Firewall Legislation for Trusts: A Glossary

Firewall legislation trust rules are statutes, found mainly in common-law seats, that tell local courts to disregard certain foreign laws and judgments when they attack a trust. The aim is to keep questions such as validity, transfers and beneficiaries' rights under the law the settlor chose. This glossary defines the vocabulary around that idea, from asset-protection statutes to recognition and enforcement. It also shows why Switzerland as a trust seat works differently: it has no trust law of its own and relies on the Hague Trusts Convention instead.

A reminder before you start: a firewall is a protection with limits. Whether one helps depends on your residence, the country of your beneficiaries, the nature and location of the assets and the timing of the transfer. Treat the entries below as general information, not advice.

A

AEOI (automatic exchange of information)

The international framework under which financial institutions report account data on foreign residents to their tax authorities, which then exchange it. It sits next to firewall legislation rather than under it: a firewall may limit foreign court orders, but it does not switch off reporting duties. Compare the regimes in trust reporting regimes compared.

AMLA (anti-money laundering law)

Known as LBA in French and GwG in German. It imposes identification and due-diligence duties on financial intermediaries, including trustees. A firewall statute does not release a trustee from these duties.

Asset-protection trust

A trust, usually discretionary, set up in a seat whose statute makes it hard for a creditor of the settlor to reach the assets. Protection depends on the trust being funded while the settlor is solvent and without intent to defeat known claims. See asset-protection statutes compared for how seats differ.

B

Beneficiaries

The persons or purposes for whose benefit the trustee holds and uses the trust assets. Firewall statutes usually say that a foreign rule giving a spouse or child a fixed share cannot be used to undo the trust. Whether that works in practice depends on where the claim is brought and where the assets lie.

Burden of proof (creditor's burden)

Many firewall regimes place the burden on the person attacking a transfer, who must show that it was made to defraud a creditor. Some require proof to a higher standard than usual civil cases. The standard differs by seat and is one of the points counsel should confirm for you.

C

Choice of law

The settlor's selection of the law that governs the trust, normally stated in the trust deed. The Hague Trusts Convention respects this choice for trusts within its scope. A firewall statute is part of the chosen law and only has effect to the extent the forum court accepts that choice.

Civil-law seat

A jurisdiction whose private law rests on codes rather than case law, such as Switzerland, Liechtenstein or Luxembourg. Civil-law seats generally have no firewall statute of the common-law type. See common-law seats versus civil-law seats.

Common-law seat

A jurisdiction built on judge-made law and equity, where trusts developed. Offshore common-law seats such as Jersey, Guernsey, the Cayman Islands or the British Virgin Islands typically have a firewall statute in their trust legislation.

CRS (Common Reporting Standard)

The AEOI standard applied by most financial centers. Trusts can be reportable as account holders or through the persons who control them. A firewall does not remove a trust from CRS reporting.

D

Decanting

Pouring the assets of one trust into another, where the deed or the law allows it. Some firewall seats pair their protection with decanting powers so that a trust can follow a better seat. See the entry on decanting a trust.

Discretionary trust

A trust in which the trustee decides who among the beneficiaries receives what, and when. Because no beneficiary has a fixed entitlement, a creditor or a claimant has less to attach. Firewall statutes are written with this model mostly in mind.

Duress and flight provisions

Clauses that let the trustee or protector move the trust, or change its seat, when a threat appears, such as a hostile court order. They complement firewall legislation. The best known is the flee clause, defined below.

E

Enforcement of foreign judgments

The process by which a court in one country gives effect to a judgment made in another. A firewall statute tells the local court not to enforce a foreign judgment that conflicts with the trust. It cannot stop a court in the country where the assets sit from acting on those assets. See courts, enforcement and foreign judgments.

F

FinIA (Financial Institutions Act)

LEFin in French, FINIG in German. Under Art. 2 para. 1 let. b, trustees are financial institutions, alongside asset managers and other categories. Art. 17 para. 2 defines a trustee as a person who, on a professional basis, manages or disposes of separate assets for a beneficiary or for a specific purpose under a trust deed within the meaning of the 1985 Hague Convention.

FINMA

The Swiss Financial Market Supervisory Authority. Under Art. 61 FinIA, asset managers and trustees are subject to FINMA supervision, which involves a supervisory organization.

