The Swiss Hybrid Trust: Achieving Asset Protection with Swiss-Based Trusts

When considering jurisdictions in which to base investment and wealth management services for a high net worth individual or substantial corporate client, Switzerland frequently ranks as one of the most popular countries in which to procure these services.  Yet, until 2007, one important limitation on the use of Swiss-based investment and wealth management services was Switzerland’s lack of a comprehensive local law governing trusts.  While Switzerland had garnered a reputation for safety in the fields of banking and investment management, this association did not extend as far as certainty in planning for Swiss-based trusts.

In July 2007, Switzerland sought to fill this legal void by joining to the Hague Convention on the Law Applicable to Trusts and on Their Recognition [1] (the ‘Convention’) and implementing several of the Convention’s provisions into Swiss local law.[2] While Switzerland previously recognised trusts as legal entities under a disorderly array of local laws,[3] ratification of the Convention finally brought formal recognition to trusts in which Swiss trustees are appointed.   The Convention also instituted a more comprehensive legal framework with which to design, implement, and apply Swiss-based trusts in estate planning.

Key provisions of the Convention, as reflected in Swiss local law, now afford trust settlors the distinct ability to invoke the law of another country while utilising the services of a Swiss trustee. While extending certainty to planning with trusts in Switzerland, the Convention also opens the door to one unique dimension of trust planning previously unavailable in Switzerland:  asset protection.

The 2007 changes in Swiss law governing trusts create the distinct opportunity for a client settling a trust with a Swiss trustee to choose the trust law of any number of jurisdictions offering comprehensive asset protection trust laws.  Furthermore, the trust agreement may be bolstered by implementing a forum selection clause for disputes, and a seat for trust administration, in an asset-protective jurisdiction. By fusing the Swiss law of the Convention with the powerful asset protection trust laws of a jurisdiction such as Belize, the Cook Islands, Mauritius, Nevis, or certain other select asset protection trust countries, the resulting ‘Swiss Hybrid Trust’ constitutes an asset protection vehicle unattainable in any one jurisdiction alone.

Choice of Trust Law in Switzerland

Switzerland is a civil law country.  Trusts, by contrast, originate under English common law. Because Switzerland is not a common law jurisdiction, there is no inherent trust law by which a trust may be settled. By necessity, reference must be made to the trust laws of at least one other country that has a domestic trust law.

Article 149c of the SPILA resolves this ambiguity under Swiss civil law by incorporating a part of the Convention that seeks to determine the applicable law of a trust. To better understand this provision, however, requires reference to the Convention itself.

Chapter II of the Convention outlines the procedure for ascertaining the applicable law of a trust. Specifically, Article 6 of the Convention provides that the "trust shall be governed by the law chosen by the settlor". Commentators have noted that this choice of wording is intended to permit settlors to freely choose any jurisdiction's trust law, regardless of the location of the settlor, beneficiaries, or trustee.  For example, a trust settlor residing in England may establish a trust with a Swiss trustee and governed under the trust laws of Australia.

Because all trust laws are not the same, the consequence of this provision is that a trust settlor may choose the trust law that is most favourable to his or her circumstances.  For example, if a settlor seeks predictability in estate planning, that settlor may choose the laws of a country with a well-developed body of trust law governing succession planning.  Likewise, if a settlor wishes to obtain certainty in asset protection planning, that settlor may establish a trust managed in part by a Swiss trustee and governed by the laws of Belize (regarded as having the strongest asset protection trust laws in the world).

Choice of Law Governs Establishment

Article 11 of the Convention, as reflected in SPILA, Article 149a, recognises the effectiveness of a trust as long as the trust has been established under the applicable law of the selected jurisdiction. If the jurisdiction does not have a trust law, then no trust is established.  Similarly, if the chosen law imposes specific requirements on trusts, these requirements may apply under the Convention to the enforcement of the trust in Switzerland

For example, many asset protection trust jurisdictions require the appointment of a resident trustee or registration of the trust with the local government, or both.  Examples include Belize, the Cook Islands, the State of Nevada, and Nevis.  Failure to follow the procedure for establishing a valid trust under the laws of the chosen jurisdiction may result in a less-asset-protective body of law applying to the trust. 

