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 Two of this Opinion deals with the issue of life insurance policies held by trusts or companies owned by trusts. The laws applicable to trust and the legal protection provided to such assets are fully discussed.

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 Two:

For a Trust or a Trust-owned Company

Dear Mr. Lattmann

You have asked me whether the conclusions of my opinion on asset protection by means of life insurance dated March 29, 1995 would also apply if the policyholder is a trust or a company owned by a trust and the trustor's spouse and/or issue are named as beneficiaries.

I would like to answer this questions as follows:

A Foreign Trust in Switzerland

1. The law applicable to a trust:

The concept of trusts is not known in Swiss law (A. F. Schnitzler, Trust und Stiftung, SJZ 61, p, 200; PM. Gutzwiller, Der Trust in der schweizerischen Rechtspraxis, SJIR, 1985, p. 53f.; Dreyer, Le trust en droit Suisse, Geneve, 1981, p. 33 seqq.; Reithmann/Martiny, Internationales Vertragsrecht, 4. ed., 1988, p. 138 seqq.). Trusts, therefore, are also not mentioned directly in the IPRG. For the purpose of Swiss conflict of law rules a trust, therefore, is regarded either as a corporation in the sense of art. 150 IPRG or as a contract in the sense of art. 112 seqq. IPRG (F: Vischer, Die Bundesgerichtspraxis zum internationalen Obligationenrecht, SJIR 1971, p. 238 seqq.; Reithmann/Martiny, p. 139; BGE 96 II 79 seqq. For the law of Germany cf. Munchner Kommentar zum BGB, 2. ed., 1990, N 371 Einleitung; SoergelLuderitz, N 257 vor art. 7 in: Kohlhammer, Kommentar zum BGB, 11. ed., 1983; Reithmann/Martiny, p. 138 seqq.; BGH 10.6. 1968, IPR spr 1968-9, N 160).

The notion of "corporation" is defined very broadly in art. 150 IPRG and encompasses all forms of organized companies and estates ("als Gesellschaft im Sinne dieses Gesetzes gelten organisierte Personenzusammenschlusse und organisierte Vermogenseinheiten"; cf. F. Vischer, IPRG Kommentar, Zurich 1993, N 1 seqq. ad art. 150 IPRG). According to the records of the parliamentary debate and the report of the Federal Council to the parliament, the definition contained in art. 150 IPRG should also cover "certain" trusts ("gewisse Trusts", Botschaft des Bundesrates zum Bundesgesetz uber das Internationale Privatrecht, BB1 1983 I 438; Sten Bull, SR 1985, S. 168, Sten Bull, NR 1986, S. 1359). In analogy to the situation of the simple partnership (einfache Gesellschaft) which according to art. 150, para. 2 IPRG is considered to be a corporation in the sense of this article only if it has a certain organization (F. Vischer, supra, N 19 seqq. ad art. 150 IPRG) only trusts which have an organization should be considered as companies, whereas trusts without such organization should rather be considered as contractual relations (cf. Federal Supreme Court Decision (BGE) 96 II 79; D. A. Dreyer, Le trust en droit Suisse, Geneve 1981, p. 115 seqq.). A trust of which the only purpose is the administration of funds by the trustee or an agent of the trustee would therefore rather qualify as a purely contractual relation for the purpose of the IPRG (cf. BGE 96 II 79).

If a trust is qualified as a company in the sense of art. 150 IPRG, the law according to which the trust was registered or formed is applicable to the relation between settlor, beneficiary and trustee and also to the question whether the trust has been validly formed (art. 154 IPRG in connection with art. 155 IPRG; Botschaft, supra, p. 442; P Nobel, Zum internationalen Gesellschaftsrecht im IPR-Gesetz, in Beitragen zum neuen IPR des Sachen, Schuld- und Gesellschaftsrechts, Zurich 1987, p. 184). If the trust, however, is qualified as a contractual relation, according to art. 116 IPRG the law which settlor and trustee have chosen in a choice of law clause in the trust agreement will be applicable to the relation between the parties and also to the question whether this contractual relationship is validly existing (F. Vischer/A. v. Planta, Internationales Privatrecht, 2nd ed., Basel 1982, p. 176). Irrespective of the trust's qualification as corporation or contract, the law mentioned in the trust instrument will, therefore, be the applicable law. Consequently, a Swiss court will recognize the existence of a trust, if the trust has been validly formed according to this law (cf BGE 85 I 115; 82 III 63, ASA 29, p. 314, Decision of the Federal Justice Department of February 28, 1973, VPR 173, No. 57; A. F. Schnitzler, DieTreuhand (Der Trust) und das Internationale Privatrecht, in Gedachtnisschrift Ludwig Marxer, Zurich 1963, p. 88 seqq.; K. Bloch, Der anglo-amerikanische Trust und seine Behandlung im internationalen Privatrecht, SJZ 46, p. 67 seqq.; SJIR, 1971, p. 223) and will apply this law also to the relationship between settlor, trustee and beneficiaries.

