Setting up a trust & the Swiss element

1. Why set up a trust?

Trusts are set up for a multitude of reasons (not all of them are tax) and can be a very useful international and private wealth structuring tool:

• A trust can offer protection (albeit not 100%) for personal, business, and family wealth during lifetime and can serve as a succession vehicle following death.
• Trusts can be customised for particular assets and / or percentage shares between beneficiaries (reducing the risk of possible disputes). They can also fulfil a specific purpose such as funding education, benefitting a particular charity or supporting a disabled or vulnerable individual.
• You can set up a trust either during lifetime or in your Will where the law applicable so allows. While both offer many benefits, setting up a lifetime trust can be especially useful:
  • it avoids the need to wait for probate after your death before your loved ones can benefit from some of your estate;
  • there is scope for amending the trust to react to your family or business situation evolving during your lifetime; and
  • the trust document is private whereas a Will is a public document.
• And now for the tax considerations. Depending on your country of residence and domicile (and, for some, nationality), setting up a trust can ringfence assets for a particular tax treatment. For example, in the UK, assets can remain outside the scope of UK inheritance tax provided certain criteria are fulfilled and maintained. It may also be possible to structure the passing of wealth to beneficiaries (e.g. family members) in a tax efficient way.

2. Terminology

Settlor: The person who creates the trust and transfers property to the trustee.

Trustee: Protects, administers and invests the trust assets. Their key powers include appointing income and capital or lending to beneficiaries. They have a duty to act for the benefit of the beneficiaries, including when considering requests for distributions. Duties and powers are defined within both the trust deed and various statutes.

Protector: Provides a ‘check and balance’ for the trustee. Powers are limited to those included within the trust deed so can be bespoke and drafted to meet client needs. It is usual to include a power to appoint / remove a trustee.

Discretionary trust: The beneficiaries do not have any right to the assets. Instead, the trustee owes duties to the beneficiaries to consider from time to time whether they should benefit. The trustee must take into account the relevant information such as the beneficiaries’ needs and priorities.

Fixed interest trust: The beneficiaries are entitled to distributions according to the terms of the trust established by the settlor.

Bare trust: This type of arrangement is akin to a nominee arrangement. The settlor is entitled to recall the assets at any time (see irrevocable trusts below).

Revocable: This allows the settlor to bring the trust to an end during their lifetime. This is more akin to a bare trust.

Irrevocable: The settlor can only use the assets if they are included within the beneficial class.

Settlor interested: A trust in which the settlor, his spouse and / or his minor children are within the beneficial class. Relevant as a settlor interested trust can carry different tax treatment to one that is not.

Letter of wishes: This is usually addressed to the trustee and is a private document that can be easily updated during your lifetime. It is a useful tool to guide your trustees in their decision making.

3. The Swiss element

In our dual qualified Swiss offices, Charles Russell Speechlys has the unique ability to provide streamlined advice on families, family offices, trustees, trusts and their tax treatment under both the Swiss civil law and English common law systems. Our trusts are prepared in a bespoke manner, tailored to be administered under both tax regimes.

• Swiss resident trustees: Switzerland is a global hub for sophisticated and high-calibre fiduciaries and professional trustees. Since 1 January 2020, most trustees need to obtain an authorisation to carry out trust activities in Switzerland. However, there are exemptions to the need for authorisation, such as certain private trust companies.
• Governing law of the trust: Switzerland does not currently have its own trust law and so Swiss professional trustees are accustomed and accomplished in managing trusts with a wide range of common law jurisdictions (ranging from the British Virgin Islands to Guernsey to England & Wales) each with their own long-established and settled trust law. The governing law choice will be tailored to your needs; relevant factors may include asset location or other ties to a specific jurisdiction.
• Swiss tax: Where the settlor or the proposed beneficiaries are (or become) Swiss resident, Swiss tax advice is recommended. The taxation of a trust depends on its qualification based on a tax circular published by the Swiss tax conference consisting of the heads of the cantonal tax authorities, which distinguishes revocable and irrevocable trusts. It is usually advisable to obtain a tax ruling from the relevant cantonal tax authority to confirm the Swiss tax treatment of the trust, for example, to clarify their income tax and inheritance tax treatment. Bespoke drafting of the trust instrument may be required. The Swiss Parliament is reviewing the possible introduction of a Swiss trust law. The Federal Council initiated a public consultation on a draft bill in January 2022 which aims to change this and strengthen the Swiss financial centre. The trust will be a specific legal instrument.
• Swiss real estate: It is possible for a trust to hold Swiss real estate. However, specific approval from the competent land authority is needed and given Switzerland’s rules on the ownership of real estate by foreign persons, the trust instrument will need to be drafted to satisfy a number of requirements which may include that the trustee must be Swiss resident and / or only Swiss nationals or Swiss residents can benefit from the trust etc. The rules vary depending on each canton.

Reporting and registration:

• Switzerland (much like many other countries) has signed up to a number of tax reporting regimes which apply to trusts with a Swiss resident trustee or, more generally, a Swiss connected person. Under the Common Reporting Standard (CRS) regime, any bank (or other financial institution) opening an account for a trust or company resident in a CRS jurisdiction may first have to obtain client due diligence on all “natural controlling persons” of the entity. For a trust, this can include the settlor, the beneficiaries, the protector and the trustees. Whether this is required will depend upon (i) the activities of the trustee and (ii) the nature of the trust’s assets. This information is then automatically shared with relevant other participating jurisdictions each calendar year.
• Swiss resident trustees should also be mindful of reporting and / or registration requirements in other jurisdictions for example in the place of residence of a beneficiary or where trust assets are located. In the UK, for example, there is a Register of Overseas Entities (ROE). When a professional trustee company incorporated outside the UK, or a non-UK company in the underlying structure holds (or is looking to acquire) an interest in UK real estate, they will likely need to register on the Register of Overseas Entities. For more information, see our article for further details: Trust structures holding UK real estate: Reporting requirements under the Trust Registration Service and Register of Overseas Entities (charlesrussellspeechlys.com).