In a recent development that has garnered significant attention in Switzerland, the Federal Council convened to discuss the proposed Swiss trust. The proposal, which aimed to establish a Swiss trust mechanism for wealth and estate planning, faced considerable scrutiny and opposition. Given the aforementioned factors, the Federal Council has decided last week not to proceed with the proposed Swiss trust. Instead, they have suggested that Parliament dismiss motion 18.3383. This decision reflects the prevailing sentiment among political leaders and experts who have reservations about the trust's feasibility and potential consequences. In this article, we provide a comprehensive update on the outcomes of this crucial discussion.
Current Situation regarding Trusts in Switzerland
Switzerland does not have specific trust legislation like some other jurisdictions, such as the United Kingdom or the United States. Instead, Swiss law has traditionally relied on other legal structures, such as foundations or contractual arrangements, to achieve similar purposes. Despite the absence of trust-specific legislation, trusts are still used in Switzerland, especially by individuals with international connections. Swiss residents may create trusts governed by foreign laws, such as English law, which recognizes trusts. These trusts can hold assets both within and outside Switzerland.
Foreign trusts are generally accepted in Switzerland, and Swiss financial institutions have experience in managing the wealth held within them. It has historically been a hub for international wealth planning, which often includes the use of trusts governed by foreign laws, such as those established under The Hague Convention on the Law Applicable to Trusts and on their Recognition. Here's how foreign trusts are accepted in Switzerland and how their wealth can be managed in the country:
- Recognition of Foreign Trusts: Switzerland recognizes foreign trusts created in accordance with the laws of the jurisdiction where they are established. This recognition is based on the principle of comity, which means that Swiss courts and authorities will generally respect the legal validity and effects of trusts established abroad. This recognition allows foreign trusts to hold assets in Switzerland and engage Swiss financial institutions for wealth management.
- Use of Swiss Financial Institutions: Many individuals and families choose to use Swiss financial institutions, including banks and wealth management firms, to manage the assets held within their foreign trusts. Swiss institutions have a strong reputation for financial expertise, discretion, and a long history of serving international clients.
- Asset Protection and Diversification: Switzerland is often selected as a jurisdiction for the management of foreign trust assets due to its political stability, sound legal system, and strong currency. These factors can contribute to asset protection and diversification, especially for clients seeking to safeguard their wealth from political or economic instability in their home countries.
- Wealth Management Expertise: Swiss wealth managers are experienced in handling a wide range of assets, including those held in trusts. They can provide tailored investment strategies, estate planning, and tax optimization services to meet the specific needs and objectives of the trust's settlors and beneficiaries.
- Confidentiality and Discretion: While Swiss banking secrecy laws have been relaxed in recent years to comply with international standards, Swiss financial institutions still maintain a high level of confidentiality and discretion. This can be particularly appealing to individuals and families looking to keep their financial affairs private.
It's important to note that the specific treatment of foreign trusts and their taxation can vary depending on various factors, including the jurisdiction of the trust, the residency status of the parties involved, and changes in international tax regulations. As a result, individuals and families considering the use of foreign trusts and Swiss wealth management services should seek advice from legal and financial professionals with expertise in international wealth planning and compliance with Swiss and international regulations.
Why a Swiss Trust
Over the years, there has been a recurring discussion within Switzerland's financial services industry and among legal experts about the need for a specific Swiss trust law. While Switzerland has traditionally relied on other legal structures to fulfill similar purposes to trusts, there are a variety of reasons why some have advocated for the introduction of a dedicated trust law in Switzerland. With the absence of its own trust law, Switzerland faced a legislative gap in the domain of wealth and estate planning. The establishment of a Swiss trust would have provided a formal legal framework for individuals and entities seeking to create trusts within the country. The introduction of a Swiss trust was seen as a potential means to enhance the Swiss financial center's competitiveness on a global scale. Trusts are widely utilized in international wealth management, and having a domestic Swiss trust mechanism could attract more high-net-worth individuals, families, and institutions to Switzerland, thereby bolstering the country's financial services sector.
Timeline and Legislative Process
A group of experts appointed by the Federal Office of Justice (FOJ) had been diligently working on regulatory proposals for the Swiss trust since June 2018. Their efforts were geared toward ensuring that any introduced trust legislation would be comprehensive, effective, and aligned with international best practices. The proposed introduction of a Swiss trust also had implications for the tax landscape. A working group consisting of representatives from the federal government, the cantons, and academia, under the Federal Tax Administration (FTA), was tasked with clarifying the tax treatment of trusts in anticipation of the potential establishment of a Swiss trust.
The Federal Council was instructed by Parliament through motion 18.3383 to create the legal foundation for a Swiss trust. This motion signified the recognition by elected representatives of the potential benefits of having a Swiss trust law in place.
On January 12, 2022 the Federal Council initiated the consultation process on the proposed amendment of the Code of Obligations, signaling the beginning of a thorough review and assessment of the trust legislation. This step was an essential part of the legislative process to create a legal basis for a Swiss trust.
And then, on September 15, 2023 after careful deliberation, the Federal Council made a critical decision. They opted not to draft a dispatch on the proposed amendment of the Code of Obligations. Instead, they recommended that Parliament dismiss motion 18.3383. This decision, as communicated through an official media release, reflects the culmination of discussions and consultations that have taken place over a considerable period.
While the proposal for a Swiss trust may not have gained traction in the current political climate, the need for effective wealth and estate planning tools remains a topic of interest and concern for many individuals and families in Switzerland. It's likely that the discussion surrounding this issue will continue, with potential revisions and alternative solutions being explored in the future.
Switzerland's enduring appeal as a top spot for wealth management of assets held in foreign trusts is underpinned by its unwavering commitment to financial stability, expertise in international wealth management, and respect for the privacy and security of its clients. With a long-standing tradition of discretion and a robust legal system, Swiss financial institutions have continually adapted to meet the evolving needs of global wealth management, providing tailored solutions to preserve and grow assets while ensuring compliance with international regulations.
In an ever-changing financial landscape, Switzerland's enduring strengths, from its political neutrality to its wealth management proficiency, continue to make it a trusted and reliable partner for individuals and families seeking to safeguard and optimize their wealth held within foreign trusts.