Is Switzerland Introducing a Trust Law?

Is Switzerland Introducing a Trust Law?

On a governmental level, the introduction of a Swiss law on trusts is currently being reviewed as Switzerland does not provide for a suitable instrument to be used for estate planning or asset protection purposes.

Arguments for the introduction of a Swiss Trust Law

It is argued that an introduction would have various advantages, for example citizens would be offered an instrument that is subject to the domestic legal system being more accessible and easier to understand, and providing clarity, leading to greater transparency and legal certainty. In addition, new areas of activity would be created for Swiss professionals to advise on trusts, to set up trusts and to manage trusts and their assets.

Is a Swiss Trust a suitable instrument?

Many scholars and practitioners take the view, that a common-law trust is not a suitable instrument and that therefore it would be more advisable to review the existing instruments, such as the Swiss family foundation or the fiducie (Treuhand), and to amend them accordingly.

One of the main concerns is that ownership cannot be split into legal and beneficial ownership. To be the owner, a trustee must have all property rights in the assets while the beneficiaries have personal rights against the trustee only. Thus, the common law trust concept would need to be amended in order to fit into the Swiss legal system.

What would be the tax implications?

So far, most foreign trusts are treated tax transparent for Swiss tax purposes based on an economic assumption that the settlor has not given the assets fully away if he is either a beneficiary or retained certain rights such as amending the trust deed, appointing and/or removing a trustee or changing the beneficiaries. In this case, the funds and the income therefrom are still allocated to a Swiss resident settlor with the respective tax consequences.

This transparent tax treatment can be advantageous as no transfer tax is levied when settling the trust.

With the introduction of Swiss trust law it is not clear yet whether such transparent treatment would remain. There is currently an expert group analysing if a Swiss trust could become subject tax in Switzerland. If this was the case, it is likely that no Swiss trust law will be introduced.

Outlook

If and when a trust law will be introduced is not clear yet. However, it will take at least another 3 to 4 years for an implementation. As the already existing family foundation could be a suitable civil law instrument, it would be feasible to analyse the existing obstacles for the use of Swiss family foundations and to amend these provisions at the same time. https://blumgrob.ch/

Dr. Natalie Peter works as an attorney-of-law in Zurich and is heading the private client practice of Blum & Grob Attorneys-at-law.

Trust law

Natalie Peter

Blum Grob
Can I Create Trusts Under Swiss Law?

Can I Create Trusts Under Swiss Law?

Switzerland does not have a law relating to trusts (yet). However, it ratified the Hague Convention regarding trusts and agreed therefore to recognize trusts that are created in accordance to the convention.

Switzerland, as a civil law country, does not have a law relating to trusts. The creation of a trust under Swiss law is, therefore, not possible. It is noteworthy, however, that in 2018 the Swiss parliament mandated the Federal Council to create the legal basis for a Swiss trust and since then an expert group has been drawing up corresponding proposals for regulations.

Nevertheless, at the time of writing it is too early to say whether Switzerland will implement a law relating to trusts in the foreseeable future and how this law might look like. Thus, in the following it is described what Swiss alternative to the trust is available to a descendent under existing law and how he or she might arrange for the establishment of a trust to be governed by the law of another jurisdiction.

The Swiss Usufruct

The so-called usufruct, a limited right in rem that can be created for a maximum term of 100 years, is the closest that Swiss law comes to the concept of dual property rights as recognised in common law jurisdictions. The beneficiary of the usufruct is entitled to possess, enjoy and use the property during his or her lifetime. The right of disposition, however, is restricted in so far as it would affect the rights of the owner of the bare property.

Recognition of Foreign Trusts

Switzerland has ratified and put into force per 1 July 2007 the Hague Convention on the Law Applicable to Trusts and on their Recognition of 1 July 1985. Even though Swiss law still does not provide for trusts to be established under Swiss law, the Hague Convention permits to create a trust choosing a law—other than Swiss law—which recognises the trust. A trust created in this way is – as consequence of the ratification of the Hague Convention – also recognised in Switzerland.

As a second consequence of the ratification of the Hague Convention and in order to codify the concept of property separation between trust and trustee property in Swiss law, Switzerland made the corresponding amendments to the Swiss Debt Collection and Bankruptcy Act. Thus, trust property will be protected from personal creditors of the trustee.

However, Swiss succession law and especially the provisions protecting the compulsory portion of statutory heirs may conflict with the settlement of assets into a trust. The heir whose rights to a compulsory portion are infringed can file an action in court for reduction.

The Foundation of a Trust in a Last Will or Contract of Succession

Even though trusts that are created in accordance with the Hague Convention are recognized in Switzerland, it is controversial whether a testator can provide for the constitution of a trust in a last will or in a contract of succession. The common advice is to establish a trust during lifetime with a nominal trust fund and to bequest additional funding by testamentary dispositions.

Switzerland recognizes Trusts

Switzerland does not have a law relating to trusts but recognizes trusts that are created in accordance to the Hague Convention on the Law Applicable to Trusts and on their Recognition. Nevertheless, due to the controversy around testators providing for the constitution of a trust in a last will or in a contract of succession and the additional possibilities the Swiss usufruct offers, it is advisable to address the subject in good time and seek the advice of a professional. https://www.paltzerprivateclientslaw.ch/en/ 

Dr. Edgar Paltzer works as an attorney-at-law in Switzerland and counts estate planning among his specialist areas of expertise.

Trust law

Edgar Paltzer

Paltzer