If you're looking for a way to manage your wealth that offers privacy, flexibility, and protection, a Liechtenstein foundation may be your solution.
Liechtenstein is between Austria and Switzerland, has the Swiss franc as its currency, and is part of the European Economic Area.
With 160 square kilometers and 39'000 inhabitants, it is one of the smallest countries in the world but known for its economic and political stability.
Since 1926, Liechtenstein has attracted foreign investment with its liberal corporate law.
Foundations, in particular, stand out and have served many states as a blueprint for their implementation of foundation laws.
This structure can provide a range of benefits for wealth owners and their families who want to preserve and grow their assets over time.
This blog post will explore the advantages of a Liechtenstein foundation and how it can help you achieve your wealth and estate planning goals.
What is a Liechtenstein foundation?
Let’s start with the legal definition under Liechtenstein law:
A foundation is a legally and economically independent special-purpose fund established as a legal entity by the founder's unilateral declaration of intent.
The founder dedicates the designated foundation assets and determines the designated foundation purpose and beneficiaries.
The foundation thus has its own legal personality, and its assets are legally independent of those of the founder and the beneficiaries and belong to the foundation itself.
The foundation has no members or shareholders but beneficiaries.
The main difference between a foundation and a trust is that the foundation is a legal entity. Otherwise, there are overlaps in terms of the arrangement and objectives.
Three essential characteristics are required to create a foundation: i) the intention of the founder to form a foundation, ii) the stipulation of the purpose, and ii) the dedication of specific assets.
With that, two essential principles of Liechtenstein’s foundation law come into play.
According to the principle of separation, the segregation of the foundation assets from the founder’s assets, and according to the solidification principle, the perpetuation of the founder's will occur.
The solidification principle is only broken in the case of reservation of rights by the founder, such as the right of revocation and amendment.
The purpose of the foundation
The foundation may have a public-benefit or private-benefit purpose to be defined by the founder.
A private-benefit foundation’s activities are intended to serve private purposes and are usually established as a family foundation.
Pure family foundations serve exclusively to defray the costs of upbringing or education, the endowment or support of members of one or more families, or similar family interests.
Mixed family foundations predominantly pursue the purpose of a pure family foundation and serve charitable or other private-benefit purposes.
How to establish a Liechtenstein foundation
This can be done during the founder’s lifetime with a declaration of formation or a disposition upon death.
Private-benefit foundations acquire their legal personality with the founder’s unilateral declaration of formation, although a formation notification must be deposited with the companies register.
The founder can be a legal or natural person who needs to commit a minimum capital of CHF 30’000 to the foundation.
The foundation deed needs to contain the intent of the founder to establish the foundation, the foundation's name, the dedication of specific assets, the foundation's purpose, appointment, and powers of the foundation council.
Since professional service providers can represent the founder in establishing the foundation, the founder’s identity does not need to be disclosed in the foundation deed.
The founder may draw up a supplementary foundation deed if she has reserved the right to do so.
For the further execution of the foundation deed or the supplementary foundation deed, the founder, the foundation council, or another foundation body may issue internal orders in the form of regulations if this has been reserved in the foundation deed.
Regulations issued by the founder take precedence over those issued by the foundation council or another foundation body.
The founder’s rights
The founder may reserve the right to revoke the foundation or amend the foundation declaration in the foundation deed.
These rights may not be assigned or inherited. The founder can not reserve these rights if the founder is a legal entity.
The beneficiaries
The beneficiary is the natural or legal person who enjoys or may enjoy an economic benefit from the foundation. According to Liechtenstein law, there are four types of beneficiaries:
i) Beneficiaries with legal entitlement
Based on the foundation documentation, these beneficiaries have a legal claim to benefit from the foundation assets or the foundation income, the amount of which is also determined or can be determined.
Beneficiaries with legal entitlement have an enforceable claim vis-à-vis the foundation, and the foundation council has no discretion about their beneficial interest and entitlement.
ii) Prospective beneficiaries
Prospective beneficiaries are not actual beneficiaries but will obtain their entitlement at a specified later moment or in the event of fulfilling a specific condition.
iii) Discretionary beneficiaries
Discretionary beneficiaries belong to the group of beneficiaries designated by the founder and whose possible beneficiary status is left to the discretion of the foundation council or another body appointed for this purpose.
