Wealth preservation and estate planning in times of the coronavirus pandemic

Wealth preservation

Generally speaking, the term 'wealth preservation' means the protection of wealth against any erosion which may result from external developments and undesired events, such as liability claims of creditors. Essentially, the task is to secure wealth so that one's own family and descendants may be certain that they will receive a degree of financial support even if something untoward happens to the owner of the assets. Ultimately, the aim is to prevent any possibility of access to the assets, for instance through enforcement actions. The risks  of a managing director, supervisory-board member or shareholder of a business partnership being held liable privately is constantly growing, due to the ever increasing number of new statutory rules being introduced every year, as well as the current uncertain economic times.

In addition to the existing general economic and legal risks for entrepreneurs and high-net-worth individuals, the current coronavirus pandemic is increasing the risks of liability and the assets being reduced. The lockdown in many European countries will hopefully come to an end in the near future, however the economic and financial consequences of this crisis will concern us all for a long time to come.

European governments and the institutions of the European Union (in particular the ECB) are currently taking on huge new debts in order to deal with the economic and social consequences of the pandemic. Many of the countries affected were already heavily indebted before the crisis, such that their financial situation will now deteriorate further. The question therefore arises of who will bear the burden of these new debts over the medium and long term. In some countries, such as Germany which already has a very high level of income tax by global standards, political demands are already being made for the introduction of taxes targeting large fortunes and the reintroduction of wealth tax.

Estate planning

Estate planning with the aim of providing economic security for your family and descendants is a multi-layered and complex matter, particularly when dealing with substantial family wealth. Estate planning may cover many different facets – from preparing a Will, to transferring family assets or company shares to an independent legal entity, such as a Liechtenstein family foundation. Against the background set out above, a structure which provides wealth preservation and estate planning outside Germany, in a country such as Liechtenstein, which offers a high degree of legal certainty also with regard to wealth, is more important than ever.

Liechtenstein: the ideal location for wealth preservation and estate planning

Alongside Norway and Iceland, Liechtenstein is a member of the European Economic Area (EEA), i.e. European fundamental freedoms apply in the country, with the result that Liechtenstein's legal structures are also recognized in the EU. The liberal economic order, efficient official and regulatory structures, an attractive EU-compatible tax system, plus a high degree of legal certainty and political stability, make Liechtenstein a reliable partner. The country has no government debt and practically no unemployment. In 1923, based on a customs union with Switzerland, Liechtenstein adopted the Swiss franc as the country's currency.

Framework conditions of a family foundation in Liechtenstein

For the purposes for both wealth preservation and estate planning, the use of a family foundation in Liechtenstein is an attractive alternative option to a German foundation. Liechtenstein has a long tradition of foundations; the foundation was anchored in statute back in 1926. On 1 April 2009, Liechtenstein's new modern foundation law entered into force. A foundation may operate on both a private and a charitable basis. It is structured as a legal entity and is established by a founder who determines the foundation's purpose and dedicates assets to it. Assets serving to provide future support to a family are thereby segregated and acquire a separate legal identity; in terms of civil law, they are allocated to the foundation and not to the founder. The assets are also allocated to the foundation from a tax perspective, provided the founder no longer exercises any legal or de-facto control over the foundation's assets.

Structures become open to legal challenge if individuals do not properly separate themselves a  foundation’s assets. Separation means that the founder of a Liechtenstein foundation must set up the foundation on an irrevocable basis and, with effect from establishment, must dispense with all influence and control. As a result, the assets are no longer owned by the founder and legally belong to the foundation. This apparently dramatic step does however give rise to a number of advantages. The founder of a Liechtenstein foundation largely has free scope in the wording of the foundation's statutes, i.e. the purpose of a foundation may, for instance, be specified as providing for the founder's family and preserving wealth. The beneficiaries within the family may be freely nominated.

Tax advantages of a family foundation in Liechtenstein

Unlike a German foundation, a family foundation in Liechtenstein is not subject every 30 years to the so-called 'substitute inheritance tax' (assumoffing a fictitious transfer of assets to successors, which may lead to a significant outflow of liquidity from a German foundation). Moreover, a foundation in Liechtenstein is subject to only a moderate level of ordinary taxation on earnings of 12.5% (in contrast to Germany where, in the case of commercial income, the tax on earnings of a foundation, with corporate income tax and trade tax, may be over 30%, depending on location). Alternatively, a foundation may also be taxed as a private wealth structure at a flat tax rate. Consideration of German tax rules is essential when planning, and this makes it essential to refer to tax experts when engaging in such planning.

Conclusion

Particularly in times of a pandemic, a Liechtenstein family foundation can be a successful vehicle for wealth preservation and estate planning, subject to timely implementation. As the affects of the current pandemic will continue for a while yet, high-net worth German clients will still need  security, self-determination and privacy. Wealth preservation and tax-efficient estate planning are not mutually exclusive. The experts at First Advisory Group have the know-how and experience to support the establishment of Liechtenstein family foundation for German clients.