Trusts in Swiss estates – A new Federal Supreme Court decision provides some clarity

Trusts, which originated in Anglo-Saxon law, are a valuable legal instrument for asset protection, tax optimisation and, in particular, for estate planning. It is not surprising therefore that trust structures are often used by wealthy individuals and expats (from Anglo-Saxon countries) who take up residence in Switzerland.

However, as trust law is not regulated by Swiss law, this often leads to uncertainty when it comes to handling trust assets in the event of death. Although foreign trusts have been recognised since 2007, many aspects of practical application at the interface between trust law and inheritance law have remained unclear for a long time.

The recent interesting decision by the Federal Supreme Court (BGer 5A_89/2024 of 16 December 2024) answers two key questions regarding the treatment of trust assets within inheritance in Switzerland. In this specific case, the deceased had set up an irrevocable, discretionary trust during his lifetime. After his death, a legal dispute arose between his six legal heirs (three children and three grandchildren) as to whether or not the assets of the trust, which only came to light after the distribution of the inheritance, were part of the deceased's estate. In contrast to the upper cantonal court, the Federal Supreme Court held that the assets of an irrevocable trust are not part of the estate under Swiss inheritance law, because the deceased had irrevocably waived his rights to the assets of the trust.

With this ruling, the Federal Supreme Court anchors an important principle of trust law in Swiss case law. However, it is worth noting that this conclusion was not easily reached, as is shown by the rollercoaster ride through three court stages.

A further point of contention in this case was as follows: The by-laws of the trust provided that after the death of the settlor, two of his children would benefit from the capital and income of the trust. Therefore, the question arose whether these two beneficiaries must place into hotchpot (equalization) within the division of the estate what they will be receiving from the trust. The Federal Supreme Court ruled that in the case of a discretionary trust, the mere appointment of a legal heir as a beneficiary in the event of death of the settlor, does not constitute a lifetime gift that must be placed into hotchpot by the legal heir benefitting from this appointment within the division of the estate.

The Federal Supreme Court's differentiation between discretionary and fixed-income trusts is understandable, even though other solutions could also have been considered.

Overall, the decision is to be welcomed, as these two clarifications by the Federal Supreme Court should provide greater legal certainty and therefore greater flexibility for estate planning with trust instruments in Switzerland.