A legal claim of the discretionary beneficiary to a specific benefit from the foundation's assets or income will only arise upon a proper resolution of the foundation council or the body otherwise responsible for this on an actual distribution to the corresponding discretionary beneficiary. It will expire upon receipt of the same.
iv) Ultimate beneficiary
The ultimate beneficiary is the person to whom any assets remaining after the liquidation of the foundation has been carried out will be allocated.
Information rights
Beneficiaries have the right to inspect the foundation documentation regarding their rights.
Such information rights are restricted to the rights concerning a beneficiary and may be further restricted in specific scenarios.
Information rights may not be exercised with unfair intent, in an abusive manner, or contrary to the interests of the foundation or other beneficiaries.
The information right may be denied for important reasons to protect the beneficiary.
The foundation council
The foundation council manages the business of the foundation and represents it.
It is responsible for fulfilling the foundation’s purpose in compliance with the provisions of the foundation documents.
The foundation council consists of at least two members, which can also be legal entities.
Unless otherwise provided for in the foundation documents, the appointment of the foundation council is for a term of three years, reappointment being permissible, and the members may perform their duties for a fee or free of charge.
The foundation council manages the foundation’s assets in line with the foundation’s purpose, taking into account the founder’s intent.
The founder may lay down specific and critical management criteria in the foundation deed, the supplementary foundation deed, or regulations.
A change in the purpose of the foundation by the foundation council is only permissible if the purpose has become unattainable, impermissible, or contrary to reason or if circumstances have changed in such a way that the purpose has acquired a completely different meaning or effect so that the foundation is alienated from the intent of the founder.
The change must correspond to the presumed intent of the founder, and the authority to make the change must be expressly reserved to the foundation council in the foundation deed.
Other foundation bodies
In the foundation declaration, the founder may establish a controlling body for the foundation, which will annually verify that its assets are managed and used for its purposes.
Furthermore, a protector may be appointed as an intermediary between the foundation administration and the beneficiaries.
Especially in the case of discretionary foundations, this can be useful to limit and control the discretion of the foundation board.
The foundation must have a representative in Liechtenstein vis-à-vis authorities, but such a representative does not have a governing body function.
Liechtenstein foundations and estate planning
Since a foundation can exist in perpetuity and allows for individualized arrangements on how beneficiaries can benefit, it is an attractive vehicle for estate planning.
To most evident benefit is that with the settlor’s decease, no probate procedure is required to transfer wealth to the beneficiaries.
However, foundations are not suitable for circumventing forced heirship rules by a founder since the heirs can contest the donation of assets to the foundation in the same way as a gift.
Within the limits of the law, Liechtenstein foundations allow for flexible arrangements to preserve and transfer family wealth in various scenarios.
By transferring assets to the foundation, wealth owners can ensure their wealth is managed and distributed according to their wishes after their lifetime.
The foundation can be set up to provide ongoing support for family members or charitable causes and can also be used to protect assets from potential creditors or legal disputes.
A Liechtenstein foundation can effectively preserve and grow wealth for future generations with careful planning and management.
Liechtenstein foundations and asset protection
One of the key advantages of a Liechtenstein foundation is its ability to provide asset protection.
By placing your assets into a foundation, you can separate them from your personal liabilities and protect them from potential legal claims or creditors.
This can be particularly beneficial for individuals at risk of being sued or who want to shield their assets from potential financial risks.
In the case of family foundations, the founder may stipulate that the beneficiaries’ creditors may not deprive them of their gratuitously acquired beneficiary rights, expectant rights, or individual claims thereunder through security proceedings, execution, or insolvency proceedings.
With this, founders can protect family wealth, and beneficiaries’ creditors can only satisfy their claims if an actual distribution to a beneficiary happens.
Regarding the founder, Liechtenstein law allows creditors to challenge contributions to the foundation in the same way as a gift in specific scenarios to prevent abuse.