2. Property rules applicable to trust assets:

The Anglo-American trust is based on a two-tiered property concept: the trustee has legal ownership in the trust assets, whereas the beneficiary has an equitable interest in the same assets (cf. Restatment of the law 2nd., Trust 2nd. vol. 1, para 2; D. A. Dreyer, supra, p. 15 and p. 35 seqq.; Keeton and Sheridon, The Law of Trusts, 10th ed., London 1974, p. 2 seqq.; K. Biedermann, Die Treuhanderschaft des liechtensteinischen Rechts, Bern 1981, p. 99-1 BGE 96 II 92). This concept which historically is based on the old English distinction between Law and Equity (G. W. Keeton, supra, p. 3 seqq.), is unknown to civil law countries (BGE 96 II 90), where the property law is based on the concept of indivisible ownership. Although a trust, which has been validly formed according to a foreign law is recognized in Switzerland, the property rules, associated with a trust can therefore create a problem as far as property located in Switzerland is concerned.

According to art. 104 IPRG Swiss property law is applicable to property located in Switzerland as far as third parties are concerned, even if the parties to an agreement concerning this property have agreed upon the application of a different law (Botschaft, supra, p. 400; Anton Heini, IPRG Kommentar, Zurich 1993, N 10 seqq. ad art 104 IPRG; A. K. Schnyder, Das neue IPR-Gesetz, 2 ed. 1990, p. 94 seq.). Therefore, the property concepts of the law applicable to a trust cannot be applied to trust assets located in Switzerland if such law provides for two-tiered property rights, as Swiss property law is based on the concept of undivided ownership (D. A. Dreyer, supra, p. 39). In Such a case the rights in the trust assets must be converted into the forms provided by Swiss property law (BGE 96 II 88; For the law of Germany cf. Kegel, Internationales Privatrecht, 6. ed., Munchen 1987, p. 377). According to a decision of the justice department of February 28, 1973 (VPR 1973, Nr. 57) this conversion must be accomplished on a case by case basis. Therefore, in a case where a trustee in a testamentary trust had to manage the estate until the distribution to the heirs and had to distribute the estate according to the last will of the settlor, the trustee was not accorded any property rights in the estate but the position of a Swiss executor in the sense of art. 517 seqq. CC (VPR 1973, N. 57). In cases, however, in which the trustee had to manage the trust assets for a relatively long time, the trustee was regarded as the owner of the trust property (BGE 82 III 63, BGE 96 II 93; ASA 29, p. 314; D. A. Dreyer, supra, p. 158: Kotz, Zur Anknupfung des unter Lebenden errichteten Trusts, IPrax 1985, p. 204 seqq.). This solution which gives the beneficiary only contractual rights against the trustee but no direct interest in the trust assets, will thus also be applied when the trust was formed as an inter-vivos trust for holding of a life insurance policy.

3. The separation of the trust assets from the settlor's assets:

If according to the law applicable to the trust concerned the settlor has no ownership in the trust assets, the trust assets cannot be considered to be part of the settlor's estate for the purpose of a collection procedure against the settlor (F. Vischer, Die Bundesgerichtspraxis zum internationalen Obligationenrecht, SJIR 1971, p. 237).

However, a trust may be disregarded and the property of the trust be considered as property of the settlor, if the settlor's insistence on the existence of the trust and on the separation of the trust assets from his own assets constitutes an abuse of rights in the sense of art. 2 CC. According to Federal Supreme Court decisions concerning art. 2 CC. a person commits an abuse of rights, if he uses a right for a purpose for which such a right was not intended or if the use of a right is in blatant contradiction with the previous actions of the person concerned (P Tuor/B. Schnyder/J. Schmid, Das Schweizerische Zivilgesetzbuch, 11th ed., Zurich 1995, p. 52 seqq.).

In particular, Swiss Courts on the basis of art. 2 CC. have disregarded the formation of a corporation, if the corporation's funds have constantly been mingled with the shareholder's funds, if the shareholder has not treated the corporation as a separate legal entity by constantly bypassing the corporation's directors and the shareholder has not complied with the formal requirements of the administration of corporation (J. N. Druey, Aufgaben eines Konzernrechts ZSR 99 (1980), p. 372 seqq.). These criteria by analogy also apply to trusts (BGE 96 II 99). Trusts, therefore, most probably will be disregarded, if the settlor himself does not respect the separation of the trust assets from his own assets and does not comply with the formal structures of a trust by constantly bypassing the trustee in the administration of the trust assets. It must also be assumed that a trust may be disregarded, if the settlor according to the deed of trust has complete power over the trust because he e.g. can revoke the trust at any time and is also its sole or main beneficiary (cf also SJZ 54, p. 2, in which case a merchant formed a trustlike entity which was entirely under her control and which then acquired her insolvent business in order to shield her from personal liability).

