Swiss Trusts: A New Dawn
(along with a timely reminder about licensing)
It is perhaps odd to start an article about Swiss trusts noting that, as things currently stand, there is no formal Swiss trust Law in Switzerland. Stranger still to note that a significant amount of trust administration is undertaken here.
There is a good reason for this. Trusts governed by foreign laws have been recognized by Swiss courts since 1874 and by law following Switzerland’s ratification of the Hague Convention on Trusts on 1 July 2007. What this doesn’t explain, however, is why foreign law trusts have become (alongside foreign law foundations) the option for Swiss nationals seeking to preserve their wealth for future generations.
The answer to that question is, in short, a lack of suitable alternatives. Swiss law foundations do exist, but they are utilized almost exclusively for charitable purposes/international philanthropy and their use for estate planning purposes is limited due to restrictions on the making of unconditional maintenance payments/living expenses. A lacuna exists that needs to be filled. Step forward a draft bill on the introduction of a new Swiss trust law.
Filling the void – a new idea?
Whilst the idea of a Swiss trust law that would enable Swiss nationals to establish a trust under domestic law is not a new one (it has been 70 years since it was first raised), it has gained significant traction in recent years.
Citing a desire to prevent Swiss nationals from having to turn abroad to set up trusts, the Swiss Parliament instructed the Swiss Federal Council in 2017 to create the legal basis for the introduction of the Swiss trust into Swiss Law. Following the appointment of an expert panel to work on a draft law (and one suspects a huge amount of work behind the scenes from its members), a consultation on the proposed draft law commenced on 12 January 2022. It is due to run until 30 April 2022.
Features of the draft law.
Set out below are some of the key features of the draft law:
- Swiss trusts will have no legal personality
- The law is predominantly aimed at Swiss residents
- Swiss law trusts will have the same features as an English Trust whilst sitting within established core principles of Swiss domestic law
- A trustee can be sole beneficiary of a Swiss Trust
- Trusts can be settled during the settlor’s lifetime or upon death
- The draft law allows for settlor reserved powers to be incorporated into the trust instrument
- It also includes provision for protectors to act (one or multiple protectors)
- Trustees must act with due care and loyalty in the exclusive interest of the beneficiary or beneficiaries
- It contains provisions regarding disclosure of information to beneficiaries
- Trust period limited to 100 years
- Swiss trusts are not able to be utilized as purpose or charitable trusts.
- Unanimous agreement of the beneficiaries can bring trust to an end earlier than its trust period.
Taxation of Swiss law trusts.
There are no provisions within Swiss tax laws which deal with the taxation of trusts in Switzerland. That said, guidance was issued in August 2007 which notes that neither a trust nor its trustee would be subject to Swiss taxation.
However, where a trust has a Swiss resident settlor or beneficiary, tax will be payable by the settlor/beneficiary as appropriate depending upon the type of trust being utilized (e.g., revocable, irrevocable fixed and irrevocable discretionary trusts). Consideration will need to be given to the taxation position on a case-by-case basis and the appropriate vehicle selected to meet the client’s needs. Further refinements are required on the taxation position under the draft law vis a vis inheritance tax.
Opportunities for Swiss law trusts
The preamble of the consultation document notes that the Swiss trust can be “used both to structure private assets and in the context of commercial transactions”. It is perhaps easy to assume therefore that the draft law fills the missing gap in the Swiss wealth planning armory. To make that assumption would be to underappreciate the possibilities that the draft law affords. It is not just a case of providing a family/wealth succession planning tool, but also could facilitate Real Estate Investment Trusts (REITs), Employee Benefit Trusts (EBTs), pension trusts, escrow trusts and as a vehicle to protect Swiss businesses (particularly in situations where there are foreign investment protection treaties and free trade agreements in place, which may be of particular interest to Latin American clients).
Timeframe for Swiss law Trusts
Following closure of the consultation, the draft bill would need to pass through the legislative process before becoming law. It is therefore expected that the Swiss trust law will not come into force prior to 2024 (provided it is not rejected or subject to significant amendment as it passes through the legislative process).
Swiss Trust Licensing – A reminder
From 1 January 2021, new regulatory requirements for trustees acting in or from Switzerland on a professional basis were introduced.
Where trustees have either:
- a gross income of more than CHF 50,000; or
- business relationships with more than 20 contractual parties; or
- control over third party assets for an unlimited period of time, the value of those assets exceeding CHF5million at any time,
they will need to obtain a license to carry out their activities from the Swiss Financial Market Supervisory Authority (FINMA). Limited exceptions to this requirement may apply for trustees who act for individuals with whom they have economic or familial ties. As a result, several family offices and private trust companies may be exempt from the licensing requirement.
From a timing perspective, existing trustees were required to notify FINMA of their intention to apply for a license by 30 June 2021. The deadline for making the formal application is the 31 December 2022.
The objective of this new regime is to create a uniform competitive landscape for financial intermediaries and to improve client protection. One of the main and most important consequences of the new legislation for Swiss trustees is the necessity to meet certain criteria to obtain a license to practice in Switzerland.
Swiss trustees will need to comply with additional structural, organizational, business conduct and audit requirements, all of which are designed to ensure that trustees have robust processes in place and that they are fit to act as professional trustees.