Thought leadership from our experts

Introduction of a Trust Law In Switzerland

General Remarks

Although Switzerland has a significant trust administration, it has not enacted its own trust law yet. A trust settlement is therefore typically administrated based on the provisions of the trust laws of another jurisdiction chosen as the proper law applicable. In 2007 Switzerland ratified The Hague Convention on Trusts which was enacted on July 1, 2007. When ratifying The Hague Trust Convention, it was common understanding that Swiss law on trusts was neither necessary nor desirable. Switzerland intended to grow its own trust industry by providing high standards of trusteeship, unparalleled expertise in the field of wealth management, and the protection of individuals' rights to confidentiality. Since the ratification of The Hague Trust Convention Switzerland recognizes trusts as an institute of its own kind. As a consequence, a trust is no longer reinterpreted into a domestic form but became valid under Swiss law provided the trust was validly settled according to the law in which the trust was settled (the trust statute).

Only two years after the ratification of The Hague Convention, the Federal Council was requested to analyzing whether a Swiss trust should be introduced to strengthen the financial market by protecting the privacy of customers of Swiss banks, and to amend the restrictions on the use of family foundations in order to have an equivalent instrument to foreign family foundations or trusts. The Federal Council denied the necessity of Swiss trust law. Again in 2015 and 2017 the Federal Council was asked to analyzing the opportunity of introducing a Swiss trust as part of its financial market policy. The argument was that trusts are often used for estate planning and the preservation of large family owned funds. The introduction of Swiss trust law would therefore strengthen the Swiss financial market as trusts are an important instrument when competing with other financial markets such as London, Luxemburg, Singapore, etc. In addition the petitioners are of the opinion that an introduction of Swiss trust law would have various advantages such as (i) Swiss citizens would be offered a more accessible instrument that is subject to the domestic legal system and easier to understand, (ii) appropriate civil law arrangements would provide clarity, leading to greater transparency and legal certainty, and (iii) 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.

Both the Council of States and the National Council approved the motion despite the act that the Federal Council again expressed its opposition referring to the yet increasing international trend for transparency. The Federal Council was in any event instructed to prepare a report detailing advantages and disadvantages of an introduction of Swiss law on Trust and to outline necessary adjustments to the applicable tax law.

Controversies on the Implementation of Swiss Law on Trust

Quite a controversy has arisen about the introduction of a Swiss law on trust. Supporters argue that trusts are already today an economic reality in Switzerland. As Switzerland is lacking its own trust law, practitioners are forced to draw on foreign trust law. By introducing a Swiss trust law a major gap in our legal system could be closed; Swiss banks could offer a broader range of services; the gap between Switzerland and other financial centers which have their own trust laws could be bridged; and it would create a level playing field between Switzerland an offshore jurisdictions. These are of course mostly economic arguments that contradict with the more technical and legal arguments of the critics.

Swiss statutory law does not provide for a split of ownership between 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. It is therefore impossible to create a legal transplant of a common law trust by twisting and squeezing this concept into the Swiss legal system. Since Switzerland is already providing for similar instruments it is in the opinion of the critics irritating why a Swiss law on trust should be introduced rather than analyzing and possibly amending these existing Swiss instruments, i.d. the family foundation and the law of fiducie.

Scholars have already outlined comprehensively how the current law of fiducie could be used as a basis. A clear distinction between the initial disposition of the property and the resulting fiduciary relationship would be required. The latter would bind the fiduciary to the interests of the fiducie's beneficiaries. The fiduciary would not be the owner of the property, this being an important distinction from the common law trust. If the law of fiducie was amended in Switzerland, no new law of trust would be necessary.

Other scholars promote reviewing the law on family foundations. The Swiss family foundation is currently not an option in many cases since the Civil Code is limiting the purpose of a family foundation to covering of costs of educating, endowing and supporting family members. Family foundations seeking to grant advantages to their beneficiaries to enable them to enjoy a higher standard of living are unlawful. Art. 335 CC has been criticized by scholars for quite a while. There is a widely shared and justified finding that this provision in its current version can be regarded as outdated.

Another legal aspect mentioned is that Swiss courts are unfamiliar with common law traditions, in particular the importance of case law. They would therefore be unable to fulfil the role typically assumed by courts in the administration of trusts. Recent decision show that Swiss courts are not at ease when dealing with trusts. In Rybolovlev vs Rybolovleva the Federal Supreme Court held that the spouses were subject to the Swiss matrimonial regime of jointly-acquired property and, therefore, the wife had a right to half of her husband's jointly-acquired property. The husband remained the "economic owner" of the property transferred to the trusts due to his rights and powers (he was appointed as protector with the power to appoint and remove the trustee and add and exclude beneficiaries) under the trusts and due to the claw-back mechanism under the Swiss matrimonial regime. The Federal Supreme Court, therefore, upheld the order attaching the trustee's property. It noted though that the question of whether and how such measures could be enforced remained open.

Another more political argument used against het introduction of a Swiss trust law is the bad timing. The current political climate demands tighter regulation of financial markets and increased fiscal transparency. Trusts are deemed "prone to abuse" and have been under wide scrutiny by various jurisdictions. There is an inconsistency in supporting stricter regulations of (offshore) financial centers while copying their financial instruments. Before this background the introduction of Swiss trust law does not seem opportune.

Outlook

Regardless of its limited use, there is a common understanding that a Swiss instrument for estate planning and asset protection purposes should be implemented into Swiss law. There is no doubt that families are increasingly in need for a suitable instrument for family estate planning, preservation of assets or for tax planning. Different paths have been thought about and need further analysis. Advantageous and disadvantageous of these instruments must be weighed against each other to come up with the most suitable instrument for Swiss planning purposes.

Even though on a governmental level the introduction of Swiss law on trust is currently reviewed, it seems to be clear that a common law trust cannot and should not be implemented into the Swiss legal system. Thus, the currently available instruments of the family foundation or the fiducie should be reviewed and amended where needed. In any case, an introduction of a trust without a liberalization of the family foundation does not make much sense.

The trust instrument has already been introduced and enacted in other civil law systems, such as Liechtenstein, who was the first continental European country to have its own law on trusts. The incorporating of the trust as a "legal transplant" was undertaken to attract foreign capital typically from foreign investors since the trust instrument is better known to Anglo-American customers than the Liechtenstein foundation. The Liechtenstein trust has, according to local experts, never become a popular instrument and has therefore never been widely used. Switzerland should therefore take experiences our neighboring countries made with the introduction of a trust into their own law into account when analyzing pros and cons.