Trust law in Switzerland

  • Author : Dr Thomas M Mayer
  • Date : January 2011
ABOUT THE AUTHOR: Dr Thomas Mayer is Attorney-at-Law in the Swiss Federal Office of Justice, Private International Law Unit

The trust law in Switzerland is not substantive trust law; it consists of private international law provisions as well as substantive provisions on other matters that deal with trusts governed by a foreign law.

A survey conducted by the Swiss Federal Department of Finance has uncovered a certain demand within the financial industry for the introduction of a substantive trust law. The survey had been mentioned in the report,1 published by the Department of Finance in response to the parliamentary motion by Mr Konrad Graber,2 which in the meantime has led to another parliamentary motion by Madame Isabelle Moret.3 These two motions are what we call postulates. They leave the government with more discretion than a motion in the technical sense.

The postulate by Madame Moret demands an analysis of a possible optimisation of Swiss foundation law, including taxation aspects. This analysis would also have to explore the possibility of incorporating in our foundation law certain elements taken from other countries’ trust laws.

The postulate is currently being examined by our government, the Swiss Federal Council, and, the way things look at the moment, there is a fair chance that the Federal Council will recommend its adoption.4

Unfortunately, I cannot tell you yet when the relevant chamber of our parliament – the National Council in the present case – will debate the adoption of the postulate. But I would like to draw your attention to yet another parliamentary motion, this time one that has already been adopted.

I am referring to the motion of Mr Werner Luginbühl,5 which is now a motion in the technical sense. This motion, too, aims at rendering Swiss foundation law more attractive. It again includes tax law; actually its main focus is on taxation matters. One of the issues that is likely to be discussed is the one of widening the legal institution of the family foundation and turning it into a more general private foundation, which could be used for all kinds of non-charitable purposes.

If the postulate by Moret is going to be adopted, the most likely scenario is that the Federal Council will first complete its review of foundation law under the motion of Luginbühl. Should the internal or external experts entrusted with the study examine new rules for a Swiss private foundation, they would almost certainly have to look at the law of other jurisdictions dealing with private foundations and related institutions, which would include the trust law of certain common law jurisdictions. This would give them the opportunity to take over those elements of trust law that seem useful and appropriate in a Swiss context and are still compatible with our legal system and our public policy. The issue of introducing the trust to Swiss substantive law might then turn out to be obsolete.

Current legislation

Now, let’s leave the future legislation aside and turn to the current legislation.

In fact, no legislation has been passed since the adoption of the 2006 bill on the ratification of The Hague Trust Convention and the accompanying amendments in our domestic private international and insolvency law. What is under way, however, is a revision of the regulation that implements the Swiss Civil Code’s rules on immovable property law and the land registry, the Grundbuchverordnung, as it is called in German.

As its name suggests, the Grundbuchverordnung is a Verordnung – or ordonnance in French – which means that, unlike a Federal statute, it will be passed by Federal Council rather than by parliament. It also means that the process will be simpler and briefer.

The new version of the regulation will contain a few provisions on the treatment of immovables that belong or are dedicated to a trust. One part will deal with conveyances over trust property. Here the current draft, which will be soon submitted to a preliminary hearing among experts, provides for a pragmatic and user-friendly solution. There would now only be one simple form requirement, calling for any inter vivos conveyance over immovable trust property to be preceded by a contract incorporated in an authenticated instrument.

Thus, the settlor, upon the dedication of an immovable to a trust, cannot convey the property to the designated trustee without first signing a contract with the latter in an authenticated document. Likewise, a trustee wanting to transfer a trust immovable to its successor trustee or to a beneficiary would have to conclude an authenticated contract with the respective person. This solution might not be flawless from a dogmatic point of view, but it is simple and user-friendly, while still taking due accounts of the fundamental principle in Swiss immovable property law, that inter vivos transactions involving immovables require an authenticated instrument.

The other part of the new trust provisions will deal with the annotation of a trust encumbrance on an immovable on the latter’s page in the land register, as provided for by Art. 149d of the Swiss Federal Private International Law Act. Of course there will also be a provision on the deletion of such annotations.

These new provisions will replace the current guidelines of the Federal Office for Land Registry and Real Estate Law, which deals with the same topics. Unlike those guidelines, the new regulation will be binding; it will have the status of law.

Case law

Now, that is all there is for the moment from the legislation front. However, there have been some important developments in our case law.6

The Swiss Supreme Court has settled three important issues that had not been addressed by the 2006 legislation. They were touched upon in our explanatory report, and I am quite happy to say that the court followed our views.

