We take pleasure in presenting this legal opinion from Dr. Urs Schenker, a member of the international law firm of Baker & McKenzie in Zurich. Dr. Schenker explains how individuals, trusts or companies owned by a trust can protect their assets with the purchase of a life insurance policy from a Swiss life insurance company. Part One of this Opinion provides a thorough legal analysis of asset protection for individual policyholders in the framework of Swiss law, with the relevant Swiss statutes translated in an annex. We hope You find Dr. Schenker's treatment of these aspects of asset protection informative and helpful in planning your financial future.

JML Jurg M. Lattmann AG

Asset Protection by means of life insurance policies.

A legal opinion

Part One:

For An Individual Policy Holder

Dear Mr. Lattmann

You have asked me to analyse the following question: 1. May the creditors of a person domiciled outside of Switzerland seize a life insurance policy their debtor has purchased from a Swiss insurance company, if they have obtained a judgment against such debtor abroad? 2. May the annuity payments under an insurance policy issued by a Swiss life insurance company be protected from the creditors of the beneficiary? I would like to answer these questions as follows:

A CONCLUSIONS

Based on the legal analysis set forth below I have come to the following conclusion: 1. If a person residing outside of Switzerland (hereinafter referred to as the "policy owner") purchases a life insurance policy from a Swiss insurance company and designates his spouse or his descendants as beneficiaries of such insurance policy or irrevocably designates any other third party as beneficiary, this insurance policy is protected by Swiss law against any collection procedures instituted by the creditors of the policy owner and is also not included in a Swiss bankruptcy procedure. Even if a foreign judgment or court order expressly orders the seizure of such policy or the inclusion in the estate in bankruptcy, such an insurance policy may not be seized in Switzerland or included in the estate in bankruptcy. Creditors may only seize the policy or have it included in the estate in bankruptcy if the purchase of the insurance policy or the designation of the beneficiaries must be considered as a fraudulent conveyance under Swiss law. This condition is fulfilled if the policy owner has designated the beneficiaries less than 6 months before the bankruptcy decree has been issued or his assets have been seized in a collection procedure. It is also fulfilled if the beneficiary has been designated with the clear intent to damage creditors in which case the creditors have to file a lawsuit for fraudulent conveyance within five years after the designation has been made. This intent, however, cannot be proved if the beneficiaries have been designated at a time the policy owner was solvent and no creditors had yet asserted any claims against him which could have rendered him insolvent. If the policy owner has designated his spouse or his descendants as beneficiaries of the insurance policy, the insurance policy is protected from his creditors irrespective of whether the designation is revocable or irrevocable. The policy owner may therefore designate his spouse and/or his descendants as beneficiaries on a revocable basis and revoke this designation before the policy runs out if at such time there is no threat from any creditors and then at the expiry of the insurance policy either collect the proceeds or roll them over into a new life insurance policy. 2. Annuity payments under a Swiss insurance policy are protected from the beneficiary's creditors if the beneficiary has received such payments without having compensated the policy holder, the insurance company or any third party for such payments and if the policy owner states in the designation that the annuities to be paid are not subject to the rights of the beneficiary's creditors. 3. The above conclusions are valid for all life insurance policies which have been recognized by the supervisory authority, the Federal Agency for Private Insurance Matters ("Bundesamt fur Privatversichterung"), i.e. also for life insurance policies linked to mutual funds and derivatives.

