Swiss trust genesis

In 1874, the Swiss Federal Constitution was approved by popular  referendum.

A lesser‑known fact: the first Swiss judgment dealing with trusts was rendered in the same year on 22  January.^[1]

Since then, the Swiss legal system, Swiss courts and financial professionals have been regularly exposed to trusts. During the Cold War, the Swiss government adopted a decree authorising Swiss companies to protect their assets, in case of international conflict, by establishing trusts.^[2] In tax matters, investment trusts, unit trusts and pension trusts already benefit from several Swiss double taxation treaties (DTTs).^[3] For asset protection purposes, trusts also enjoy the benefit of several Swiss investment‑protection treaties and free‑trade agreements.^[4] One can even settle a real estate investment trust to invest in Swiss real estate.^[5]

Since 2007, we further witnessed a notable acceleration of Swiss dealings with trusts, when Switzerland ratified the Hague Convention on the Law Applicable to Trusts and on their Recognition (the Convention). Trust companies now form an integral part of the country’s financial centres (387 trustees now have registered to obtain a licence) and organisations like STEP and the Swiss Association of Trust Companies (SATC) have contributed positively to the education, regulation and professionalisation of the sector. This has created a hospitable environment for local service providers to act as trustees in or from Switzerland.

The 2018 enactment of the Swiss Financial Institutions Act further comforted the public at large, as it compels both Swiss and foreign trustees active in or from Switzerland to obtain a licence to pursue their activities and to remain subject to continuous regulatory supervision.^[6] The introduction of these additional prudential requirements (encompassing the need for qualified personnel, proper internal governance, audit functions, professional indemnity insurance, business continuity planning, etc.) constitutes a key alignment with international standards.^[7]

Thus, trusts have been a reality for quite some (Swiss) time, in private matters as well as in financial dealings.^[8]

Swiss parliament’s impetus

Yet, to date, there was still no trust or substantive trust law in Switzerland. However, the idea of introducing the trust into the Swiss legal system is not new: it was mentioned in the 1950s and was the subject of renewed interest in the 2000s.^[9] Thus, the introduction of a Swiss trust has been advocated for ever since the country ratified the Convention.^[10][11]

Between 2017 and 2019, the Swiss parliament passed no fewer than three initiatives requesting that the government introduce a trust into Swiss legislation.^[12] Consequently, in 2018, the Swiss Federal Office of Justice established a group of experts (the Expert Group) to draw up a draft Bill.^[13] During the past three years, this group worked on the draft Bill as well as a substantial explanatory report that details the Swiss trust’s features, its distinctions from other Swiss tools and from other countries’; it runs to over 110 pages.^[14]

In parallel, the government also commissioned an impact report that was published in 2019. This report confirmed that the use of foreign trusts was already a reality in Switzerland and found that 75 per cent or more of the stakeholders were in favour of introducing a Swiss trust (support for the liberalisation of Swiss foundation law was less widespread). This official report further indicated that a Swiss trust would expand the range of services currently available for succession and wealth planning and concluded that introducing a Swiss trust would have a positive cost‑benefit ratio.^[15]

Trusts in civil‑law jurisdictions

Before turning to the Swiss draft Bill, it is important to recall that trusts can validly exist and operate in civil‑law countries. Indeed, a legion of eminent scholars have amply demonstrated that ‘the trust presupposes neither equity, nor divided ownership’.^[16] As Professor Maurizio Lupoi elegantly put it, ‘[it] impinges on the generally held notion that trusts are the creatures of equity, which is plainly true, and on the equally generally held notion that trusts cannot exist without equity, which is untrue but not for the reasons that are commonly given for that’.^[17]

Thus, trusts may well live without equity.^[18] In this respect, the reader is referred to Jessica Schaedler TEP’s recent Trust Quarterly Review contribution highlighting the authoritative Principles of European Trust Law, co‑authored by Dr David Hayton, and Professor Lupoi’s works, among others.^[19] Further to these, a trust can operate in any legal system provided it contains five invariable elements (formation; segregation; divestment; beneficiaries; and a fiduciary element). Schaedler also aptly remarks that the trust industry has moved a long way since the traditional English and Welsh common‑law trust, based on uncodified equitable principles, to the more recent and largely codified international trust institution.

More specifically in Switzerland, eminent academics on both sides of the Röstigraben have also shown that trusts can be introduced in Swiss legislation and that this does not require a splitting of ownership:^[20] ‘the issue of a Swiss trust law is fundamentally justified and certainly not a legislative impossibility’.^[21]

Rooted in Roman law

Accordingly, a Swiss trust firmly based on the established legal principles of Swiss civil law, which themselves stem from Roman law, would prove easier to implement into Swiss legislation.^[22] After all, ‘the trust was the most dynamic institution of the Roman law of succession, perhaps of Roman law as a whole’.^[23] To the point, trusts became so much favoured under the reign of Caesar Augustus (63BC–14AD), the first emperor of the Roman Empire, that he introduced a jurisdiction for trusts, the fideicommissari praetor.