Some asset protection trust jurisdictions do not require the use of a resident trustee or registration with the local government.  Examples of such jurisdictions include the Channel Islands, Mauritius, and Seychelles. In such cases, a trust may be established with a Swiss trustee that elects, as its applicable law, the laws of such a jurisdiction, and the trust should generally be recognised in Switzerland.[4]

Disputes and Foreign Judgments

In a tilt toward asset protection, Swiss law permits the trust agreement to contain a forum selection clause. Under SPILA, Article 149b, a forum selection clause "shall be conclusive for all matters related to the law of trusts". Furthermore, "the forum selection shall be exclusive". The clause must be in writing in order to be effective.  The forum for disputes may be different than the forum whose law applies to govern the trust.  For example, a trust may be established with a Swiss trustee and a Nevis co-trustee, use Nevis as its applicable law, and require that all disputes be adjudicated in Delaware.

SPILA, Article 149e governs the application of foreign judgments to a trust in Switzerland. It permits a Swiss court to recognise a foreign judgment concerning a trust if the judgment is rendered, among other things, in the jurisdiction named in the forum selection clause or in the jurisdiction that is the seat of the trust.  The ‘seat of the trust’ is the place of trust administration specified in the trust instrument or, in the absence of a specific designation, its actual place of administration.[5]

This is augmented by Article 284a of the Swiss Federal Debt Enforcement and Bankruptcy Act, which requires that debt enforcement against a trust be taken against the trustee of a Swiss-based trust.  If the seat of the trust is not in Switzerland, then the creditor must bring its claim in the jurisdiction of actual administration of the trust.

In the field of asset protection planning, the Swiss Hybrid Trust offers a unique opportunity.  Construing Articles 149b and 149e together, a competent trust agreement stipulating a foreign jurisdiction as the exclusive forum for trust administration and disputes may, under Swiss law, require creditors to first proceed in that foreign jurisdiction and obtain a judgment there before that judgment may be presented and collection proceedings initiated against trust assets in Switzerland.   The Convention as implemented in Switzerland gives rise to new levels of certainty in trust planning previously unattainable under pre-Convention law.

Advantages of the Swiss Hybrid Trust

With proper planning, a Swiss Hybrid Trust containing a properly drafted forum selection clause – designating an asset protection trust jurisdiction as the exclusive forum for disputes and trust administration – may offer a level of protection that is not inferior to the protection afforded if the trust is simply established and conducted exclusively from the selected asset protection trust jurisdiction itself.  There are several compelling reasons to appoint a Swiss trustee, even for a trust that may be registered in an asset protection trust jurisdiction and administered in part by a resident trustee in that jurisdiction.

Avoiding Black Lists

Unfortunately, many countries and financial institutions refuse to do business with trusts and LLCs established under the laws of bank secrecy jurisdictions. Several Central and South American countries also bar their citizens from maintaining trusts and companies in tax haven countries. Utilising a Swiss trustee may permit the trust to be characterised as a ‘Swiss trust’, opening the doors to additional banks and financial service providers to handle trust assets. Also, while Switzerland offers bank secrecy and traditionally does not assist other countries in enforcing tax laws, Switzerland is not a ‘tax haven’ in the eyes of many countries.

Gaining Access to Tax Treaties

Switzerland enjoys a network of tax treaties with approximately 70 countries, including the United States, Canada, the United Kingdom, Japan, and China.  Most notable asset protection trust jurisdictions have no such treaties, meaning that trust income and certain gains may be subject to punitive withholding taxes.

Discouraging Litigation

Swiss law allows trust settlors to select a forum for litigation that differs from that of the applicable law of the trust. Theoretically, a settlor may utilise this freedom to require litigants to appear in one foreign jurisdiction to litigate claims under the trust laws of yet another foreign jurisdiction.  Moreover, recourse through the Swiss courts, while possible, is an expensive and difficult endeavor.