B LEGAL ANALYSIS

1. The protection of life insurance policies in Swiss collection and bankruptcy procedures: In principle, a creditor may seize an insurance policy purchased by his debtor in a collection procedure against such debtor or have it included in such debtor's estate in bankruptcy (Fritzsche/Walder, Schuldbetreibung und Konkurs nach schwcizerischem Recht, Vol. 1, Zurich 1984, p 305 seq.). According to art. 79 para. I of the Swiss Insurance Act, this is, in general, also possible if the policy owner has designated a third party as beneficiary of the policy (A. Maurer, Schweizerisches Privatvcrsicherungsrecht, 3rd. Ed., Bern 1995, p. 452 seq.; Jaeger/Roelli, Kommentar zum Schweizerischen Bundesgesetz uber den Versicherungsvertrag, Bern 1933, N. 14 to art. 82 VVG) as according to this provision, the designation of the beneficiary will become null and void in case the policy is seized by the policy owner's creditors or the policy owner falls into bankruptcy. According to the Swiss Insurance Act, a life insurance policy, however, is protected from the policy owner's creditors under the following conditions: a)Irrevocable designation of a third party as Beneficiary If the policy owner has irrevocably designated a third party as beneficiary of a life insurance policy such policy according to art. 79 para. 2 of the Swiss Insurance Act may not be seized by the policy owner's creditors (Decision of the Federal Court (BGE)112 II 157; A. Maurer, supra, p.453). The Federal Court, on pages 160 and 161 of the cited decision held the following with regard to the effects of an irrevocable designation of a third party beneficiary: "En cas d'execution forcee contre le preneur d'assurance, si la designation du beneficiaire est irrevocable, il n'y a, dans le patrimoine du preneur, ni creance d'assurance, ni droit de fair naitre la condition resolutoire a laquelle est soumis, en regle generale, le droit du beneficiaire. Les creainciers du preneur ne peuvent donc rien faire saisir, inventorier ni realiser C'est ce u'exprime l'art. 79 al. 2 LCA, aux termes duquel, si le preneur d'assurance avait renonce a son droit de revoquer ladesignation du beneficiaire, le, droit a I'assurance qui decoule de cette designation n'est pas soumis a 1'execution forcee au profit des creanciers du preneur." Translation: "In case of enforcement measures against the policy owner, if the designation of the beneficiary is irrevocable, there is in the estate of the policy owner no insurance claim and the policy owner has no right to revoke the beneficiary's right as normally would be the case. The creditors of the policy owner may, therefore, not seize, have listed or auction off [an insurance policy]. This principle is expressed in art. 79 para. 2 Swiss Insurance Act according to which, if the policy owner has waived its right to revoke the designation of policy emanating from such designation may not be seized by the policy owner's creditors." According to art. 77 para. 2 of the Swiss Insurance Act, the designation of a third party as beneficiary is only irrevocable if such designation is made in writing and the policy is handed over to the beneficiary (BGE 85 III 58; Maurer, supra, p. 453). b) Designation of spouse and/or descendants as beneficiaries If the policy owner has designated his spouse and/or his descendants as beneficiaries of the insurance policy concerned, such insurance policy according to art. 80 of the Swiss Insurance Act may not be seized by his creditors (K. Amonn, (Grundriss des Schuldbetreibungs- und Konkursrechtes, 5th Ed., Bern 1993, p.180; Jaeger/Roelli, supra, N. 46 to art. 80 VVG; BGE 59 III 203) unless he has explicitly granted a security interest in such policy to a creditor. Regarding art. 80 and 81 of the Swiss Insurance Act the Federal (Court wrote in BGE 105 III 133 the following: "Art 80 und 81 VVG; sehen zugunsten des Ehegatten und der Nachkommen des Versicherungsnehmers, falls diese Begunstigte aus einem Lebensversicherungsvertrag sind, folgende Sonderregelung vor; Die Begunstigung erlischt nicht der Konkurseroffnung uber den Versicherungsnehmer wie dies nach Art. 79 Abs. 1 VVG sonst grundsatzlich der Fall ware. Der Versicherungspruch ist nach Art. 80 VVG der Zwangsvollstreckung entzogen, und die Begunstigten treten nach Art 81 VVG; sofern sie dies nicht ausdrucklich ablehnen, mit dem Zeitpunkt der Konkurseroffnung an Slelle des Versicherungsnehmers in die Rechte und Pflichten aus dem Versicherungsvertrag ein. Selbstverstandlich werden dadurch die Pfandrechte, Dritter am Versicherungsanspruch nicht beruhrt (Art 80 VVG)". Translation: "Art 80 and 81 of the Swiss Insurance Act provide for a special rule if a spouse and the descendants of the policy owner are beneficiaries of an insurance policy. The designation as beneficiary may no longer be revoked when the policy owner is declared bankrupt as would normally be the case in accordance with art. 79 para. 1 of the Swiss Insurance Act. Pursuant to the art. 80 of the Swiss Insurance Act the claim against the insurer may not be subject to enforcement measures and the beneficiaries, pursuant to art. 80 of the Act, when bankruptcy is declared, will enter into the rights and obligations of the insurance agreement replacing the policy owner unless they expressly decline such transfer of the agreement. Naturally, eventual liens of third parties relating to the insurance policy will not be concerned thereby (art. 80 of the Swiss Insurance Act). " In contrast to the designation of another third party as beneficiary, it is, in case of a designation of spouse and/or descendants, irrelevant whether such designation is irrevocable or revocable, so that the insurance policy is also protected from the policy owner's creditors if the designation of spouse and/or descendants is revocable (Fritzsche/Walder, Vol. 1, P. 306; Jaeger/Roelli, supra, N. 46 to art. 80 VVG). If the policy owner falls into bankruptcy or if the collection office certifies to his creditors after a seizure that the assets seized do not cover the policy owner's debts, spouse and descendants who are beneficiaries of the policy according to art. 81 of the Swiss Insurance Act will be assigned all the rights and duties of the policy owner under the