Trust seems the ideal word in legal English to translate the Latin fideicommissum, as the two legal institutions have much in common: under a fideicommissum, an object was entrusted (commissum) to the good faith (fides) of the recipient, for the benefit of another person.^[24] The fideicommissum was also very similar to the fiducia: a fiducia enabled the transfer of property from one living person to another with conditions presented in a fiduciary agreement (pactum fiduciae), whereas a fideicommissum enabled the transfer of property under conditions after death.^[25] As Roman law developed to unrivalled heights, it is unsurprising that other Roman concepts also found their way into existing trust legislation worldwide, such as Jersey’s and Guernsey’s utmost good faith or ‘bon père de famille’.^[26][27]

For centuries, authoritative English and Welsh jurists have acknowledged that trusts stem from civil law, such as Lord Chancellor Francis Bacon.^[28] In particular, in Sir William Blackstone’s own words:

‘Uses and trusts are in their origin of a nature very similar, or rather exactly the same: answering more to the fideicommissum than the usus‑fructus of the civil law […]. The fideicommissum, which usually was created by will, was the disposal of an inheritance to one, in confidence that he should convey it or dispose of the profits at the will of another. […] This notion was transplanted into England from civil law, about the close of the reign of Edward III, by means of the foreign  ecclesiastics.’^[29][30]

The proposed Swiss trust

The Expert Group hence decided to build upon these established principles of civil and Roman law. This option proved the most attractive because it avoided the need to introduce Anglo‑American split ownership in a civil‑law jurisdiction. By contrast, Liechtenstein introduced the trust and the business trust, based on the common‑law model, into its domestic legislation in 1926 (Treuhänderschaft and Treuunternehmen). Yet, almost a century after its adoption, the legal qualification of a Liechtenstein trustee’s rights over the trust property remains controversial.^[31] Accordingly, the first option that consisted of incorporating a foreign trust law into Swiss law, by means of a graft or a legal transplant, was discarded.

Rather, the Expert Group proceeded by analogy, by creating a new sui generis legal institution that offered the same characteristics and produced the same effects as a foreign trust, while respecting the principles of Swiss domestic law. As a starting point for its works, the Expert Group referred to Professor Luc Thévenoz’s 2001 book, which contains the commissioned report written for the Federal Office of Justice on ratifying the Convention.^[32] The Expert Group also considered the English and Welsh trust as the reference model.

Furthermore, as the Swiss trust would mainly be aimed at Swiss residents and due to the traditional Swiss consensus, the Swiss statutory provisions protecting the rights of the settlor’s creditors, spouse or registered partner and heirs would be reserved. Thus, the proposed Swiss trust is not intended to compete with offshore jurisdictions (the distinctions are detailed below) and should not be taking part in what some authors have dubbed the ‘race to the bottom’.

More specifically, the proposed trust is based on legal institutions already known in Swiss law and, to the extent possible, it refers to rules that are already laid down in Swiss law or that have been clarified by case law. This option guarantees international recognition by way of the Convention. This also explains why the proposal is limited to express trusts; it does not provide for trusts created by law or by a court order (resulting trusts, constructive trusts and statutory trusts).

Given these characteristics, the Expert Group also suggests anchoring the Swiss trust in the Code of Obligations (CO) rather than the Civil Code (the Code). Moreover, because the proposed Swiss trust is neither a contract nor a legal entity, the new provisions are to be inserted between these two chapters, for systematic coherence, under a ‘title twenty‑two’ of the CO containing art.529a and thereafter of the proposed CO (p‑CO).

According to art.529a p‑CO, the Swiss trust is defined as a lasting legal relation between a trustee and a beneficiary with respect to a separate patrimony held in the beneficiary’s interest. It could be settled during the settlor’s lifetime (inter vivos) or upon death (mortis causa). If it were settled by will or succession pact, but without providing for any trustee, the court could appoint one.^[33] Self‑settled trusts would also be allowed.^[34] The trustee could not be the sole beneficiary of a Swiss trust.^[35]

The Swiss trust would entitle a settlor to retain reserved powers, such as revoking the trust, amending its terms, consenting to certain acts of the trustee, hiring/firing the trustee, designating/replacing a protector, holding the trustee to account or ordering an audit.^[36] These reserved powers would not suffer any representation, for instance, in case the settlor became incapable. Moreover, the terms of the trust could also confer some or all of these powers to a protector, whose powers would also not be subject to any representation. However, if granted the revocation power, a protector could only revoke the trust during the settlor’s lifetime.^[37]

In terms of duties, trustees would have to act diligently and faithfully in the exclusive interest of the beneficiaries.^[38] In particular, they would have to perform the duties arising from the terms of the trust and the law, with such diligence as may reasonably be expected from a person with their abilities and profession. Unless otherwise provided in the trust deed, the trustee would also have to act impartially, avoid any conflict of interest in the exercise of their function, and invest the trust assets with due care and prudence in the interests of the beneficiaries.^[39]