The first judgment was handed down last on 17 November 2010 and it is about the Swiss equivalent to the rule against perpetuities. This is Art. 335(2) of the Swiss Civil Code, which prohibits the establishment of family foundations for the sole purpose of providing an income to family members.

It had been debated whether or not this rule extended to comparable entities created under the law of another jurisdiction such as Liechtenstein foundations or common law trusts. The court came to the conclusion that, from a present day view, the interests underlying the rule of Art. 335(2) were not important enough to make the latter part of Switzerland’s public policy (ordre public). It therefore held that the rule did not apply independently of the law governing the entity in question,7 that, in other words, it only applied where the respective entity was governed by Swiss law.

The latter was not the case in the constellation under review by the court. The entity was a foundation with a seat in Vaduz, Liechtenstein, which the court found to be governed by Liechtenstein law.

The main message from this judgement is that Art. 335(2) of the Swiss Civil Code does not apply to trusts, at least as long as there is no Swiss trust law.

The second ruling, passed on 7 January 2010, was based on an action of the administrator of an inheritance against an agent of the decedent. The plaintiff claimed information and documents relating to a trust that the decedent had created a few years before his death.

The claimant’s request was granted on the grounds that an administrator was entitled to all obtainable information that was relevant in connection with its mandate. So far the ruling is not very spectacular since the result seems rather obvious and can easily be derived from the text of the Civil Code. What is much more interesting in this judgment is the outright way the court answered a preliminary question, namely whether a trust inter vivos could be subject to a claim for reduction by the heirs of the settlor in the event that it was incompatible with their forced share.

The court seemed to hold it as obvious that such was the case, even though the issue was quite controversial, due to the somewhat narrow language of Art. 527 of the Civil Code. Many scholars read the term used in paragraph 3 of the provision – which would translate to ‘donation’ – in a narrow sense as meaning a donation contract rather than just any kind of gratuitous transaction. Nevertheless, the court’s view corresponded to the one taken by the federal administration in the explanatory report for the 2006 bill.

The third judgment, of 15 January 2010, deals with the treatment of a trust under the Lex Koller, the statute on the acquisition of real estate by foreign residents.

The trust in question was created by a Swiss national living in the US in favour of himself, after his death of his wife, and after her death of their common children. The trust concerned real estate in Switzerland. Its trustees were the settlor himself and his wife. All the family members involved were US residents, but Swiss nationals.

When the settlor and his wife applied for a decree stating that the transfer of the immovable to the trust did not require authorisation under the Lex Koller, their request was turned down. The competent cantonal authority reasoned that the trust was to be treated like a legal entity in the narrow sense – what we call a legal person – and that it had its seat in the US. It therefore held that the trust had to be treated as a person domiciled abroad.

The applicants took the case to the cantonal appeals commission, which overruled the decision. The cantonal supervisory authority did not agree with this result and appealed to the Federal Supreme Court. The latter found that it was not appropriate to treat the trust as the acquirer of the immovable, since the property was to be registered in the name of the trustees. Furthermore it considered that a trust did not have a seat in the proper sense. Thus, it came to the conclusion that no authorisation was required for placing real estate in a trust where – like in the case under review – all the trustees and beneficiaries were Swiss nationals.

There is a fourth ruling that I would also like to mention. It was rendered on 25 March 2010, and it is about the freezing of a trust account in a criminal proceeding.

The court held that the freezing order could only be contested by the trustee and not by the beneficiary, because only the former had the power to dispose over the trust’s assets.

This ruling is also in line with the explanatory report for the 2006 bill, which views the beneficiary’s interest as a mere economic interest and not as some kind of legal entitlement to the trust assets.

Edited text of a speech given by Dr Thomas M Mayer at the Annual General Meeting of the Swiss Association of Trust Companies (SATC) on 27 May 2010 in Neuchâtel.

On the government’s strategies with respect to the domestic financial markets. See www.efd.admin.ch/dokumentation/zahlen/00578/01622/index.html?lang=de.
www.parlament.ch/d/suche/seiten/geschaefte.aspx?gesch_id=20093209
www.parlament.ch/d/suche/seiten/geschaefte.aspx?gesch_id=20103332.
Which has been the case in the meantime: www.parlament.ch/d/suche/seiten/geschaefte.aspx?gesch_id=20103332.
www.parlament.ch/D/Suche/Seiten/geschaefte.aspx?gesch_id=20093344.
The new case law can be found on http://www.trusts.ch/index.php?page=1&lang=EN.
It was not a mandatorily applicable provision (the technical term being loi d’application immédiate) in the sense of Art. 18 of the Federal Private International Law Act.

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