Urquhart, Timothy: A Trust in Switzerland!

If you ask most people what words they associate most with Switzerland your answer will probably range from “Watches”, or “Chocolate”, if they have been a tourist there or “Banking” or “ Pharmaceuticals “ if they are in business but it is unlikely that the first word that will spring to the lips of those you ask will be “Trusts”.

Perhaps in a decade or so this may change because one of the more interesting developments in this small country, surrounded as it is by high tax neighbours, is the development over the last decade and a half of the Trust “industry”.

The development has taken a significant step further in the last year by the initiative of the Swiss Federal Government to ratify the Hague Convention on Trusts signed in 1985.

Before looking at the steps that have been taken, it is appropriate to review the principle provisions of the Convention itself and only after that to look at what Switzerland has done.

The Convention only applies to Trusts which are created voluntarily, evidenced in writing and created under a “chosen law” which itself recognizes Trusts. Specifically it does not apply to Wills or Testamentary Transfers. One of the more important provisions of the convention is the requirement for the Trust to have a legal framework “chosen” for it. In the ideal case the document constituting the Trust will have a clause in which a law is specifically “chosen” for it. However in the event that there is no specific choice of law the Convention in Article 8 provides a means of “deducing” which law has been chosen from a series of factors. So the “chosen law may be the place “designated for the administration” of the trust, or the “situs of the assets” of the Trust or again the place of residence (in the case of individuals) or business (in case of a corporation) of the Trustee or finally the place “where the objects of the Trust will be fulfilled”.

When reading the Convention itself it must not be forgotten that the principle concern which gave rise to the Convention was the need to allow Civil Law jurisdictions to recognize structures, where under Civil Law, such structures would otherwise be incapable of interpretation, because Civil Law does not recognize the ability to split an estate and allow the legal interest in that estate to exist separately from the beneficial interest in the estate. One only has to look back over the last decade to see the difficulties that the Swiss Court wrestled with, in hearing the case involving Corr Trust, where the Court had difficulty, at least initially, in allowing the Trust estate in dispute to be separated from other parts of the property in the legal ownership of Corr Trust, to understand that in a Civil Law jurisdiction this principle creates very real and practical difficulties for a Trustee subject to litigation in the courts of a Civil Law jurisdiction.

Largely for this reason Article 11 of the Convention takes on great importance because once ratified the courts of the country ratifying the Convention must accept that any Trust Property constitutes a separate fund independent from the Trustee’s own estate. This ensures that the trust property will be free, from claims by personal creditors of the Trustee, from any claims in the event of the Trustee’s bankruptcy or insolvency, and any claims against a Trustee in a personal matrimonial dispute or on death. It enables the Trustee, qua trustee to sue and be sued, and last but not least, in a legal system that often requires registration, it requires the Notary or other official responsible for this to register the Trustees’ title as a separate title.

In the period prior to ratification, the question was often asked why did Switzerland need to ratify the Convention because it already had structures in the Civil Law code which equated to the Trust. The questioner then went on to cite the Foundation (particularly the so-called “Family Foundation”), and the Contractual Fiduciary relationship. Although in many cases these achieve a position similar to the Trust they are not the same. Just to look at three aspects of each of these, the way in which assets are held, their independence and their relationship to the jurisdiction of incorporation by way of example. The Fiducia holds its assets as agent of the Principal subject to the conditions of the contract by which it is established. The Foundation holds assets as the legal owner in the same way as an incorporated body. The Trust holds its assets through its Trustee as the legal owner. In the second aspect, let us look at that of the independence or otherwise of the three. The Fiducia because of its status as an agency can only act in accordance with the instructions of the Principal, the Foundation operates within its constitution and the resolutions of its Board which may or may not be subject to direction of the Founder depending on the wishes of that person and the way in which the Constitution is framed. The Trust on the other hand, once established, can, and in many cases must, act totally independently of the person who creates it.

Unlike either of the other two the Trust is the only one of the three that can move from one jurisdiction to another by a simple change of Trustee, or change its governing law or situs.

So the intellectual argument, for a means of recognizing the trust as a structure different from and in addition to the others already available to Civil Law Practitioners, was already made. However in many ways these arguments were much less important than the practicalities of financial and banking life.

Professor Thevenoz has been one of the leading advocates for ratifying the Hague Convention in Switzerland for many years. At the turn of the century, he was commissioned by the Swiss Federal Justice Ministry to analyse the steps that would need to be taken to implement the ratification of the Convention and the consequences of so doing. He produced a powerfully persuasive report, published in 2001, which, amongst other things, analysed the use of Trusts in Switzerland even before the ratification procedure had started. Professor Thevenoz concluded that Trusts were already a commercial reality in Switzerland.

Most of those of us involved in the private sector tend to think that the use of Trusts is limited to the planning and protection of private wealth, but the use of Trusts in the commercial banking sector for securitisation to give just one example is widespread, to say nothing of its use in the other more complex commercial banking operations.

This, coupled with two other facts, that there are many financial institutions, practitioners and others located in Switzerland that have subsidiary links to Trustee companies in many overseas jurisdictions, and that increasingly those wealthy persons who are attracted to move their residence to Switzerland due to Switzerland’s benign tax treatment of certain foreign high net wealth individuals, often have Trusts holding their wealth, means that Switzerland has been compelled to recognize that Trusts exist, even though before the 1st July this year such recognition was not supported by law.

Unlike in the Common Law jurisdictions, cases coming before the courts in Switzerland are not reported for reasons of the doctrine of precedent and it is therefore difficult to give an accurate figure but one estimate that has been given to me calculates that over the last 5 years there have been approximately 50 different cases before Swiss courts (usually at the lower level i.e. the Cantonal courts) involving Trusts.

The first case in recent history that necessitated the study of a Trust in detail by the Swiss Courts was the Harrison Case in 1970. This case, which has been widely publicised, was the first time that the Swiss Judiciary were compelled to interpret a Trust. The courts attempted to equate it to quasi contractual relationship but it was evident that the means of interpretation attributed to the Trust was neither clear nor very accurate.

A further attempt at clarifying the position was made in 1989 when the Federal Private International Law Statute (FPILA) was passed. This law tried to define the Trust as an “organized unit of assets” a concept recognized by Swiss Law which equated the Trust to the Foundation concept. As was set out earlier neither of these interpretations accurately showed the Trust as being what it is.