Can you define what British and US legislations traditionally consider to be a “trust”; what are its purposes and how does it work? The concept of a trust is derived from common law and is therefore not defined legislatively, but could be essentially characterised by the separation of legal and beneficial ownership in one or more assets. A person (the “grantor” or “settlor”) places assets “in trust” by transferring legal control to one or more “trustees” who hold or invest these assets on behalf of the “beneficiaries”. There can be a single beneficiary, multiple beneficiaries or a defined group of beneficiaries; for example, all the grantor’s children under the age of 21.
There are a number of reasons why a trust may be established, but tax savings and estate planning are amongst the most popular.
For example, the estate of an individual who either lives or has been a resident in the UK for 17 out of the 20 fiscal years prior to his death will incur inheritance tax at 40% above a relatively low tax-exempt sum (currently £325,000). To prevent avoiding inheritance tax by using trusts, an individual residing in the UK who puts property or assets in trust (a “chargeable lifetime transfer”) will be immediately charged an inheritance tax in some circumstances. An individual with a high net worth seeking to relocate to the UK may, therefore, wish to consider settling certain property in trust for his heirs before relocating. This serves to remove these assets from his estate, thereby avoiding the UK’s inheritance tax when he dies and bypassing the tax on a chargeable lifetime transfer.
Another attractive feature of trusts is secrecy – the ownership of some assets (shares and real estate being common examples) is a matter of public record. A trust is constituted by a private document, so it is possible to protect the identities of beneficiaries from public scrutiny by placing assets in trust. Therefore, only the trustees’ identities become available for public access.
The grantor may also dictate how the trust property is distributed to the beneficiaries, either by expressly directing the trustees to apply the trust property in a specified way (for example, releasing a specified sum to each of the grantor’s grandchildren when they reach the age of 21) or by defining situations in which the trust property should be applied at the trustees’ discretion (for example, meeting education costs).
What is the situation in Switzerland regarding the trust industry? Is it possible to establish a trust in Switzerland according to local laws and how? Switzerland does not have a domestic legislative policy for establishing trusts. However, by ratifying “the Hague Convention on the Law Applicable to Trusts and on their Recognition” Switzerland is obligated to recognize the concept of trusts. The requirements for acknowledging trusts have been clarified as well (for example, the trust must be confirmed in writing).
Establishing a trust is fairly straightforward – the grantor appoints one or more trustees, usually specifically named employees at a private bank. He instructs counsel to draft the trust’s governing document (a “trust deed”), signs the deed and transfers the property to the trustees. Various formal requirements must be completed, such as the provision of identification to the trustees to allow them to comply with their “client due diligence” procedures.
Are there differences in practices between Swiss, American or British trusts? There is a great deal of flexibility as to the manner in which a trust is organised and operated. Although local laws and practice do differ from one jurisdiction to another, this flexibility is common to the UK, the US and Switzerland. While Switzerland does not have a domestic regime analogous to the common law trust system in the UK and the US, Switzerland has signed and ratified “the Hague Convention on the Law Applicable to Trusts and on their Recognition”, as has the UK (the US has signed but not ratified the Convention). Accordingly, it can be said with certainty that the trust concept applicable in Switzerland broadly mirrors that in the UK.
What are the advantages of Swiss trusts compared to trusts in other countries, such as New Zealand, Panama, or the UK? Panama offers a largely tax neutral framework for establishing trusts, but its appeal is curtailed by a general lack of faith in Panama and threats of political sanctions stemming from its reluctance to compromise banking secrecy. The time zone differential may also be an issue for clients in Europe or Russia. Furthermore, Panama does not have a wide range of dual taxation treaties hence full domestic withholding tax is charged on the trust’s foreign income and there is no protection from foreign capital gains or direct income tax either.
The UK offers a stable, well established trust system. A key disadvantage is tax – UK resident trustees will be taxed on income generated by the trust. However, applying the UK’s wide range of tax treaties should create potentially significant reductions in the withholding tax rates on foreign income and provide protection from foreign capital gains tax as well as direct income tax. It is important to note that these treaty based advantages are commonly restricted when the trust’s beneficiaries are not UK residents.
