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Switzerland frequently ranks as perhaps the safest and most prestigious jurisdiction for investment and wealth management services, particularly for high net worth individuals and family offices. The Swiss banking system is considered the safest in the world, with approximately one third of all wealth stored through its central bank and network of public and private banks.
One lesser known benefit of banking in Switzerland is that Swiss trust law is highly protective of trusts. Switzerland is one of only a limited number of countries to have joined to the Hague Convention on the Law Applicable to Trusts and on Their Recognition (the “Convention”).
The Rise of the “Swiss Hybrid Trust”
Under the Convention, trust settlors can choose the law of any country, within certain limitations, to govern their trusts. This includes the ability of the settlor to choose the law of an asset protection jurisdiction such as Nevis or Belize. The trust agreement may be bolstered by a forum selection clause governing disputes and the seat for trust administration.
Swiss law offers the opportunity to establish a trust in an asset protection jurisdiction, such as Nevis or Belize, and appointing a trustee in Switzerland to custody trust assets. The resulting “Swiss Hybrid Trust” constitutes an asset protection vehicle unattainable in any one jurisdiction alone.-The Speiser Law Firm, P.A.
Choice of Trust Law Under the Convention
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 6 of the Convention provides that the “trust shall be governed by the law chosen by the settlor.” This 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 favorable 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).
Issues Under Swiss Trust Law
What if the trust settlor chooses a jurisdiction that does not have a trust law? Under Swiss law and the Convention, no trust is established.
What if the trust settlor chooses a jurisdiction that imposes certain requirements – such as trust registration – but the trust never meets those requirements? 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. Under both Swiss law and the Convention, the trust may not be enforceable.
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 enforceable in Switzerland.
Disputes and Foreign Judgments
In a tilt toward asset protection, Swiss law permits the trust agreement to contain a forum selection clause. 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.
Swiss courts will recognize 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.
Swiss law further 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. A trust agreement may stipulate a foreign jurisdiction as the exclusive forum for trust administration, requiring 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.
Advantages of the Swiss Hybrid Trust
With proper planning, a Swiss Hybrid Trust containing a properly drafted forum selection clause offers a unique level of protection. 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. Utilizing a Swiss trustee may permit the trust to be characterized 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 utilize 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 dwindling population of fewer than 18,000 people, 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 in #4, 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 capitalized 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.
Trust settlors previously had to settle for the services of small, thinly-capitalized 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. The Swiss Hybrid Trust offers a profound degree of certainty in asset protection planning.
 Convention on the Law Applicable to Trusts and on Their Recognition (Concluded at The Hague, 1 July 1985).
 See: Swiss Private International Law Act (“SPILA”), Articles 149a – 149e; Swiss Federal Debt and Bankruptcy Act, Articles 284a & 284b.
 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, e.g., The Trusts Act 2001 of Mauritius §§ 28(2) & 28(4).
 SPILA Article 21.