Before we start discussing the Trusts in Liechtenstein, the reader has to distinguish between
- the Trust Settlement (Treuhänderschaft) according to Art. 897 to Art. 932 of the Company Code (Law on Persons and Companies (PGR)); or
- the Trust Enterprise (Treuunternehmen) according to Art. 932a with 170 clauses of the PGR.
The Trust Enterprise is in practice used like the Establishment (Anstalt) and entered into the Public Register. Its purpose can be set up for pure holding ends or for commercial trading activities. The legal form of the Trust Enterprise (Trust reg.) may be drafted in a corporate form or have the elements of a Foundation. The Trust Enterprise can contrary to the Foundation be used for non-commercial and commercial purposes.
The article below will only deal with the Trust Settlement and try to compare it in various points with the well-known Liechtenstein Foundation.
Legal effects of the Trust relationship
The predominant opinion in Liechtenstein has been so far that the Liechtenstein Trust Settlement is based on the trust concept of the Common Law. Recent researches and court rulings by the Supreme Court (Fürstlicher Oberster Gerichtshof (OGH)) since July 2000 have favoured the opinion that an important part of the Liechtenstein provisions on the Trust Settlement rely on Civil Law fundamentals. The Liechtenstein law makers were guided by the concept which draws a difference between the "Germanic/English" trustee and the "Roman" fiduciary agent and considered the trust form in Art. 897 to 932 PGR being guided by legal trust and legal German models.
The drawing of a difference if an asset management agreement or an investment relationship might be a Trust Settlement according to Art. 897 to 932 PGR or a fiduciary relationship (as also known in Germany, Austria or Switzerland) is probably not of such an importance. With the new opinion, there is only the perception that the will of the contracting parties has to be analysed before knowing if the agreement is a Trust Settlement according to Art. 897 ff. PGR or a mere fiduciary contract.
The terms of the trust instrument (deed), such as those of the trust agreement, the disposition mortis causa or the articles shall be authoritative in the first place for the interpretation of the trust relationship between settlor, trustee and beneficiaries (Art. 910 al. 1 PGR).
If a trust deed is contrary to laws or "ordre public" it has to be interpreted in such a way that the trust deed is coherent with such provisions. Interpretation and application of all regulations of the Trust Settlement and all other trust provisions shall ensue according to the principles of equity (Art. 910 al. 6 PGR).
The Trust Settlement in Liechtenstein law is known as a special property endowment (not as a juridical person).
Setting up a Trust Settlement
According to Art. 899 al. 1 PGR a Trust becomes existent by a written agreement between the settlor and trustee. If the establishment ensues by virtue of a unilateral declaration by the settlor (Art. 899 al. 2 PGR), the Trust will only exist upon the written declaration of acceptance by the trustee. The relationship must be declared as a "Trust".
More precisely, there are two legal requirements for setting up the Trust, i.e.
- the legal establishment (the duty of commitment) which follows by written agreement, unilateral declaration of trust (trust letter) or disposal upon death;
- the transfer of the trust assets to the trustee (the duty of disposal). The trustee should make sure that the trust property is vested in him or under his control.
The trust deed should as far as possible contain:
- the detailed description of the beneficial interest, the possible distributions and their time;
- the powers reserved to the settlor or the beneficiaries;
- the authority of the trustee to administer and distribute;
- provisions relating to the appointment and removal of the trustee (the right to remove implies the right to appoint);
- the trustee's duty to submit accounts or his release from this duty;
- the termination of the Trust and its amendment;
- the possible transfer of the trust property to other Trusts or abroad (any Trust may be migrated into our out of Liechtenstein if so foreseen in the other jurisdiction), but any flee clause should be drafted very carefully;
- the subordination or non-subordination to a supervisory authority and the determination as to whether the Trust shall be entered or deposited.
Any Trust the duration of which exceeds 12 months may either be registered or deposited (the trust deed must be deposited with the Public Register). In case of registration, the following data must be disclosed:
- the designation of the Trust;
- the date of creation of the Trust;
- the duration of the Trust (no rules against perpetuity);
- the name, first names and address or firm and domicile of at least the Liechtenstein trustee.
Possible protectors and also the audit body need not be registered.
In case of deposition, the deposited documents, i.e. the original trust deed and all the amendments, are not accessible to the public, but to the participants, in particular, under certain preconditions, to the beneficiaries.
Where property of a trust is registered in other Public Registers, such as the Land Register, the Patent Register or similar and the Trust itself is entered in these Public Registers, the Registrar may agree to waive an additional entry of the Trust in the Public Register (Art. 901 PGR).
An extract from the register which is only available for registered Trusts can be helpful to prove the Trust's existence to third parties (e.g. banks) without having to produce the trust deed itself.
The legal position of the trustee
According to Art. 897 PGR the trustee administers or uses the trust asset in his name as independent legal owner for the benefit of one or several third persons (beneficiaries) with effect towards all other persons. The trustee's management and disposals take effect towards any person. Art. 898 PGR speaks of the presumed trustee as legal owner and owner of the assets. According to Art. 910 al. 3 PGR the trustee has the legal position as a self-entitled person (real management right or administrative right in rem).
According to Art. 911 al. 1 PGR the trust assets consist of any assets which are designated by the settlor or by operation of the law, as well as all assets acquired by the administration of such property, whether it has been included in a schedule or an inventory or not.
The trust assets endowed represent assets segregated from any other assets of the trustee. The trustee is the holder of assets in his name and has to administer and dispose of the trust assets according to the settlor's will and the trust deed. If the trustee goes bankrupt, the trust assets are separated from the other assets.