By law, trustees would be entitled to an appropriate remuneration, the reimbursement of costs as well as compensation for damages suffered through no fault of their own.^[40] They would be liable for any damages caused to the trust fund or a beneficiary arising from their failure to discharge their duties, in accordance with art.97 (among others) of the CO. Moreover, the trust deed could never exclude liability for fraud or gross negligence of the trustee’s auxiliary.^[41]

In line with modern trust laws, the draft Bill also contains provisions on insolvent trusts and tracing.^[42] By contrast to some asset protection jurisdictions, Swiss trust beneficiaries would be guaranteed certain minimal rights. Most importantly, beneficiaries would be entitled to request information from the trustee on their rights or expectations under the terms of the trust. However, the trustee would be entitled to refuse to answer on the grounds provided for in the deed or if it jeopardised the legitimate interests of other beneficiaries.^[43] Further, a beneficiary could apply to the court for the removal of a trustee or a protector where they are in serious breach of their obligations.^[44]

Distinctions

The draft Bill also contains certain classic limitations inspired by English and Welsh law: following the Saunders v Vautier rule, if all the beneficiaries have been identified they may terminate the Swiss trust earlier by unanimous agreement in writing.^[45] Also, and in any event, a Swiss trust comes to an end 100 years after its settlement at the latest.^[46] Finally, a Swiss trust can neither act as a purpose trust nor be used as a charitable trust.^[47] In comparison, several offshore trust laws authorise the settlement of perpetual trusts and non‑charitable purpose trusts.

These limitations are notably meant to create a clear distinction from Swiss foundations that, by contrast, enjoy legal personality, may be perpetual and can be settled for charitable purposes. Moreover, the respective regulatory regimes of Swiss trusts and foundations are different, as professional Swiss trustees require a licence to operate. Further, trusts are flexible by nature, and the rigidity of some rules governing Swiss foundations limit their use to private purposes and exclude almost any use for commercial or financial purposes.^[48] In addition, recent attempts at liberalising the Swiss foundation have failed. In 2020, a draft Bill aimed at implementing the Luginbühl initiative was rejected during the consultation phase, as most of its proposals were deemed highly controversial.^[49] In the same vein, the Federal Administrative Court recently rendered a judgment whereby a Zurich foundation was refused registration based on art.335 §2 of the Code, which prohibits family maintenance foundations.^[50] Although this (outdated) provision does not apply to trusts, the Expert Group decided not to repeal it so as not to mingle with a separate legal institution.^[51]

These separate functions and clear distinctions drawn between Swiss trusts and foundations should reassure proponents of foundations. Incidentally, history should reassure all practitioners both common law and civil law alike: ‘In the ascendant for more than five centuries, from the days of Augustus, the trust finally under Justinian became the predominant legal institution. In the course of this history, the civil law institutions did not wither and drop. They persevered.’^[52]

The draft Bill also contains secondary proposed amendments to Swiss legislation to properly integrate this new institution into the existing framework, especially the Code, the Private International Law Act and the Debt Collection and Bankruptcy Act.^[53] With respect to successions governed by Swiss law, the testator would be entitled to bequeath all or part of the disposable portion of their estate to settling a trust.^[54] In case of bequests to a Swiss trust, the action for abatement may be brought against each beneficiary in respect of the benefits already received, or against the trustee in respect of the trust fund.^[55]

Swiss arbitration

Naturally, the draft Bill provides for the possibility of requesting the Swiss court’s intervention to decide certain questions. As these interventions fall within the scope of non‑contentious jurisdiction, they would be subject to the summary procedure.^[56] Therefore, Swiss courts would have jurisdiction for non‑contentious applications when there is legitimate doubt about the scope of the rights or obligations, or to have the compliance of a proposed trustee act checked (blessing).^[57]

However, as a notable Swiss finish, a Swiss trust could alternatively contain an arbitration clause that would be binding upon the settlor, trustee, beneficiaries and protectors for any legal issues arising from the trust, including non‑contentious applications as well as applications to remove the trustee or protector in case of breach of trust.^[58] This rule would complement the recently enacted Swiss provisions that enable arbitration clauses in unilateral legal acts. It would allow sensitive family or succession disputes to be settled in private with the assistance of professional Swiss arbitrators.^[59]

Next steps

On 12 January 2022, the draft Bill on Swiss trusts, together with its explanatory report, was published for consultation. During the consultation phase, stakeholders, including STEP and the SATC, will be able to submit their comments. The federal government will then review all the feedback and make any necessary amendments, before sending the final Bill to the Swiss parliament for consideration within its legal commissions and ultimately vote. It is hard to predict when these subsequent steps could occur but it is safe to assume that, given usual Swiss timing on the legislative process, any entry in force would not occur before 2023.

The first Swiss judgment on trusts dates to 1874. This is also the year when the famous Swiss escalator group Schindler was founded. Therefore, we can only hope that the proposed Swiss trust steps up to the plate and continues to elevate the Helvetic financial centre.