Workshop by Andrea Opel and Andrea Hildebrand on the occasion of the ISIS) seminar on September 23-24, 2024 entitled "Asset structuring using trusts and foundations"
Note: This language version is an automatically generated translation. The text may therefore contain linguistic and terminological errors.
view in original language (German)A., a resident of the Canton of Baselland, owned various properties in the Czech Republic, which he contributed in 2007 to D. s.r.o., a company he owned in the Czech Republic. In 2008, he sold 90% of the shares in D. s.r.o. to E. Ltd., based in the British Virgin Islands. E. Ltd. in turn sold its stake in D. s.r.o. to the Liechtenstein family foundation F., which A. had established for the benefit of his family.
The foundation’s primary purpose was “the investment and management of the foundation’s assets, as well as grants to beneficiaries to be determined in accordance with the bylaws and regulations. In addition to members of certain families, beneficiaries may also include other third parties not belonging to these families, as well as charitable institutions and organizations. The foundation serves to finance living expenses, education, and healthcare; to secure and/or improve the current standard of living in general; to provide economic promotion and support for beneficiaries in the broadest sense; and to pursue similar purposes.”
A. did not declare either the shares in D. s.r.o. or the F. Foundation in his tax returns for the years 2007 through 2011. A tax assessment and penalty proceeding was initiated.
NB: The wording of Liechtenstein law indicates that a founder may revoke the foundation unconditionally or amend its charter only if he has expressly reserved such a right (see Art. 559(4) PGR). In the present case, no such right of revocation or amendment was included in the foundation’s charter.
Father V., a resident of the United States, left behind two sons upon his death. Son S. is a resident of Switzerland. Son U. is a resident of the United States. At the time of death, both sons received small amounts directly from their father’s estate. The remainder was transferred to the T. Trust in accordance with the trust deed and their father’s will. The trust has total assets of CHF 500 million.
Since 2014, annual distributions have been made from this trust to the sons. S. receives annual distributions of CHF 150,000–200,000. He declared these distributions in his annual Swiss tax returns as an inheritance from his father.
The key provisions of the trust can be summarized as follows according to the trust deed of the “T. Irrevocable Family Trust”:
Settlor: Father V., deceased, USA
Executor: Son U., USA
Beneficiaries: - 1st rank: Son U., USA, and Son S., Switzerland, as well as the descendants of both sons.
According to the trust deed, the trustees may distribute funds from the assets or the income at their discretion, either equally or unequally, with distributions to the first-tier beneficiaries and their descendants.
Distributions from the trust (so-called HEMS Standard[1]): Distributions are generally at the discretion of the trustees; however, they may only make distributions for the “maintenance of the health and reasonable comfort of the beneficiary and their descendants, for a complete education (including preparatory, school, postgraduate, and vocational education), or for the maintenance of a beneficiary’s accustomed standard of living” (so-called HEMS Standard).
Starting at age 30, each beneficiary has the right to receive 5% of the trust capital.
Trustees: Son U., USA, and Son S., Switzerland. If the two sons no longer act as trustees, then grandson E. (son of S.), Switzerland, becomes a trustee.
Following the death of the primary beneficiaries (S. and his brother), it is intended that the descendants generally be benefited “per stripes” (by line).
The two trustees determine the distributions annually. They must make these decisions unanimously.
There is no possibility for the trustees to dissolve the trust.
The trust is considered a taxable entity in the U.S. and pays substantial income taxes there. S. also pays taxes in the U.S. on the distributions received, at least USD 50,000 per year.
The tax periods for 2020 and beyond are still open. The tax periods for 2014–2019 have been definitively assessed. Regarding these periods, a back-tax proceeding has been initiated against the son S.
1 HEMS Standard: HEMS stands for “Health, Education, Maintenance, and Support” and means that distributions are permitted only for these purposes. Under U.S. tax law, compliance with the HEMS standard means that the trust assets do not form part of the beneficiary’s (taxable) estate, even if the beneficiary also acts as trustee. In this case, the assets are allocated to the trust for tax purposes, and the trust is therefore recognized for U.S. tax purposes.
