date | theme

24. September 2021 | Asset protection pays off!

28. October 2021 | Which risks threaten assets?

November 3, 2021 | Tax models of the rich – Handelsblatt researches at Kanzlei Meyers & Partner AG

19. October 2022 | Diversification & Asset Protection? Family Foundation in Liechtenstein! (this contribution)

Asset Protection knows an important tool, namely diversification. Because wealth is always exposed to a multitude of risks. The more assets are subject to a certain framework of risks, the greater the loss incurred when such a risk event occurs. Under certain circumstances, all assets are lost in one fell swoop. The diversification of assets into different asset classes minimizes the so-called lump risk and thus increases the effect of asset protection. Diversification can be carried out at very different levels. For example, the establishment of a family foundation in Liechtenstein is a way to prevent the tax lump risk of a wealth tax levied again one day in Germany.

Those who are wealthy have a different view of their own wealth than those who have no wealth. The generally accepted view that wealth automatically leads to a longer-term secured higher quality of life often misses reality. It is true that wealth offers the best prerequisite for even more wealth, but this also has a downside that few people consider.

This is about the risks that can potentially reduce assets. Anyone who invested a fortune in the shares of Wirecard AG, for example, knows what we are talking about here. Taxes, asset management costs and other risks are also suitable for reducing assets. Therefore, it is only logical that you look for a strategy to hedge your own assets against as many risks as possible. The magic formula for this is asset protection through diversification.

Diversification is only part of asset protection. Asset protection refers to a large number of measures designed to protect assets. In addition to diversification, this also includes targeted tax advice, legal advice and asset succession planning. As part of asset protection, diversification in particular takes on the task of protecting assets against lump risks.

So before we talk about diversification in the context of asset protection, we need to clarify the importance of so-called lump risks. Lump risk is a term that comes from banking. It describes the fact that a concentration of investments in very few or even individual forms of investment that are subject to similar default risks may lead to the loss of the invested assets. The spectrum of default risks can be very large and these are even in causal connection with each other. For example, the strategy of investing all available assets in real estate in the Midwestern U.S. faces the general risk that tornadoes will one day damage or destroy a large number of properties in one fell swoop. You might as well invest in wind turbines on the edge of an active volcano. One day this strategy will certainly prove to be a mistake.

However, lump risks can also exist in other respects. For example, choosing the maturity of government bonds can also pose a lump risk if you opt for a variety of different bonds.

If you look at the totality of potential lump risks, you can see the extent to which you have to operate asset protection through diversification. This is why in-depth risk analysis is of great importance as a first step towards asset protection.

An example of a promising strategy to operate asset protection through diversification is the establishment of a family foundation in Liechtenstein. A family foundation in Liechtenstein generally offers a variety of advantages. However, as part of this article, we want to focus on the aspects associated with diversification for asset protection.

The first stage of diversification through a family foundation in Liechtenstein is achieved by relocating part of the assets in the course of the foundation establishment. Because by relocating some of the assets abroad, it is subject to a different tax regime there. This reduces the lump risk, which was previously that all assets were subject only to German tax law. For example, a resurgence of the wealth tax that politicians have discussed time and again in the past could pose such a lump risk. With the establishment of the family foundation in Liechtenstein by transferring part of the assets, we are already achieving initial diversification and thus the desired asset protection.

Of course, the Family Foundation in Liechtenstein can now continue diversification by investing in different asset classes. Investments in securities, real estate and cryptocurrencies are just as suitable as in other assets. In this way, it is known to try to achieve that a misguided investment in an asset class affects the entire asset. The less dependent the asset classes in which you invest, the more effective the asset protection through diversification.

And here too, the diversification of assets by investing in various asset classes abroad plays a major role. This is the only way to achieve asset protection at all levels through diversification. Of course, you need extensive background knowledge about the potential risks and opportunities that you can always expect from foreign investments. A specialized tax consultancy with international background knowledge is therefore a very useful recommendation.

So what can we gain in knowledge from the present considerations? First of all, we can state that diversification is the means of choice for asset protection. Otherwise, one risks that a single event will result in the loss of the assets concentrated in an investment or asset class. Secondly, we learn from this that the more organized diversification is, the more solid asset protection is. In addition to the asset classes that form the core element, diversification should also cover risks due to reliance on individual or few jurisdictions. And thirdly, within the framework of asset protection through diversification, you should also integrate many other advantageous aspects. This includes, among other things, a skilful and far-sighted planning of asset succession.

The point here is that you can set up this and much more through a family foundation in Liechtenstein. There are also attractive tax advantages. For example, there is no substitute inheritance tax in Lichtenstein, in Germany already. In addition, you can regulate and define the aspect of asset protection across generations. In this way, one avoids the risk that could exist if later successors inherit the property and waste it or lose due to other wrong decisions.