insurance policy (cf. BGE 81 III 142). c) Rules on fraudulent conveyance: According to art. 82 of the Swiss Insurance Act, creditors of an policy owner may, however, seize the policy even in the above cases, if they can prove that the irrevocable designation of a third party or the designation of the spouse and/or descendants as beneficiaries was a fraudulent conveyance in the sense of art. 285 seqq. of the Swiss Debt Collection and Bankruptcy Act (cf. BGE 81 III 143). The purchase of an insurance policy and the designation of beneficiaries would be considered as a voidable preference under the Swiss fraudulent conveyance rules in the following cases: aa) Designation made within 6 months before bankruptcy or seizure According to art. 286 of the Swiss Debt Collection and Bankruptcy Act, gifts made by a debtor are a voidable preference if he falls into bankruptcy or if his assets are seized within 6 months after the gift was made (FritzscheWalder, Schuldbetreibung und Konkurs nach schweizerischem Recht, Vol. II, Zurich 1993, p. 549 seq.). As the gratuitous designation of a third party as beneficiary under an insurance policy must be regarded as a gift to such third party, such designation can, therefore, be avoided by the creditors if it was effected within this 6 months' period (H. V Gaugler, Die paulianische Anfechtung unter besonderer Berucksichtigung der Lebensversicherung, Vol. 2, Basel 1945, p. 564; K. Amonn, supra, p. 421). As far as spouse and/or descendants are designated as beneficiaries certain legal writers do not consider such designation as a gift if it is made in order to take care for the reasonable needs of spouse and descendants as such legal writers maintain that the care for the family is a moral obligation and a transfer in discharge of such obligation is not a gift (Jaeger/Roelli, supra, N. 20 to art. 82 VVG; Gaugler, supra p. 538). According to this view the designation of spouse and/or descendants is a voidable preference only if the policy owner has already been insolvent at the time of the designation or the insurance sum is excessive in comparison with the needs of the policy owner's family. However, since the Swiss Federal Court until now has never treated the question whether the designation of spouse and/or children is a gift for the purpose of Swiss fraudulent conveyance rules and so far has treated other gratuitous transfers to spouse and/or descendants as voidable gifts, I would not advise to rely on these writers but rather assume that such designation is a gift and, therefore, voidable if made within the 6 months' period mentioned above. bb) Designation made with the intent to damage creditors: According to art. 288 of the Swiss Debt Collection and Bankruptcy Act, any transfers effected by a debtor with the intent to damage his creditors can be avoided by the creditors, if at the time of the transfer the recipient of the transfer knew of this intent and if the debtor later falls into bankruptcy or a seizure of his assets is effected which does not cover his liabilities (Fritzsche/Walder, Vol. II, p. 558 seq.; K. Amonn, supra, p. 423 seq.; BGE 101 III 94, 99 III 98). Such suit, however, must be filed by the creditors within five years after the transfer has taken place. If the designation of the spouse and/or the descendants or of a third party was made with the specific intent to damage creditors and the beneficiaries knew of this intent, the designation is thus also voidable (H. Gaugler, supra, p. 542). In order to avoid the transfer the creditors concerned have to prove the intent as well as the beneficiary's knowledge. It is, however, not sufficient for the proof of such intent if it can be shown that the designation took place at a time at which the policy owner was - due to his professional activities or his investments - aware of certain risks but the policy owner's assets still covered all his debts and he could not foresee an insolvency (Fritzsche/Walder, Vol. II, p. 561 seq.; K. Amonn, supra, p. 423 seq., cf BGE 43 III 249; 83 III 85). 2. Protection of foreigners having purchased Swiss life insurance policies a) Collection and bankruptcy procedures against foreigners in Switzerland In Switzerland, a creditor can only institute a collection procedure against a foreign debtor, if he can first attach assets of such debtor in Switzerland. According to art. 271 of the Swiss Debt Collection and Bankruptcy Act, a creditor may obtain such an attachment if he can establish a prima facie case of his claim and prove that the debtor concerned, has no domicile in Switzerland (K. Amonn, supra, p. 401 seq.). Such prima facie case normally can be established easily if the creditor has obtained a judgment abroad which confirms his claim. According to art. 278 of the Swiss Debt Collection and Bankruptcy Act, the creditor must then within 10 days file a writ of payment against the debtor. If the debtor opposes such writ, the creditor must institute an ordinary civil procedure against the debtor or if he has already obtained a judgment in a foreign country file a petition for the execution of such judgment in Switzerland. In accordance with art. 25 of the Swiss Conflict of Law Act the execution is granted, if the foreign court concerned has jurisdiction, the judgment cannot be appealed in the country concerned and the foreign court has not violated fundamental principles of law or due process (A. K. Schnyder, Das neue IPR-Gesetz, Zurich 1988, P. 34 seqq.; Volken, IPRG Kommentar, Zurich 1993, N. 6 seq. to art. 25 IPRG and N. 6 seq. to art. 28 IPRG). AN even more limited review of the foreign judgment takes place if the Lugano Convention on Jurisdiction and Enforcement of judgments in Civil and Commercial Matters (the "Convention") is applicable because the judgment has been rendered in a country which has signed the Lugano Convention. A foreign judgment can, therefore, in principle, be enforced in Switzerland and can serve as basis for a collection procedure against a foreign resident, if it meets those conditions. If a foreigner, however, has fallen into bankruptcy in the country of his domicile, the creditors do not have to attach his assets and seek the enforcement of a judgment they have obtained against him; they may also file