There’s an even higher level of protection in family situations. Suppose the spouse or descendants of the policyholder are beneficiaries. In that case, subject to any liens, the policyholder’s insurance claim will not be subject to execution for the benefit of the policyholder’s creditors or to bankruptcy. Registered partners are deemed equal to spouses.

Unless they expressly refuse, family members assume the policyholder’s rights and obligations under the insurance contract at the time of successful enforcement of a claim against the policyholder or opening of bankruptcy proceedings.

Due to the robust protection of a policyholder, Swiss law provides for the above-outlined remedies for creditors. In lawful settings, a life insurance policy safeguards the family wealth in a flexible estate planning setup.

Asset protection in Liechtenstein

 

General principles of creditor protection

 

Any creditor with an enforceable claim, regardless of the time of its creation, has the right of avoidance. This is provided that the execution has not led to the satisfaction of the creditor or, at the time of granting the execution, it may be assumed that it will not lead to such satisfaction.

Gifts contestation

 

In general, gratuitous dispositions and equivalent dispositions performed within one year before the granting of execution may be contested:

  • Gratuitous dispositions, which the debtor was not legally obliged to perform, and all executed gifts, unless they fulfill a legal obligation or are customary occasional within conventional amounts.
  • Legal transactions in which debtors have accepted a disproportionate consideration to their own performance if the other party recognized or should have recognized the disproportion between performance and compensation or otherwise a squandering of assets to the creditor's detriment.

The burden of proving the facts and circumstances giving rise to the right of avoidance lies with the creditor.

Insolvency

 

Furthermore, the following legal acts are voidable if the debtor has performed them within the last year before the granting of enforcement and the debtor was already insolvent at the time of their performance:

  • Establishment of liens to secure existing debts, which the debtor was not previously obliged to fulfill.
  • Repayment of financial debt by means other than cash or other customary means of payment.
  • Payment of non-mature debts.

Voidability is excluded if the beneficiaries prove their unawareness of the debtor's financial situation.

Disadvantaging creditors

 

Finally, all legal acts performed with the intention, recognizable to the other party at the time of their performance, to disadvantage creditors or favor individual creditors to the detriment of others are voidable. The burden of proof for all circumstances lies with the contesting creditor, and action must be filed within five years since the performance of the voidable act.

Liechtenstein foundations for asset protection

 

A Liechtenstein foundation is similar to a trust but is a separate legal entity and a legally and economically independent special purpose fund.

It is established by the founder, who endows the foundation with assets for a specific purpose. The founder appoints the foundation council members responsible for the foundation’s administration and representation and designates the beneficiaries to receive the beneficial interest.

After the establishment, the founder usually does not hold any rights, powers, or office but may be a beneficiary.

Creditors' rights

 

Creditors can contest the donation of assets to the foundation in the same way as a gift or seek to pierce the corporate veil in abusive scenarios. If the founder has reserved the right to revoke or amend the foundation, this right is subject to creditors' access.

Family foundations

 

In family foundations, the founder can stipulate that the beneficiaries' creditors may not deprive them of their gratuitously acquired beneficiary rights through execution or insolvency proceedings. However, distributions to beneficiaries are still within their creditors’ reach, and if founders are also beneficiaries, their beneficiary rights are not considered gratuitously acquired.

The balance between asset protection and creditors' rights

 

Liechtenstein foundations allow for separating the settlor’s and the foundation’s assets to implement individual estate planning strategies and ensure family wealth preservation over generations. Liechtenstein law strikes a balance between founders’ legitimate interests in protecting their assets and creditors’ interest in enforcing their claims. If established in periods with no pending liabilities of the founder, irrevocable foundations can perpetuate family wealth in a strong asset protection vehicle. 

Life insurance policies

 

Like Swiss law, a Liechtenstein life insurance policy is generally subject to bankruptcy or enforcement proceedings against the policyholder. Thus, the designation of beneficiaries expires if the insurance claim is seized in Liechtenstein or if bankruptcy proceedings are opened against the policyholder in Liechtenstein.

However, if the policyholder has waived the right to revoke the beneficiary designation, the insurance claim will not be subject to execution for the benefit of the policyholder's creditors. Still, creditors of the beneficiary may enforce their claims.

Family situations

 

In family situations, Liechtenstein offers even more robust asset protection than Switzerland. In the case of spouses or descendants as beneficiaries, subject to any liens, neither the beneficiaries’ insurance claim nor that of the policyholder will be subject to execution for the benefit of creditors or to bankruptcy. Registered partners and persons living in a de facto cohabitation with the policyholder are deemed equal to spouses.

Protection of the family's financial security

 

This specific provision aims to protect the financial security of the policyholder’s family, and contrary to Swiss law extends asset protection also to the beneficiaries. Creditors could still challenge such protection in the event of an intention to defraud creditors. However, in all legitimate scenarios, Liechtenstein life insurance policies offer asset protection in bankruptcy and enforcement proceedings, which extends to the policyholder and the spouses and children if they are beneficiaries.

Conclusion on legitimate asset protection

 

In Switzerland and Liechtenstein, as a general principle, all debtors' assets are subject to the claims of their creditors unless the law expressly provides otherwise.

Balancing interests

 

Both jurisdictions enable asset protection with specific vehicles and balance wealth owners’ legitimate interests in protecting their assets and creditors’ interest in enforcing their claims.

How to achieve asset protection

 

In basic terms, wealth owners need to give up control over the assets, and there are no pending or contingent claims and sufficient liquidity at the time of disposition.

Generally, only an irreversible legal separation from the wealth owners’ assets for the benefit of the family will protect such assets from future claims in connection to the risk sphere of the wealth owner’s entrepreneurial activity.

Avoid aggressive schemes

 

Aggressive asset protection schemes may have a short duration because of the actions creditors can instigate to safeguard their interests. That’s why it’s advisable to see asset protection in context with estate planning and long-term family wealth preservation to achieve lasting results.

The sharp line between legitimacy and criminal action

 

Laws precisely balance interests and draw sharp lines between legitimacy and criminal action. Their most potent weapon is the contestation of dispositions over relatively long periods unless they originate from protection-worthy motivations.

Play by the rules

 

However, within the legal limits, various suitable and effective wealth structuring options can be found to counter risks threatening family wealth preservation. As outlined above, Switzerland and Liechtenstein offer an attractive environment to ensure wealth preservation over generations.

Updated 06-11-2021

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