New Zealand is an attractive alternative. Like Switzerland, it does not tax income (other than income on revenue acquired in New Zealand itself) generated by New Zealand trusts established by non-residents. New Zealand classifies these trusts as “foreign trusts” and trustees who are residents of New Zealand are not subject to New Zealand’s tax on income generated abroad. Furthermore, trust beneficiaries who don’t reside in New Zealand are not subject to taxation on trust distribution. While the trust’s foreign income is not taxable, should its trustees be residents of New Zealand the trust will be treated as New Zealand resident. As a result, it is entirely possible to use New Zealand’s tax treaty network as leverage to obtain reduced withholding tax rates as well as protection from foreign capital gains and direct income tax (although the previously cited restriction on treaty benefits should be noted).
Swiss trusts generally encompass the same advantages as New Zealand trusts. Switzerland offers a more extensive network of dual tax treaties than New Zealand, and its geographical location means time zone differentials are likely to be less problematic for European, Russian, Middle Eastern and EST (Eastern Standard US Time) American clients on the East Coast.
What are the advantages for Russian clients to establish trusts in Switzerland? Are there differences between clients residing in Switzerland or living abroad? One key advantage to a trust is that it is defined by a transfer of assets from the grantor to the trustee(s). The grantor thereby entirely relinquishes the trust property, providing that he isn’t a beneficiary of the trust himself. Consequentially, the trust may offer effective protection from imposed inheritance laws, expropriation and expensive divorce settlements which can also concern Russian nationals.
Trust taxation differs depending on where both the grantor and beneficiaries reside. As a general rule, a trust that is managed in Switzerland will not be taxed there if neither the grantor nor the beneficiaries are Swiss residents. Barring certain restrictions, a grantor can also put assets into trust and then move to Switzerland without incurring a tax penalty. However, if beneficiaries of a trust are Swiss residents they will usually be taxed on their supposed share of the trust fund.
To what extent can trust structures replace bank secrecy in Switzerland? How do you foresee the future of trusts in Switzerland? Political pressure has recently impaired Swiss banking secrecy and banks may be now required to divulge information that would have previously been completely inaccessible. This specifically regards clients with capital and income accounts in Swiss banks, which now should comply and cooperate with requests from foreign law enforcement and tax authorities. Swiss banks naturally maintain a strict code of secrecy to the extent these enforcement provisions allow, so the risk of disclosure extends only to law enforcement and tax authorities.
Although a trust can obscure beneficiaries’ assets from public access, in many cases disclosure can be compelled by similar enforcement provisions. It is therefore misleading to suggest that using trusts can serve as a tool to replace bank secrecy.
Notwithstanding the issues already covered in this interview, trusts can be an attractive option in certain circumstances. Although a trust should not be considered to guarantee privacy from official enquiries, the fact that the grantor is fully divested of a trust property provides the means to circumvent issues such as forced inheritance laws.
The use of trusts for tax savings, estate planning and securing the privacy of beneficiaries from public scrutiny is becoming more commonplace in Switzerland. In our opinion, the demand for trusts in Switzerland is likely to increase in the coming years. On the other hand, Swiss private banks are concerned that increased trust activity will attract further unwanted attention from foreign tax authorities and have proved reluctant to expand their trust proposals lately. There are also issues about the intrinsic conflict of interest for trustees between their loyalty to the client and their obligations to the bank employing them.
Trusts have gotten bad press both in Europe and Switzerland, where they are often associated with tax evasion or money laundering; yet a lot of people still don’t understand trusts or even know much about them. Isn’t there something that the trust industry itself could do to familiarise the public with their product? How can the public’s perception of trusts be improved? As mentioned earlier, the recent introduction of wider reaching powers permitting law enforcement and tax authorities to compel the disclosure of any beneficiary’s identity makes using a trust as a device to facilitate money laundering or tax evasion largely ineffective. While the trust adds an additional layer of complexity to transactions, thereby partially obfuscating the flow of funds, the authorities are familiar with such structures and are allowed access to them.
Considering these new parameters, improving the public’s perception of trusts might best be approached by promoting their positive attributes – flexibility, confidentiality (though not in the sense of fraudulently hiding illicit activity from the authorities) and the ease with which they can be implemented.