a petition for the recognition of the foreign bankruptcy decree in Switzerland. According to art. 166 of Swiss Conflict of Law Act, a foreign bankruptcy decree which was rendered in the state of domicile of the debtor will be recognized in Switzerland if such decree cannot be appealed in the country concerned, does not violate fundamental principles of law and due process and the country concerned does recognize Swiss bankruptcy decrees (A. K. Schnyder, supra, p.12 1; Volken, supra, N. 9 seq. to art. 166 IPRG). In such a case, all assets of the debtor located in Switzerland will be auctioned off and the proceeds be distributed to the creditors in accordance with Swiss bankruptcy rules (A. K. Schnyder, supra, p. 1 2 3; Volken, supra, N. I seq. to art. 170 IPRG; Decision Nr. 27 in SJZ 87 (1991), p. 191 et seq.) b) Swiss insurance policies in a collection or bankruptcy procedure against the foreign debtor: According to art. 275 of the Swiss Debt Collection and Bankruptcy Act, only assets which a creditor can seize in a collection procedure can be attached (K. Amonn, supra, p. 400) - As this principle applies also to foreign debtors (BGE 79 III 72), a Swiss insurance policy purchased by a foreigner is protected under the conditions set forth above in para. 1 of this letter (Jaeger/Roelli, N. 78 to art. 79/80 WG). If creditors do not file for an attachment but rather for the recognition of a foreign bankruptcy decree, the insurance policy is also protected, as according to art. 170 of the Swiss Conflict of Law Act, the debtor's assets in Switzerland will be auctioned off for the benefit of his creditors in accordance with Swiss bankruptcy rules (A. K. Schnyder, supra, p. 123; Volken, supra, N. I seq. to art. 170 IPRG), which include the protection of certain life insurance policies (Jaeger/Roelli, N. 78 to art. 79/80 VVG). As collection and bankruptcy procedures in Switzerland therefore are always based only on Swiss law, life insurance policies are protected in accordance with Swiss law in such procedures, even if the collection or bankruptcy law at the debtor's domicile would not afford him such protection. In particular, according to art. 171 of the Swiss Conflict of Law Act, only the Swiss rules on fraudulent conveyance apply, so that the designation of beneficiaries cannot be avoided by the creditors unless they prove that the conditions for fraudulent conveyance described above, are met even if such purchase or designation were a voidable preference under the fraudulent conveyance rules applicable at the debtor's domicile. Therefore, the creditors of a person residing outside of Switzerland may in Switzerland not seize or include in the estate in bankruptcy any life insurance policies which are protected under Swiss law even if they have a judgment or a bankruptcy decree which is enforceable in Switzerland, unless they can prove that the designation of the beneficiaries of the insurance policy is a voidable preference under Swiss fraudulent conveyance rules. As the rights under an insurance contract between a foreigner and a Swiss insurance company according to Swiss law are deemed to be located at the domicile of the Swiss insurance company, foreign collection and bankruptcy procedures concerning such insurance contracts in any event would not be recognized in Switzerland and an insurance company could not make any payments to a creditor due to any foreign collection or bankruptcy procedures. So even if in a foreign bankruptcy or a collection procedure a judgment or an order were issued which gave a creditor the right to seize the insurance policy, the Swiss insurance company could not comply with such judgment or order but would have to distribute the proceeds to the beneficiary named in the insurance policy. However, if the policy owner's and the beneficiaries' rights are embodied in a policy which must be considered as a security, a creditor could claim that such security could be seized in accordance with the collection and bankruptcy rules of the country in which such security is deposited as securities normally are subject to the collection and bankruptcy law of the country in which they are deposited. This problem, however, can be avoided entirely, if the insurance policy is deposited in Switzerland. 3. Protection of annuity payments from beneficiary's creditors: In principle, annuity payments become, upon payment, part of the beneficiary's fortune and, therefore, may be seized by his creditors in a collection procedure and are included in his estate in bankruptcy (BGE 64 III 179). However, according to art. 519 in connection with art. 520 of the Swiss Code of Obligations (CO) annuity payments under an insurance policy may not be seized by the beneficiary's creditors and are not included in his estate in bankruptcy, if the policy holder has excluded such seizure in the policy and the beneficiary receives such payments free of charge, i.e. without compensating the policy holder, the insurance company or any third party for the right to receive the annuity payments (Giovanoli/Schatzle, Berner Kommentar, N. 20 seqq. to art. 519 CO; BGE 61 III 193; BGE 79 III 71). As this provision constitutes an exception from the general rule that all assets of a debtor may be seized by his creditors, the Federal Supreme Court is very strict in examining the requirement that the beneficiary may not pay any compensation (cf. Giovanoli L.C., N. 27 seqq.; BGE 70 III 65; BGE 79 III 74). Due to this requirement it is, naturally, not possible that a policy holder who has paid the insurance premium designates himself as the beneficiary or that the policy holder enters into an agreement with a third party for reciprocal designation where both parties designate each other as beneficiaries under an annuity policy. In order to avoid that the recipient voluntarily subjects his annuity payments to his creditors by assigning or pledging them to his creditors, the policy holder may, furthermore, determine that such payments may not be assigned (art. 164 CO), or pledged (art. 899 Swiss Civil Code) to any third party. The above principles apply also to foreign beneficiaries, so that the annuity payment to be paid to them cannot be seized by their creditors in Switzerland.

