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At present Switzerland doesn’t have a suitable instrument for family wealth and estate planning in its legal system. In particular, there are limited options available for the controlled transfer of family assets to descendants as an alternative to the immediate and comprehensive transfer of family assets to heirs.
Background
So far, trusts established under foreign jurisdictions or family foundations in the Principality of Liechtenstein have commonly been used as alternatives. However, this leads to an outflow of assets from Switzerland and its wealth management industry to foreign jurisdictions. One option to open up new possibilities in this area of family wealth and estate planning would have been the introduction of a Swiss trust law. However, since the proposed regulation of the taxation of trusts in Switzerland has already faced criticism in the preliminary investigations of this project, the failure of this solution was inevitable. Given that the proposed introduction of a Swiss trust solution is currently unable to gain a political majority, the Swiss Federal Council suggested to the Swiss Parliament in September 2023 that this project should not be pursued any further.
New opportunity
In December 2022, a member of the Swiss Parliament started a motion (an order to the Swiss Federal Council to prepare a draft law to the Swiss Parliament) proposing an interesting alternative to the trust solution discussed above. Swiss civil law already allows the establishment of family foundations in Switzerland. However, since the legislature imposed very strict restrictions and limitations on Swiss family foundations, this vehicle is currently only used very rarely. One of the major restrictions is that the family foundation cannot be used to make distributions for the maintenance payments of family members. Based on the motion filed, this restriction could now be removed. A time limit for family foundations was proposed in this context in order to prevent the perpetuation of assets. Additionally, consideration should be given regarding the rights of the founder. It could be possible to grant the founder more rights regarding revoking a foundation or modifying the foundation deed, which is not possible under current law.
Tax treatment
Since a family foundation is already considered a tax subject in the Swiss tax system in comparison to a foreign trust, the need for adjustments to tax legislation would be manageable. If family foundations are treated in a non-transparent manner for tax purposes, the taxation of the capital contributions to the foundation with the cantonal inheritance tax/gift tax in combination with the taxation of distributions as income on the side of the beneficiaries could lead to a very high tax burden in some cases. This high tax burden could, however, be reduced if the taxation of contributions to the foundations were linked to the degree of relationship between the founder and the beneficiaries (analogous to inheritance and gift taxes). The canton of Zug already implements this in its law today. However, according to the current practice, foreign family foundations can also be viewed as transparent for tax purposes depending on their setup. In the case of a revocable foundation, the assets of the foundation as well as the income are still assigned to the founder. For family foundations with fixed legal claims, the assets are allocated to the beneficiaries for wealth and income tax purposes.
Timeline
The resolution on the motion discussed in this article was completed with the approval of both chambers of the Swiss Parliament in February 2024. It is now the responsibility of the Swiss Federal Council to draw up a draft law in this context. In contrast to the implementation of a trust within Swiss legislation, the chances for a political majority are much better for expanding the possibilities within the existing legal framework of the Swiss family foundation.
The experts of PwC are happy to have a talk with you on the latest trends as well as future changes regarding family wealth and estate planning.
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