Liechtenstein’s trust transplant

Tuesday, 03 June 2014
Professor Dr Francesco A Schurr examines the Liechtenstein law of trusts, 88 years after the principality imported the concept from the common-law world.

In 1926, the law of trusts was imported from the common-law world into the Liechtenstein legal system by means of a ‘legal transplant’. The Treuhänderschaft (trust) was codified in articles 897–932 of the Persons and Companies Act (PGR),1 in order to attract investors, in particular from Anglo-American cultural and legal backgrounds. The same year the legislation on private foundations (Privatstiftung) was enacted, in the same piece of legislation.

Over the past decades, many landmark cases decided by the Supreme Court of Liechtenstein (FL-OGH),2  have developed the law through statutory interpretation. Liechtenstein trust law has also been influenced by the ratification of the Hague Trust Convention in 2006. Furthermore, academic discourse on modern Liechtenstein trust law by local and foreign commentators has had an extremely positive effect on its economic success. This is enhanced by the fact that the trust represents an appropriate legal structure to ensure the long-term security of assets and therefore a popular alternative to private foundations.

Creation of an express Liechtenstein trust

A valid express trust requires an agreement between the settlor and the trustee or trustees regarding transfer of trust property. The agreement is a dedication of property, not a contract.3 In it, the settlor declares the transfer of assets to the trustee and must transfer them to the trustees; conversely, trustees may compel the settlor to transfer the assets (article 919(1) PGR); the provision is interpreted as a duty on the part of the trustee to bring an action for performance.

As under English and Welsh law, every trust must also fulfil the requirements of the three certainties (certainty of intention, subject and object) in Liechtenstein.4 In Liechtenstein, private purpose trusts are permitted. To satisfy the certainty of object, either the beneficiaries,5 or the purpose (article 927(7) PGR), must be defined in the trust documents.

To reduce the dangers associated with a lack of beneficiaries in purpose trusts, the Court of Justice (Landgericht) acts as a supervisory body, assuming the supervisory function otherwise performed by beneficiaries, thereby playing a key role in assuring balanced trust governance.

Trust documents

In Liechtenstein, the formal requirements of the trust deed are specified in article 899 PGR. Unlike under English and Welsh law, trusts must always be created in writing in Liechtenstein. In practice, the settlor usually drafts a written unilateral declaration, which must be accepted by the trustees in writing, as must an appointment in a testamentary trust. Where a testamentary trust is created and the person named as trustee does not wish to assume this position, the Court of Justice will appoint a trustee in non-contentious proceedings (article 904(1) PGR).

Settlor’s private autonomy

In a trust deed, the settlor declares the transfer of assets to the trustees, but may provide for the trust property to result to him or herself. The same applies with regard to reversion of the property to any of the settlor’s successors (article 917(1) PGR).

The settlor may also reserve the right to require their prior express consent for certain acts (article 917 PRG). This right is restricted insofar as trustees may not be bound to the settlor’s continuous instructions (article 918 PGR). In addition, the settlor may set out the conditions for the removal and appointment of trustees (article 917(2) PGR).

A trust is irrevocable, unless the settlor reserves the right to revoke it (article 907(2) PGR). The provisions governing modifications to a foundation apply to variations of trust (article 910(4) PGR). Furthermore, the right to vary may be reserved by the settlor, or granted to the trustees or a third party.

Special features

It is common practice for the trust deed (Treuurkunde or Treusatzung) to state whether the trust should be registered or whether its documents should be deposited at the Public Registry. Trusts created for a period of longer than 12 months must be registered if a trustee’s domicile or head office is in the principality (PGR, articles 900 and following). However, the trust will be validly created whether or not it has been registered.

The rule against perpetuities and the rule against accumulations, which apply in most of the common-law jurisdictions, do not apply in Liechtenstein.

Beneficiary rights

The beneficiaries’ role is defined in article 932a, s78 PGR. As in England and Wales, beneficiary rights represent the core of Liechtenstein trust law, and are determined by reference to relevant provisions in the trust documents; any statutory provisions on this matter apply in default.6

A clear principle of English law is that a trust can only exist if the beneficiaries have enforceable rights in order to supervise the trustees.7 In Liechtenstein, beneficiaries who may be entitled to receive a benefit always have a right to receive appropriate information and be rendered accounts, a right that must not be exercised in an improper manner. While the core duties owed by trustees cannot be curtailed, information rights can be restricted, but not excluded, if the purpose of the trust requires special confidentiality.

As under English and Welsh law, beneficiaries generally have a passive role to prevent them from influencing trust administration, but, where there are signs of improper trust administration, the beneficiaries may exercise an active supervisory function. Where beneficiaries petition the court, it will determine and may give instructions about which information is owed.

Interestingly, beneficiaries are in a somewhat weaker position under Liechtenstein trust law than under English and Welsh trust law: for example, the Saunders v Vautier rule does not apply in Liechtenstein.8

Trustee duties

The trustees’ legal position is governed by article 897 PGR. The statutory provisions respect the settlor’s private autonomy in selecting trustees and determining their duties and powers. Where there are several trustees, they are clearly under a duty to supervise each other – a co-trustee may petition for the removal of another who has breached their duty (article 929(3) PGR).

