Civil Law Entities

While there are a number of civil law entities that could be utilized for asset protection purposes, the most popular structures for U.S. planners are two trust-like entities, the stiftung and the anstalt, created under the law of Lichtenstein (a small country located between Switzerland and Austria) and foundations created in Panama. We will examine these entities, and how they might fit into an overall asset protection plan.

The stiftung, is basically a fund for a particular purpose that has by statute been given the status as a legal entity. The Stiftung is created by a “Founder” and has a separate legal identity from the Founder. The assets of the Stiftung must be segregated from any personal assets, and are typically not available to creditors of the Founder.

The Stiftung can have some commercial activities, but it cannot be utilized solely for commercial purposes. Instead, the Stiftung is designed to act basically as a private foundation, and it may be formed purely as a family foundation. For asset protection purposes, however, it is better if the Stiftung is formed for the promotion of some important interest (such as to further education or medical research) because there may be less chance that the Stiftung will be considered an “insider” for purposes of evaluating whether the contributions to the Stiftung were fraudulent.

A Stiftung has no shareholders. However, a Stiftung may be drafted to have beneficiaries, including the Founder as a beneficiary. Neither of these features is suggested as the Stiftung then starts looking like a foreign asset protection trust. Instead, the Stiftung should be limited by its terms to supporting the purpose for which it was created and used in that fashion. This does not mean, however, that there are not methods to utilize assets of the Stiftung to endow private scholarships, etc.

The Stiftung is managed by a Council of Members, which most often is originally appointed by the Founder. At least one person on the Council must be resident in Liechtenstein. Assuming that none of the persons on the Council are named as beneficiaries of the Stiftung, it likely will be very difficult for a creditor to pierce the Stiftung. Similarly, since the Stiftung has no “owner,” neither the Stiftung itself nor its assets should be available to any creditors of the persons sitting on the Council.

It is very difficult to get information about a Stiftung in Liechtenstein. The by-laws of the entity, which control things such as to whom and under what conditions distributions can be made, are typically not filed in any public registry. If they are kept in Liechtenstein, this means that a litigant seeking the information may have to bring legal action in Liechtenstein.

The Liechtenstein Anstalt is an entity, which has no members, participants or shareholders, and is a sort of hybrid between a corporation and a Stiftung. An Anstalt can have beneficiaries. The principal practical difference between an Anstalt and a Stiftung is that an Anstalt can conduct all kinds of business activities. Liechtenstein also recognizes a form of registered trust, called an “Eingetragenes Treuunternehmen” and an unregistered trust that simply may be filed confidentially with the Public Register Office, called a “Treuhanderschaft”. The former operates as a separate entity, somewhat similar to a U.K. “unit trust”, while the latter is very similar to a common law trust, having no legal identity separate from its components. Neither, however, carries the legal background (and baggage) of restrictive common law interpretations, meaning that they offer somewhat better flexibility that common-law trusts.

Where these entities and the Stiftung probably have their greatest use is not in holding significant assets, but rather as acting as the holder of stock in traditional domestic or offshore entities that are used as management companies. The civil law basis of these entities, and the fact that they usually do not have identifiable beneficiaries, make them very difficult for creditors’ attorneys to conceptualize, and thus attack. But note that a U.S. judge could also miss the subtle differences, and simply treat them as Foreign Asset Protection Trusts and order that their assets be repatriated. Also, Liechtenstein law may not protect the settlor from a U.S. court’s finding of contempt.

Panamanian Foundations

Liechtenstein entities are relatively expensive to form and maintain. And although the time difference between the U.S. and Liechtenstein may prove frustrating to creditors in communicating with their local counsel, it more immediately will be frustrating to the U.S. client and planner attempting to form and then administer the entity from this side of the Atlantic. For this and other reasons, Panama copied much of Liechtenstein’s Stiftung legislation, giving us the option of the Panamanian Foundation.

The Panamanian Foundation is modeled after the Stiftung, with some important differences, however. The Foundation is formed by the filing of a Charter, and is treated as a separate legal entity. As an entity, it can hold title to assets in its own name like a corporation. However, it can also make discretionary payments to the Founder or beneficiaries, like a trust. When used for this latter function, the entity is sometimes referred to as a “Family Foundation”.

Panamanian law permits the appointment of one or more protectors to oversee the three or more members of the Foundation Council. The members of the Council are required to apply the Foundation’s assets for the benefit of its beneficiaries or some beneficial purpose as set out in the Charter. As with the Stiftung, the Foundation is mostly controlled by its Regulations (bylaws) which are not required to be registered or publicly disclosed.

Panama has a three-year statute of limitation for fraudulent transfer challenges to contributions to the Foundation. If gifting is utilized to fund the Foundation, there will be a three-year window available for creditors to attempt to void the gifts. For this reason, the Foundation should be initially funded with a small gift, but if it is desired that the Foundation hold significant assets, then the Foundation should be funded by some alternative for-value transfer method, such as an installment note sale or private annuity.

Once past the three-year limitation, however, the assets are probably safe from creditors. Panamanian law specifically provides that the Foundation assets may not be applied towards the debts of either the Founder or any beneficiary. But perhaps the greatest advantage of the Panamanian Foundation over the Stiftung is that the Panamanian version is relatively inexpensive to form and maintain. Another advantage is that Panama is in the same time zone, making administration of the Foundation from the United States easier.

As with the Stiftung, probably the best use of the Panamanian Foundation is not to hold assets but rather to own an entity that is used as a management company. From a creditor’s viewpoint, the management company will be owned by a Panamanian charity with three Panamanian residents as members of the Foundation’s Council. The creditor will likely not see that the U.S. settlor has appointed one or more protectors to make sure that the Council members carry out the purposes of the Foundation as set forth in the charter. It will thus be very difficult for a creditor to claim that the U.S. owner of the asset being managed has any ties to or control over the Foundation.

Terms

• Anstalt
  A civil law entity that is somewhat similar to a U.K. Unit Trust and can carry on commercial business.

• Foreign Foundation
  A charitable organization typically created in a tax and debtor haven jurisdiction, most often on the model of the Stiftung.

• Panama Foundation
  A charitable organization formed in Panama that is modeled from the Stiftung.

• Stiftung
  A civil law arrangement that is basically a charitable fund that is created for a particular purpose. It is similar in many respects to a Purpose Trust.