The new literature in Liechtenstein has shown a controversy on the legal position of the trustee, and there is the opinion that
- the trustee is full legal owner of the trust's assets (Common Law concept); or
- the trustee has only the position of an entitled person to manage and dispose of the trust's assets according to the trust deed (Verwaltungs- und Verfügungsberechtigter an einem Sondergut); or
- the trustee becomes full legal owner of the trust's assets, however upon the condition that the trust's assets fall upon the settlor or beneficiaries according to the provisions in the trust deed. The trust deed limits therefore the real legal power of the trustee.
The Liechtenstein courts seem to favour lit. b) above. The dogmatic fundamentals seem to be the legal German fiduciary doctrine. However, the position can functionally be compared to the English trustee.
Classification of trusts
Liechtenstein law is very flexible and there are various classification criteria available:
√ criterion is nature of setting up:
√ Express Trust by Agreement;
√ Trust by Operation of Law.
√ criterion is nature of obligations:
√ Bare/Simple Trust (e.g. nominee shareholder functions);
√ Special Trust (e.g. nominee shareholder functions with voting obligations).
√ criterion is nature of beneficial rights:
√ Fixed Trust (rights in favour of beneficiaries are fixed);
√ Discretionary Trust (rights in favour of beneficiaries at the discretion of the trustee).
√ criterion is functional:
√ Family Type Trust (structuring the family assets);
√ Business Trust, like Voting Trust, Investment Trust, Trusts for the Benefit of Creditors, Trust reg.
Rights of intervention and disposal by the settlor
Liechtenstein has in Art. 918 al. 1 PGR the provision that the settlor cannot set forth any conditions through which he binds the trustee to continuous instructions given by the settlor himself. Thus the legal rights of intervention by the settlor are restricted within the provisions of the trust deed. On the basis of Art. 917 PGR the settlor has the right to stipulate in the trust agreement, unilateral trust instrument, testament or articles any terms under which the trust assets are to be managed or disposed of or distributed. The right to set forth conditions and dispositions vested into the settlor even after establishment of the Trust might go further than foreign law would accept. Therefore, careful planning is needed in order the Trust will also be considered as valid abroad.
International right relevant for the Trust Settlement
According to Art. 930 PGR, the law of the state which is specified in the trust deed shall apply to the trust relationship. If no express choice of law is apparent, the law of the state in which the trustee or the majority of the trustees have their usual residence or domicile and subsidiarly the law of the state in which the trustee functions are effectively exercised shall be applicable to the trust relationship. Trusts which are not subject to Liechtenstein law may not claim a better legal position than domestic Trusts.
According to Art. 931 PGR, Trusts pursuant to foreign law may be created in Liechtenstein provided
- that as far as necessary in the individual case the relationship between settlor, trustee and beneficiaries is subject to the trust regulations of the foreign law which must be included in detail in the trust instrument and that the relationship between the Trust and third parties shall be subject to Liechtenstein law;
- that a mandatory court of arbitration shall decide in disputes between settlor, trustee and beneficiary.
Qualified intermediary status (QI)
For US-QI-purposes only a complex trust within the meaning under US trust law is fit to be considered as the owner of the trusts assets. In most cases, Liechtenstein trusts might be considered as simple or grantor trusts.
Some comparison between the Trust Settlement and the Foundation
Also the Liechtenstein Foundation can principally be considered to be a Trust because the same practical and/or legal background governs the structure. The great difference in favour of the Foundation lies in that the Foundation is a legal independent entity (juridical person) and therefore not the administrator is owner of the assets for third parties, but the legal entity itself being represented by a foundation board which can be exchanged very quickly.
- The Trust Settlement can be revocable and irrevocable like the Foundation.
- Both the Trust and the Foundation have a settlor/founder.
- Both the Trust and the Foundation can fix in their deed/statutes that the beneficiaries have a fixed/determined beneficial right at the assets.
- Both the Trust and the Foundation can fix in their deed/statutes that the trustees/ foundation board have full discretion with respect of making distributions to any (un)defined beneficiaries. The beneficiaries have then no right to claim any distribution as long as the trustees/foundation board have not decided to make distributions.
- It is the trustee who holds the assets in his name. If the trustee is changed, the holder of the assets will change as well. For a Foundation it is the Foundation which holds the assets and not the foundation board. The change of the foundation board does not touch the legal position of the Foundation's assets.
What favours a Trust/Foundation compared to holding assets by individuals?
- Both the Trust and Foundation offer higher anonymity when making payments. You have to consider that the clearing systems of EURO and USD are centralized and data is easily accessible.
- Trusts are not considered as juridical persons which put them in a disadvantage with respect of the withholding tax on savings (EC directive on savings).
- Foundations are considered as juridical entities. That is an advantage but can also be a disadvantage for certain status.
- If the settlor/founder passes away, this does not have direct consequences for the Trust or Foundation. However, any matrimonial rights in existence at the moment when endowments are made by the settlor/founder to the Trust/Foundation or any forced heirship rules in favour of family members (normally the case if the settlor/founder is the first beneficiary and he passes away) have to be respected. That means that any spouse can attack the Trust or Foundation many years after the endowment if the matrimonial rights have not been respected and oblige the Trust/Foundation by a court order to hand out assets until the rights are respected.
- The trustee/foundation board play an active role and manage the assets. The settlor/ founder has a live-long partner in the trustee/foundation board.
- Both the Trust and the Foundation are well-known family planning instruments and offer within the legal frame asset protection advantages.
The above article does not replace any legal consultancy, it is intended simply to provide general information. The ALLGEMEINES TREUUNTERNEHMEN offers a comprehensive range of services relating to the formation of companies and the provision of advice on legal matters such as "family office". Supported by more than 90 members of staff, our team of professionals ensure that clients receive individual attention. For more information consult Roger Frick at Allgemeines Treuunternehmen, FL-Vaduz.