Trustees must act independently and according to the terms of the trust deed, without heeding any later instructions from the settlor, which are prohibited (art 918(1) PGR). Also, the trustees’ duty of loyalty forms the core of every trust, from which many secondary duties derive – for example, to separate trust property from personal property, to maintain a list of trust assets, and to act impartially between beneficiaries. Furthermore, there is a rule against self-dealing (article 925(2) PGR).

Trustees must provide information and render accounts to the audit authority specified in the trust deed (article 923 PGR). In the absence of an audit authority, this duty is owed to the settlor, and, in the absence of the settlor, to the beneficiaries.9

Trustees must perform their duties personally (article 919(5) PGR). Yet such performance often requires a high degree of expertise. It may therefore be concluded that trustees must perform their core duties personally; other tasks can be delegated to third parties, for the selection of whom trustees may nevertheless be liable.

Liability

Trustees risk unlimited personal liability vis-à-vis the settlor or the beneficiaries if they violate any trust deed or relevant statutory provisions (breach of trust; article 924(1) PGR). The question of whether there has been a breach of trust must be determined primarily by reference to the trust documents; Liechtenstein trust law provisions (PGR, articles 897 and following) are subsidiary. The trust documents should be as detailed as possible with regard to the trustees’ duties and powers, especially as liability for negligent acts may be excluded by an agreement to this effect.

Moreover, trustees may request directions from the court in cases of doubt (article 919(6) PGR), irrespective of whether or not the trust falls under the Court of Justice’s supervisory jurisdiction.10 In so doing, trustees may be able to exclude personal liability.

Though originally designed for representatives of legal entities, the business judgment rule (article 182(2) PGR) applies analogously to trustees. In line with English and Welsh law, trustees should have an instrument with which to defend liability claims. Where trustees act reasonably, on an informed basis, have sufficient grounds for the decision taken, and deal with the trust assets as they would their own property, it is possible to reduce or exclude their liability, placing them on an equal footing with foundation council members.

In light of the above, trustees must exercise the same standard of care and skill in administering the trust assets as an ordinary prudent businessperson would exercise in the conduct of their own affairs.

Breach

The right to follow the trust property (tracing; article 912(3), article 932a, sections 30 and 99 PGR) protects the integrity of the trust property where trustees act improperly (breach of trust). The right in Liechtenstein law is based on the process of tracing in equity in English and Welsh law. Upon breach of trust, the trustee, and possibly third parties, will also usually be liable to the beneficiaries for compensation (article 924 PGR).

The Court’s supervisory role

Court supervision plays more or less the same role in Liechtenstein as in England and Wales. Trusts registered in the public register are always placed under the Court of Justice’s continuous supervision (article 929 PGR). The Court maintains a register of the trusts concerned. However, the Court may act even where the trust does not fall within its supervisory jurisdiction (article 929(3) PGR).11 In the exceptional circumstances defined in article 929(1) PGR, supervision is only selective: i.e. the Court may only act in regard to possible breaches committed by the trustees.12 Consequently, the Court supervises both registered and deposited trusts, and beneficiaries of a deposited trust are not significantly worse off compared to those of a registered trust.

The principle in English law limiting the court’s supervisory function to core issues regarding trustee behaviour – particularly honesty, integrity and fairness – also applies in Liechtenstein law. The trust supervisory authority in particular monitors whether the trust deed instructions are being followed, preventing trustees from dealing with the trust assets haphazardly. However, the court may also assume complete supervision of a trust if the instructions in the trust deed are not followed by the trustees. This supervisory role can in part be assigned to another person – for example, a protector. The term ‘protector’ is by nature foreign to English and Welsh trust law. In practice, this role is well-known and common in Liechtenstein.13

  • 1Personen- und Gesellschaftsrecht
  • 2Oberster Gerichtshof Liechtensteins
  • 3With regard to the distinction made between a disposition and a contractual declaration, see Klaus Biedermann, Die Treuhänderschaft des liechtensteinischen Rechts, dargestellt an ihrem Vorbild, dem Trust des Common Law (Bern, 1981), pages 423 and following
  • 4FL-OGH, LES 1989, 3
  • 5For example, discretionary beneficaries, entitled beneficiaries and prospective beneficiaries
  • 6Kurt Moosmann, Der angelsächsische Trust und die liechtensteinische Treuhänderschaft unter besonderer Berücksichtigung des wirtschaftlich Begünstigten: Eine rechtsvergleichende Studie mit Erkenntnissen für das Schweizer Treuhandrecht, (Schulthess, 1999) page 258
  • 7Armitage v Nurse [1997] 2 All ER 705, 709
  • 8Compare Moosmann, page 231 and following
  • 9Biedermann, page 294 and following
  • 10See below
  • 11FL-OGH 17.1.1994, Hp 28/93
  • 12FL-OGH 14.6.2007, 10 HG.2003.17-88
  • 13In addition to the word ‘protector’, the terms ‘enforcer’ and ‘appointor’ are also commonly used
Author block
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Professor Dr Francesco A Schurr TEP

Professor Dr Francesco A Schurr TEP is Chair of Company, Foundation and Trust Law at the University of Liechtenstein.

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