The Swiss trusts controversy

in Legal, 13.03.2019

Use of trusts is widespread in English-speaking countries. Foreign trusts are both in demand and in use in Switzerland as well. On 13 March 2019, the National Council debated whether trusts should be included in the Swiss legal framework. While there are good reasons to do so, opinions on the matter differ, even within the industry itself.

A trust is a legal relationship in which the trustor confers ownership of assets to a trustee. This is tied to an obligation to manage and use the assets to the benefit of specified beneficiaries.

Unlike a foundation, a trust has no legal identity of its own. The assets constitute a separate fund and are not a part of the trustee’s own estate.

Trusts are frequently used within the scope of estate planning and as a means of separating and protecting assets. While they have been recognized as a valid legal form in Switzerland since the ratification of the Hague Trusts Convention, the Swiss legal system does not have its own domestic trust law.

How will the Swiss legal system benefit from the introduction of trust law?

This would make it possible for Switzerland to enact contemporary trust law from the bottom up. Critics contend that an undertaking of this nature is bound to fail from the outset because the concept of a trust has its origins in Anglo-Saxon law, is largely based on case law and is incompatible with our system of civil law. Specifically, Anglo-Saxon trusts have attributes that are nearly impossible to emulate within the scope of Switzerland’s Roman-based civil law framework. That being the case, taking instruments that already exist under Swiss law and developing them further would be the more prudent approach. This could conceivably be done by easing the requirements and possible uses of Switzerland’s family foundation concept, which is only currently approved for a very limited range of purposes. The result would be the creation of an estate planning instrument that does not have to be newly integrated into the Swiss legal system.

What critics fail to realize, though, is the fact that trusts are already an economic reality in Switzerland. Lacking a domestic trust option, however, Switzerland is forced to draw on foreign legislation, something that could potentially have a negative impact on legal proceedings. Including the trust as a legal institution in Swiss legislation could close a major gap in our local legal system. It would also open up new potential for the asset management business in Switzerland. What’s more, the introduction of a Swiss trust could offer private individuals yet another useful tool for their estate planning. The introduction of a Swiss trust law would significantly strengthen the Swiss financial center and the already abundant ranks of Swiss trustees.

Key step toward strengthening the Swiss financial center

Occasional attempts have been made to introduce the concept of a trust, yet the Federal Council has always expressed its opposition to the move. The competent committee of the Council of States just recently submitted a motion with a binding mandate to the Federal Council to draft a corresponding bill. The Council of States approved the motion in June 2018 and today it was heard and adopted by the National Council.

Today’s approval by the National Council gives the Federal Council a binding mandate to establish the legal foundation for a Swiss trust. The National Council’s decision thus sends a strong signal in favor of strengthening Switzerland as a business location and especially as a financial center. Given the fact that assets are increasingly being held at the location where the legal framework has been set up accordingly, this concept’s introduction into law will eliminate the country’s competitive disadvantage.

At the same time, the pending parliamentary initiative to have the trust incorporated into Swiss law as a legal institution is being suspended since the National Council’s Legal Affairs Committee feels that tasking the Federal Council with the drafting of a bill is more expedient.

Additionally, the National Council has already instructed the Federal Council to prepare a report (postulate dated 27 February 2017 “Investigation of the possible legal regulation of trusts”) detailing the advantages and disadvantages of introducing the trust as a legal institution under Swiss private law and of making adjustments to applicable tax law.

The Federal Council is now awaiting the expert group’s report, which is still in progress, before deciding on the next steps.

 

 

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