The C. Family Foundation is a family foundation within the meaning of Art. 335 para. 1 of the Swiss Civil Code (ZGB). Its purpose is to provide the couple A. and B. and their descendants (beneficiaries) with “contributions toward the costs of their dowry, by supporting their education or training of any kind, and, if necessary, to enable and facilitate their economic and academic advancement.”
During the disputed tax period, the C. Family Foundation made various grants to the three children of Mr. and Mrs. A. and B. It should be noted that one daughter reached the age of majority during the disputed tax period.
According to the foundation deed, a board of trustees (foundation council) elected by the adult beneficiaries decides on the grants.
Addendum: The C. Family Foundation was established in 1950. The founder, who has long since passed away, contributed, among other things, a block of shares to the foundation, which was valued at CHF 1 million at the time. Today, the value amounts to CHF 2 million.
J. (*1945), a Swiss citizen residing in England, has two sons, N. (*1980) and M. (*1983), both of whom are also Swiss citizens. Neither son has any descendants. J.’s estate and succession planning consists, in addition to testamentary dispositions, of a trust structure that was originally established for tax planning purposes in England.
The trust arrangement can be summarized as follows:
- J. established the trust in 2015 as settlor under the laws of Jersey as an irrevocable discretionary trust.
- The trustee is Z. Trust Company Ltd. in Jersey. J. may express wishes regarding the management and use of the trust assets, but these wishes are not legally binding on the trustee.
- The beneficiaries are J. (the settlor), his son M. and his descendants, as well as five specifically named charitable institutions (in that order).
- The protector of the trust is a long-standing advisor to J.
- There is a Letter of Wishes in which J. states that he is to be considered the sole beneficiary during his lifetime and that, upon his death, this right shall pass to his son M.
J. plans to move to Switzerland to be closer to his sons in his old age.
1. How should the trust be assessed for tax purposes after J. moves to Switzerland?
2. What are the tax consequences of J.’s death?
3. After moving to Switzerland, J. realizes that his son M. leads a dissolute lifestyle. He decides to amend the trust deed and remove his son and his descendants from the list of beneficiaries. After his death, only the five named charitable institutions are to be eligible as beneficiaries.
What are the tax consequences of this amendment to the trust deed? During J.’s lifetime and upon his death?
B. passed away on November 7, 2014. In her will dated September 22, 2013, she named a foundation to be established as her sole heir, excluded her relatives from the succession, and bequeathed certain legacies.
The will states: “All remaining assets shall be transferred to a foundation to be established after my death. This foundation is to be established as described below. Should difficulties arise due to my limited legal knowledge, I ask that corrections be made in accordance with my wishes.” This is followed by relatively detailed provisions regarding the purpose, registered office, foundation assets, and board of trustees. However, the will did not (yet) include any provisions regarding the irrevocable allocation of funds for the tax-exempt purpose in the event of the foundation’s dissolution (restricted use of funds).
"Foundation A" was entered in the Commercial Register in 2015 as follows. The foundation’s purpose is: "The foundation is intended to enable economically disadvantaged individuals to provide their animals with medical treatment that they could not otherwise afford. It is also intended to enable people in difficult financial circumstances to continue keeping an animal. The foundation is a non-profit organization and does not pursue any profit-making purpose."
The foundation’s first application for tax exemption was rejected by the Zurich Cantonal Tax Office in 2016 on the grounds of a lack of non-profit status, as, in particular, the roles of the foundation board president and the managing director were held by the same person, and the foundation board members were not serving in an honorary capacity.
As part of a second application for tax exemption in 2017, the foundation submitted, among other things, the foundation charter signed by the Board of Trustees but not amended by the Foundation Supervisory Authority—now including a dissolution clause that ensured the irrevocable use of funds for the tax-exempt purpose. Furthermore, the roles of foundation board chair and managing director were no longer held by the same person. Consequently, the foundation supervisory authority approved the amended foundation deed (on May 31, 2017), and the amendment was entered in the commercial register. However, the Zurich Cantonal Tax Office rejected the second application for tax exemption in 2018.
01 “Bequest foundations” are foundations established by a testamentary disposition (see Art. 493 of the Swiss Civil Code). For more on bequest foundations, see, for example, Thomas Sprecher, Stiftungsrecht in a nutshell, 2nd ed., Zurich/St. Gallen 2023, 25 ff.