Furthermore, the creditors of a settlor may void a trust if the formation of a trust must be considered as a fraudulent conveyance under art. 285 ff. of the Federal Law on collection procedure and bankruptcy because the trust has been formed with the intent to defraud creditors (art. 288) or must be considered as a gift to the beneficiaries which was made less than 6 months before a seizure in a collection procedure or the bankruptcy (art. 285) (see in general H. Fritzsche/H. U. Walder, Schuldbetreibung und Konkurs nach schweizerischem Recht, vol. II, Zurich 1993, p. 543 seqq.) and the settlor is subject to Swiss bankruptcy and collection procedures.

4. Lawsuits against the settler in Switzerland:

In principle, a creditor of the settlor may not bring a lawsuit against the settlor in Switzerland just because the trust property is located in Switzerland, the trustee is domiciled in Switzerland or the trust owns a Swiss insurance policy, as Swiss law does not provide for a forum in such a case (Botschaft, supra, p. 299; P Volken; in Lausanner Kolloquium uber den deutschen und den schweizerisclien Gesetzesentwurf zur Neuregelung des internationalen Privatrechts, Zurich 1984, p. 228; A. K. Schnyder, supra, p. 24). Normally, a creditor of the settlor may also not find a forum in Switzerland by attaching the trust assets since the trust assets, as shown above, are not owned by the settlor (cf. BGE 82 III 63). Only if the trust can be disregarded because of an abuse of right (see supra, para. B.3), the trust property can be attached as settlor's property which then enables the creditor in certain cases to file a lawsuit in Switzerland according to art. 4 IPRG (see in general P. Volken, IPRG Kommentar, Zurich 1993, N 1 ad art. 4 IPRG).

As the trust property is not owned by the settlor, a foreign judgment against the settlor may also not be enforced in Switzerland against the trust property unless the creditor concerned can show that the trust is to be disregarded because of an abuse of rights (see supra, para. B.4).

B Life insurance policies owned by trusts

If a trust owns a life insurance policy, the trustee will be regarded as the policyholder (cf above para A.2). In a purely formal analysis the trustor's souse and issue are not protected by art. 80 of the Swiss Insurance Act (cf. for details on such protection my opinion on asset protection by means of life insurance dated March 29, 1995 as the trustor has no interest in the policy but only contractual rights against the trustee and art. 80 of the Swiss insurance act protects only spouse and issue of the policyholder (Koenig, Schweizerisches Privatversicherungsrecht, 3. ed., Bern 1964, p. 44 1). Also according to art. 11 of the Haager Ubereinkommen uber das auf Trusts anzuwendende Recht und uber ihre Anerkennung of October 20, 1984 (Convention on the law applicable to trusts and on their recognition; at present effective in Italy, the UK and Australia) the personal creditors of the trustee cannot prosecute the trust property (IPrax 1987, p. 56).

The following arguments however could be raised against such a formalistic analysis:

1. The protection offered by art. 80 of the Swiss Insurance Act should not be based on Swiss ownership concepts which do not allow split or two tiered ownership but on whether the trustor according to the law under which the trust has been formed can be considered as policyholder. Such argument could be based on art. 155 lit f IPRG according to which the relations between a corporation and its members are subject to the law under which a corporation has been formed (The relation between the trustee and the third parties is subject to the law of the trust: Czermak, Der Express trust im IPR, 1972, p. 2 1 0; Reithmann/Martiny N 132). The validity of this argument however is insecure since art. 155 lit f IPRG covers only the internal relations between a company and its members and whereas art. 80 of the Swiss Insurance Act is relevant for the relations with third parties i.e. creditors.

2. A creditor of the trustor will be able to seize the life insurance policy held by the trust only if the applicable law allows him to disregard the trust (cf Metz, Berner Kommentar zum Obligationenrecht, Bern 1962, N 287, ad art. 2 ZGB). In such a situation it would be against the principle of good faith (art. 2 of the Swiss Civil Code) if for the purpose of art. 80 the trust would not be disregarded too as such principle forbids the use of different methods assessing the parties' legal position in a case (Merz, N 403/444 seqq. ad art. 2 ZGB).Although this argument is quite plausible it is also insecure because the application of the broad principle of good faith is never completely foreseeable (Metz, N 45, ad art. 2 ZGB).

As to the best of my knowledge there is no court precedent and no legal literature which would support the above arguments. I cannot recommend basing a client's estate or asset protection planning on the above arguments (the trusts holding Swiss life insurance policies, in general, has not been treated by the Swiss courts or by Swiss legal literature).

C Conclusion

Under Swiss law there is a strong likelihood that spouse and issue of a settlor would not be protected under art. 80 of the Swiss Insurance Act. The protection the trust beneficiaries enjoy under the law according to which a trust was formed is however not impaired if a Swiss insurance policy is purchased. If an asset protection plan is based on the protection a trust offers the purchase of a Swiss insurance policy therefore would not weaken the plan but, as set forth above in para B, would allow some additional arguments against the trustor's creditors.

Yours sincerely,

Dr. Urs Schenker

mtb International