Thus, abusive wealth structuring will not yield the desired asset protection results.
Additionally, a Liechtenstein foundation can offer protection from inheritance taxes and other forms of taxation, making it a valuable tool for asset protection.
The taxation of a Liechtenstein foundation
Liechtenstein’s favorable tax system allows for low tax rates on income, capital gains, and wealth.
Additionally, Liechtenstein has signed tax treaties with several countries to reduce or eliminate international double taxation.
In principle, for foundations, there is a choice between ordinary taxation and special tax status as a private asset structure.
The general income tax rate is 12.5 %, with various capital gains and dividends exemptions.
Ordinary taxation varies depending on the foundation’s structure, e.g., whether it is revocable or irrevocable.
The private asset structure
Foundations can apply for the special tax status of a private asset structure. This means they are exempt from income tax and are subject to a minimum income tax of CHF 1’800.
For this special tax status, foundations may not engage in any economic activity, i.e., they cannot offer any goods or services.
Within the scope of the mere exercise of ownership, the acquisition, holding, management, and disposal of assets is possible. Such a structure is thus mainly used to hold bankable assets, although real estate may also be held, provided that no income is generated.
Furthermore, participations may be held provided that no economic influence is exercised on them. These restrictions must be set out in the foundation's articles of association.
The beneficiary of a private asset structure can only be a natural person acting within the scope of the management of personal assets or an asset structure acting exclusively in the interest of the private assets of one or more natural persons.
Regarding this special tax status, it should be noted that the foundation is not considered a tax resident in the sense of a double taxation treaty and, therefore, cannot benefit from treaties to avoid double taxation.
Privacy and Confidentiality
Liechtenstein provides a high level of privacy and confidentiality.
It has strict laws and regulations to protect privacy, and the foundation structure offers an additional layer of confidentiality.
The foundation is a separate legal entity, meaning its assets may not be directly attributed to the founder or beneficiaries. This can protect against legal action or other threats to personal wealth.
Additionally, the foundation is not required to disclose its beneficiaries or other details to the public, ensuring privacy and confidentiality.
However, due to Anti Money Laundering regulations, the identity of beneficiaries of Liechtenstein foundations and details regarding their beneficial interests are recorded in a register of beneficial owners of legal entities.
Such data is disclosed to local and foreign authorities, financial institutions, and intermediaries.
The disclosure to third parties is restricted since they must prove a legitimate interest. Such an interest exists if requested data are required to combat money laundering, predicate offenses, and terrorist financing.
With such a restriction, Liechtenstein protects the privacy interests of founders and beneficiaries in private wealth matters.
Flexibility and Control
Another benefit of using a Liechtenstein foundation for wealth management is the flexibility and control it provides.
The foundation's founder can determine the foundation's purpose, the beneficiaries, their beneficial interest, and the assets that will be included.
This allows for a customized approach to wealth management that can be tailored to wealth owners’ specific needs and individual goals.
Still, control functions such as protectors can ensure that the foundation is managed according to their wishes.
To sum up on Liechtenstein foundations
Liechtenstein foundations offer a unique blend of privacy, flexibility, and protection, making them attractive for wealth and estate planning.
They are legally and economically independent entities, allowing for the segregation of assets from the founder's personal wealth.
This feature provides a robust layer of asset protection, shielding wealth from potential legal claims or creditors.
The foundation's purpose can be tailored to serve private or public benefits, making it a versatile tool for various wealth planning objectives.
The founder can specify the beneficiaries and their beneficial interests, ensuring wealth is distributed according to their wishes.
Moreover, the foundation can exist in perpetuity, making it an effective tool for transferring wealth across generations.
Liechtenstein's favorable tax system further enhances the attractiveness of its foundations.
With low tax rates on income, capital gains, and wealth, and the option to apply for special tax status as a private asset structure, foundations can offer significant tax advantages.
In conclusion, Liechtenstein foundations are a comprehensive solution for individuals and families seeking to preserve and grow their wealth over time.
With careful planning and management, they can serve as a powerful tool for achieving financial goals and securing a legacy for future generations.
Updated 27-07-2023