Matthew Ledvina, JD, LLM (US Taxation) outlines essential considerations for foreign trustees in relation to trusts linked to Switzerland.
Key Considerations
Identifying the Challenge
Trustees are increasingly finding themselves entangled in Swiss civil and criminal legal proceedings. They are becoming common participants in intricate transnational disputes and often find themselves in the crosshairs of disgruntled beneficiaries, alienated family members, or former spouses.
What’s at Stake for Me?
It's crucial for foreign trustees to recognize that they might be subject to litigation before Swiss courts, especially if the trust is managed in Switzerland or the settlor resides in Switzerland.
Key Takeaways
Maintaining an understanding of how Swiss laws, both procedural and substantive, can influence the administration of a trust—and most critically, its assets—is vital. This knowledge can help in circumventing unforeseen complications.
Detailed Analysis
Growing Popularity and Legal Complexities
Switzerland has witnessed a consistent uptick in its reputation as a prime location for trust administration and associated services. With this increase has come a rise in litigation involving trust structures. Legal battles are not confined to civil courts; claimants are progressively bringing their grievances to criminal prosecution bodies.
Despite Switzerland’s ratification of the Hague Convention of 1 July 1985 on the Law Applicable to Trusts and on their Recognition in 2007, acknowledging foreign trusts, the Swiss legal system—a civil law jurisdiction—does not recognize the common-law concept of dividing legal ownership (trustee) from beneficial ownership (beneficiary). This dichotomy presents practical challenges for Swiss judges and prosecutors as they navigate both the regulations governing the trust and their own, sometimes conflicting, legal and procedural principles.
Civil Legal Matters
Seeking Information
Swiss courts will assume jurisdiction in cases where the trustee is based in Switzerland, Switzerland is designated as the place of administration in the trust deed, or the trust is essentially managed from Switzerland, provided the trust deed does not explicitly point to a foreign court. To mitigate jurisdictional uncertainties, the trust document should include a forum selection clause and clearly indicate the trust’s place of administration.
Inheritance Legalities in Switzerland
Swiss inheritance law mandates certain forced-heirship rights, ensuring that spouses, descendants, or parents (if no descendants exist) receive a guaranteed portion of the estate. The application of forced-heirship rights depends on the assets left to heirs at the time of the testator’s death and, in some instances, on inter vivos transfers.
Swiss courts have not yet established a precedent for handling trusts under Swiss inheritance law. However, the consensus among legal scholars is that transfers to trusts are considered as either revocable or irrevocable gifts, influencing the calculation of forced-heirship rights. Assets placed in a trust may be subject to clawback claims if the settlor was a Swiss resident at the time of their death, with firewall provisions in the applicable trust law potentially not providing protection.
Divorce Proceedings in Switzerland
Under the standard Swiss matrimonial property regime, spouses maintain individual control over their respective properties during marriage. Upon death or divorce, each spouse is entitled to half of the property acquired by the other during the marriage. Transfers to trusts can influence the division of property, especially if the transfer occurred within five years of initiating divorce proceedings or was intended to deprive the other spouse of their share.
The famous Rybolovlev case serves as a noteworthy example, where the Geneva Court of Appeal ruled that trust assets must be included in the calculation of matrimonial property claims, highlighting the complexities of trusts in Swiss divorce proceedings.
Criminal Legal Matters
Filing a Criminal Complaint Involving Trust Assets
The eligibility to file a criminal complaint when trust assets are involved is a grey area, with sparse and inconsistent court decisions. Typically, the trustee, being the legal owner of the trust assets, holds the capacity to act as a plaintiff in criminal proceedings. However, recent cases have seen beneficiaries taking on this role, adding another layer of complexity to the legal landscape.
Challenging Legal Actions Involving Trust Assets
Trustees are generally the only party able to challenge legal actions involving trust assets, such as asset seizure or property searches. This is due to their status as the legal owner of the involved assets. However, the question of extending this right to beneficiaries, particularly when the trust structure has been dissolved, remains open.
Criminal Liability of Trusts
Since 2003, Swiss law has held that companies, including foreign-law structures, can face criminal liability. While this has yet to be tested in relation to trusts, there is a theoretical risk, particularly if the trust engages in commercial activities akin to those of a company.
Recent Legal Developments
Switzerland’s recent adoption of the Financial Action Task Force’s revised recommendations has implications for trusts, particularly in relation to tax offences and money laundering. Since 1 January 2016, ‘qualified tax offences’ can serve as a basis for money laundering charges, increasing scrutiny on trusts, especially those perceived as being established for tax avoidance purposes.
Conclusion
The establishment of a foreign trust does not provide absolute protection from involvement in Swiss legal proceedings. Foreign trustees must be cognizant of the potential implications of having a connection to Switzerland, whether through asset location, administration practices, or the residency of involved parties. Navigating the Swiss legal landscape requires a comprehensive understanding of both Swiss and home jurisdiction laws, ensuring that trustees are prepared for the unique challenges presented by Swiss proceedings.
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