This opinion is limited to the laws of Switzerland. No opinion is expressed herein with respect to the law of any other jurisdiction or with respect to possible changes in the applicable law. If you have any further questions concerning the problems treated above, please do not hesitate to contact me.

Sincerely yours,

Dr. Urs Schenker

Annex to Part One: Translation of the relevant statutory provisions Annex to Part One: Unofficial translation of articles 79 and 80 of the Swiss Insurance Act and of the articles 519 and 520 of the Swiss Code of Obligations 1. Art. 79 Swiss Insurance Act "The designation of a beneficiary shall be null and void in case of seizure of the insurance policy and in case the insured person is declared bankrupt. It shall become fully enforceable again if the seizure is lifted or the decree of bankruptcy is revoked. If the policy owner has waived his right to revoke a designation, then the insurance policy may not be seized by the policy owner's creditors." 2. Art. 80 Swiss Insurance Act "If the policy owner has designated his spouse or his descendants as beneficiaries neither the insurance claim of the policy owner nor the one of the beneficiary may, subject to eventual liens, be seized by the creditors of the policy owner." 3. Art. 519 Swiss Code of Obligations "The annuity creditor may assign his rights in the absence of a stipulation to the contrary. Whoever gratuitously creates an annuity in favor of a third party has the right to stipulate, at this time, that the third party cannot be deprived of the annuity for the benefit of his creditors by way of debt enforcement proceedings or bankruptcy." 4. Art. 520 Swiss Code of Obligations "The provisions of this law do not apply to life annuities subject to the Federal Law on Insurance Contracts of April 2, 1908; the provisions concerning the deprivation of annuities remain reserved."

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