Banking Services 

The best-known asset protection trust jurisdictions generally consist of very small countries.  The Cook Islands is a case in point; the jurisdiction offers a consistent body of English-derived common law and a superior reputation for asset protection trust planning.  However, with a population of 35,000, the Cook Islands cannot offer a deep-pocketed banking deposit insurance scheme as is found in much larger countries such as New Zealand or Australia (and none is offered by the Cook Islands government).  A Cook Islands trustee may wish to depend on another country with a much stronger banking reputation, such as Switzerland, to hold the fungible assets of the trust.  Yet, due to the high cost of compliance for foreign-based trusts, some Swiss banks will not open an account for a Cook Islands-based trust, and other Swiss banks make it very difficult and time-consuming to establish the account.  Appointment of a Swiss trustee may be required in order to gain critical banking services.

Integrity of the Trust   

Similar to the observation made, above, the use of a Swiss regulated trustee lends a degree of credibility to the trust arrangements which otherwise may be lacking with trusts established in certain asset protection trust jurisdictions.  Many trust companies in exotic asset protection trust jurisdictions are closely held, thinly capitalised businesses.  The presence of a Swiss co-trustee helps to keep a check on the trustee resident in the asset protection trust jurisdiction, and to provide a backup if something catastrophic occurs to the resident trustee or the asset protection trust jurisdiction itself.

Guarding Against Swiss-Based Litigation

Appointment of a Swiss trustee should not in and of itself cause a foreign judgment to be enforceable in Switzerland.  As previously mentioned, Swiss law requires that, in order for a foreign judgment to be recognised in Switzerland, the judgment must arise from a jurisdiction that is (i) referenced in the forum selection clause of the trust agreement, or (ii) if no such clause exists, the seat of the trust.[6]

The caveat to this is that a creditor remains free to bring an original claim against a Swiss-based trustee in Switzerland. Swiss law may, in certain instances, yield a different result than the law of an asset protection trust jurisdiction referenced in the forum selection clause of the trust agreement.  This risk may be mitigated in the trust agreement by providing that the trustee residing in the referenced jurisdiction may remove the Swiss trustee or administer the trust exclusively from the referenced jurisdiction.

Conclusion

Trust settlors previously had to settle for the services of small, thinly capitalised trust companies in remote jurisdictions in order to obtain comprehensive asset protection.  With the Swiss Hybrid Trust, trust settlors may now enjoy the peace of mind gained through use of a Swiss-based trustee and the flexibility to select the asset protection trust laws of the most litigation-tested jurisdictions in the world. 

A competent Swiss Hybrid Trust agreement should specify an asset protection trust jurisdiction as supplying (a) the applicable law and (b) the jurisdiction for trust administration and disputes.  The trust agreement should also provide that the trustee resident in the asset protection trust jurisdiction may remove the Swiss trustee, or administer the trust to the exclusion of the Swiss trustee, pending the resolution of any Swiss-based litigation affecting the trust.  With such protective mechanisms in place, the Swiss Hybrid Trust offers a profound degree of certainty in asset protection planning. 

[1] Convention on the Law Applicable to Trusts and on Their Recognition (Concluded at The Hague, 1 July 1985).

[2] See:  Swiss Private International Law Act (‘SPILA’), Articles 149a – 149e; Swiss Federal Debt and Bankruptcy Act, Articles 284a & 284b.

[3] See SPILA (pre-2007 amendments).

[4] Some asset protection trust jurisdictions do not require that a trust be registered or a resident trustee appointed in the jurisdiction providing the governing law of the trust.  Many of these same jurisdictions permit a trust beneficiary to apply to the courts for appointment of a resident trustee.  See, eg, The Trusts Act 2001 of Mauritius §§ 28(2) & 28(4).

[5] SPILA, Article 21.

[6] SPILA, Articles 20, 149e.