Firewall legislation

A set of provisions in a seat's trust law that bars its courts from applying foreign rules or enforcing foreign judgments that would invalidate the trust or alter beneficial interests. Typical subjects are forced heirship, matrimonial claims and insolvency. It protects against foreign law inside the seat; it cannot bind a court elsewhere.

Flee clause

A provision allowing a change of governing law and seat if defined events occur, so that a trust can leave a seat under pressure. It is the practical partner of a firewall. Read the full entry on the flee clause.

Forced heirship

Rules, common in civil-law countries, that reserve part of an estate for certain relatives. Firewall statutes commonly state that forced heirship does not affect a trust governed by the local law. See forced heirship and trusts for which seats resist these claims and which do not.

Fraudulent transfer

A transfer made to put assets out of a creditor's reach. Every firewall regime keeps an exception for it. Seats differ on how a claimant proves intent and how long they have to bring the claim.

G

Governing law

The law that decides the validity, interpretation and administration of the trust. It is not necessarily the law of the place where the trustee works. The distinction is set out in governing law versus seat of administration.

H

Hague Trusts Convention

The 1985 Convention on the Law Applicable to Trusts and on their Recognition. It lets a state that has joined it recognize a trust created under a chosen law. It deals with recognition, not with the content of a firewall statute.

I

Irrevocable trust

A trust whose terms the settlor cannot unilaterally reverse. Firewall protection is generally tied to irrevocability, since a settlor who can take assets back leaves little for the statute to shield.

J

Judgment creditor

A person who already holds a court judgment against the settlor or a beneficiary and seeks to collect. Firewall statutes are often tested by judgment creditors who ask a local court to treat the trust assets as available.

O

Oversight body (organisme de surveillance)

Under Art. 61 FinIA, day-to-day supervision of trustees is carried out by oversight bodies holding a FINMA authorization. This supervision is part of the regulated, civil-law approach to trusteeship, in contrast with a statute-led firewall.

P

Proper law

The law that governs a trust, as chosen by the settlor or determined by the court. See proper law of a trust.

Protector

A person, independent of the trustee, who holds reserved powers such as removing the trustee or approving distributions. Protectors are often central to a firewall design because they can trigger a move of seat.

Public policy (ordre public)

A ground on which a court may refuse to apply a foreign law or recognize a foreign act. A firewall statute presents itself as local public policy. A court elsewhere may invoke its own public policy to the opposite effect.

R

Recognition

The acceptance by a court that a trust exists and has effect. In a Hague Convention state, recognition covers the separation of trust assets from the trustee's personal estate. It does not decide every question of tax or heirship claims. A map is at where trusts are recognised.

Reserved powers

Powers the settlor keeps over the trust. A firewall regime often limits what may be kept before the protection weakens, and an excess can lead a court to treat the trust as a sham.

Revocable trust

A trust the settlor may revoke or amend. Courts generally treat its assets as still belonging to the settlor for creditor purposes, which is why firewall statutes concentrate on irrevocable structures.

S

Seat

The place where the trust is administered and, often, whose law governs it. The seat decides which courts and regulators the trustee deals with.

Settlor

Also constituant in French and Errichter in German: the person who creates the trust and transfers assets to it. See settlor: definition and jurisdictional rules.

Situs

The place where an asset is located. Situs matters because courts at the situs can act on local assets whatever a firewall says elsewhere. See situs of trust assets.

Sham trust

A trust that exists only on paper because the settlor in fact keeps full control. Courts can set it aside, and a firewall statute does not rescue it.

T

Trust deed

The document creating the trust and setting out the powers of the trustee, any protector and the rights of beneficiaries. Firewall-related clauses, such as a flee clause, are written here.

Trustee

The person or company holding legal title and administering the assets for beneficiaries. Under Art. 19 para. 2 FinIA, a trustee manages the separate assets, preserves their value and uses them for their purpose. In Switzerland the trustee must be a sole proprietorship, a commercial company or a cooperative entered in the commercial register (Art. 18), with a management of at least two qualified persons (Art. 20) and a minimum capital of CHF 100,000 paid in cash (Art. 22).

V

Vulnerable beneficiary

A beneficiary who cannot manage assets alone, such as a minor, a person with a disability or a second spouse needing protection. A trust can be shaped to support such a person, but a firewall does not remove a claim they may have under their own country's law. See blended-family and vulnerable-beneficiary trusts.

VISTA trust

A trust structure from the British Virgin Islands that lets the trustee hold company shares without a duty to monitor the business. It appears in the same statutes that carry firewall provisions. See VISTA trust.