The foundation establishment documents drawn up by Liechtenstein trustees often contain provisions relating to what is known as a protectorate. A protectorate may be established if, at the time the foundation is established, there is not yet a sufficient relationship of trust between the client and the trustee. The client wants to be sure that the assets transferred to the foundation and separated from his personal assets will be used for the purposes he intends. As the founder, he therefore wants to reserve the right to influence the management and use of these assets. Against this background, certain rights can be assigned to the protectorate.
Foreign persons who establish a foundation in Liechtenstein often pursue two interests: On the one hand, they want to protect the assets to be transferred to the foundation and separated from their assets from access by descendants entitled to a compulsory portion or creditors (asset protection). On the other hand, they want to limit or at least monitor the unrestricted rights of the Liechtenstein professional trustee, to whom the founders entrust their assets and with whom they do not (yet) have an established relationship of trust, to dispose of the foundation's assets.
These interests are conflicting, because effective asset protection can only work if the professional trustee is not subject to any influence from the founder of the foundation. One solution to this dilemma is to implement a protector or protectorate in the organization of the foundation. The concept of the protector or protectorate originates from Anglo-American trust law and was adopted by Liechtenstein practitioners at the end of the 20th century.
Concept of the protector or protectorate
With the protector or protectorate, one or more natural or legal persons are integrated into the foundation under the name of protector (one person), protectorate (several persons) or another designation such as advisory board or advisor, who are granted certain rights that are equal to or superior to those of the foundation board. The founder may appoint trusted persons or beneficiaries as protectors. The founder is free to determine the role to be played by the protectors. The protectors may assume a purely passive position and supervise the foundation board and/or act as a link between the foundation board and the beneficiaries. However, it is also possible to give the protectors an active role and allow them to decide on distributions to beneficiaries and the management of the foundation's assets instead of the foundation board. It can also be stipulated that protectors may amend certain foundation documents. The aforementioned rights can also be structured as rights to issue instructions to the foundation board. It is also conceivable that the execution of the foundation board's decisions could be made dependent on the approval or veto of the protectors. The founder determines which rights the protectors are granted in each individual case. Certain rules must be observed in order to successfully balance effective asset protection with the implementation of protectors.
Conceptual comparability of foundations and trusts
In practice, a protector or protectorate is often also integrated into trusts. Due to the conceptual comparability of foundations and trusts, the following considerations also apply mutatis mutandis to the protector or protectorate of trusts.
The settlor as protector
The settlor is free to appoint himself as protector. However, this can be dangerous for reasons of effective asset protection if the settlor, in his function as protector, can continue to exert influence over the assets he has contributed. Depending on the extent of the influence granted on the foundation, a court may conclude that only the formal ownership structure of the assets contributed by the founder has changed, but that in material terms there has been no separation from the founder's personal assets and the contributed assets continue to be economically attributable to the founder. The Liechtenstein Supreme Court has ruled in foundation law that, when considering the founder's rights of influence as a whole, initial or subsequent contributions of assets by the founder to the foundation can be contested if he continues to reserve the power of disposal and administration over the foundation's assets and thus does not make a so-called sacrifice of assets.
In the opinion of the two authors, this case law is also applicable to asset transfers to the trustee of a trust. If no asset sacrifice has been made in an individual case, the statutory periods within which asset transfers to the foundation can be reversed by shortened compulsory heirs or unsatisfied creditors of the founder do not begin to run. If, on the other hand, there has been a sacrifice of assets, shortened compulsory heirs can only contest asset transfers made within a period of two years prior to the founder's death. Creditors can only reverse asset transfers that took place within one year prior to the foreclosure granted against the founder.
There are concerns that a court could deny the founder's financial sacrifice if the founder appointed as protector can exercise certain rights. These include the right to issue instructions regarding the type, amount, and/or timing of the benefit if the founder himself belongs to the group of beneficiaries. Granting this right would allow him to decide at any time to distribute the entire foundation assets to himself. Caution should also be exercised when granting the right to issue instructions regarding changes to the foundation's documents, in particular changes to the beneficiary provisions. Granting the right to make changes would enable the founder, in his capacity as protector, to appoint himself as the sole beneficiary of the foundation's assets. This would effectively amount to a right of revocation for the founder. In his capacity as protector, the founder would thus continue to have access to the foundation's assets.
With regard to the trust, a further consideration must be made from the perspective of asset protection. Trust law prohibits the trustee from being bound by the ongoing instructions of the settlor. For this reason, the settlor who appoints himself as protector should refrain from reserving rights of instruction vis-à-vis the trustee via this detour. Otherwise, a court could conclude that the prohibition on ongoing binding instructions has been circumvented and that no fiduciary relationship exists. The concerns already mentioned also apply if every exercise of legal rights by the trustee is made dependent on the prior consent or subsequent veto of the settlor-protector.
Beneficiaries as protectors
The settlor has the option of appointing beneficiaries to the protectorate. In this case, there may be a gateway for unsatisfied creditors of the beneficiaries appointed as protectors to access the assets of the foundation. If beneficiaries are appointed as protectors, for reasons of asset protection, they should not be granted the right to determine the type, amount, and/or timing of the benefit. Otherwise, there is a risk that creditors who have enforceable claims against the beneficiaries appointed to the protectorate will seize this right by way of foreclosure or bankruptcy. These concerns arise from the case law of the Austrian Supreme Court on the Austrian Enforcement Code, which has been adopted by Liechtenstein and from which the Liechtenstein courts are generally not allowed to deviate. The Austrian Supreme Court has ruled that the right to determine beneficiaries constitutes an asset subject to enforcement. If the seized property right itself does not represent an asset, a two-stage enforcement procedure is provided for. In this case, the rights of the enforcing creditor are determined by the scope of the rights of the obligated party (enforced debtor). Accordingly, the enforcement court must grant the enforcing creditor judicial authorization to exercise the right to determine beneficiaries in place of the obligated party in order to subsequently be able to access any conceivable proceeds.
Conclusions
By appointing a protector or protectorate, the founder can indirectly ensure a certain degree of influence over the management of the foundation through one or more trusted persons or directly by appointing himself as protector. It is up to the founder to decide which rights the protector is granted in each individual case. If the founder appoints himself as protector or appoints beneficiaries as protectors, it must be borne in mind from an asset protection perspective that certain rights should not be granted to the protector or protectorate, as there is a risk that third parties could gain access to the assets contributed to the foundation.