Use of foundations and trusts in estate planning

Case 1: Avoidance of inheritance tax

1.1 Facts of the case

Mr. Stoll, a German national, has lived in the canton of Schwyz for over 30 years. He inherited substantial assets from his father, including real estate companies in Germany and bank investments, which he transferred to a Liechtenstein family foundation shortly after moving to Switzerland. The foundation was structured as follows:

• The founder is a member of the Board of Trustees. The mandatory trustee on the Board of Trustees can only make decisions and represent the foundation externally together with the founder. 
• The beneficiaries of the foundation are the founder, his sister resident in Germany and his descendants. (The sister has no children). However, the descendants can only receive distributions after the founder's death. One son lives with his family in the canton of Zurich. Another son lives in Germany and is not married. 
• The purpose of the foundation is to hold and manage the family assets. Some of the assets are held in Swiss banks. The establishment of the foundation was intended to keep the family assets together. 

The founder wants to ensure that the foundation is treated in a non-transparent manner for tax purposes in both Switzerland and Germany.

1.2 Questions

• How has the FL Family Foundation been treated for tax purposes in Switzerland to date?
• How do the foundation deeds have to be adapted so that the foundation is recognized for tax purposes and what are the tax consequences?

Case 2: FL family foundation

2.1 The facts of the case

Mrs. Muster lives in Zug and would like to set up a Liechtenstein family foundation before the vote on the Juso Initiative. This is intended to protect part of her assets from the inheritance tax that would be imposed if the initiative is adopted.

Mrs. Muster has two daughters who also live in the canton of Zurich.

In addition to bank assets, Ms. Muster intends to contribute her 50% stake in the family business to the foundation. She is also wondering whether she can also contribute her real estate to the foundation. 

2.2 Questions

• How should the foundation be structured and what would the tax consequences be in Zurich?
• What questions arise in connection with the contribution of your shares in the family business?

Case 3: Estate planning of parents resident in the USA

3.1 Facts of the case

Lucy is a US citizen and married to a Swiss national. She lives with her husband and two children in Uster/ZH.  

Lucy's parents, who live in the USA and have substantial assets, have implemented their succession planning. They have each drawn up a mirror-image will. In both wills, Lucy's sister is designated as executor and trustee, as she also still resides in the USA. If she is unable or unwilling to take up this position, Luca is to be the substitute executor and trustee. The executor is instructed in the will that on the death of the testator, the assets that are not yet in trusts and are not transferred to third parties as part of bequests are to be placed in two trusts - the "Qualified Terminable Trust" and the "Residuary Trust". The structure of the two trusts is set out in the will.

Both trusts are set up by inheritance in order to avoid the lengthy US probate procedure and to take full advantage of the US tax-free allowances. 

3.2 "Qualified Terminable Trust"

Assets are placed in the "Qualified Terminable Trust" in accordance with the then current tax-free amount for US federal estate tax. If the surviving spouse does not survive the deceased for more than 60 days, the Qualified Terminable Trust will not be set up. In this case, all assets would be transferred to the residuary trust. 

Until the two trusts are established, the executor/trustee should estimate the income of the trust assets and pay it to the surviving spouse. After the trust has been established, the trustee may make annual distributions from the realized income to the surviving spouse.

Upon the death of the surviving spouse, the trustee is instructed to pay out the retained income to the estate of the surviving spouse and to distribute the remaining trust assets to his or her heirs in accordance with the testamentary instructions of the second-to-die parent. 

3.3 "Residuary Trust"

The remaining assets are to be placed in the "Residuary Trust". In addition to the surviving spouse, the beneficiaries are the descendants. It is at the discretion of the trustee whether and to which beneficiaries they make distributions from the income or from the assets. The beneficiaries should not be able to derive any entitlement from the distributions. The retained income is added to the trust assets. However, the spouse should only receive distributions from the assets once the assets of the qualified terminable trust have been exhausted.

After the death of the surviving parent, the remaining trust assets are distributed directly to the descendants in accordance with the instructions in the will. If a descendant has not yet reached the age of 30, the trustee shall distribute the income of the trust share at his discretion until the 25th birthday. From the 25th birthday, the beneficiary should receive the annual income. It is at the trustee's discretion whether to distribute assets to the beneficiary descendant. As soon as the descendant reaches their 25th birthday, they can request distributions of trust assets. If a descendant dies before the assets are distributed, it is intended that these assets will be distributed in accordance with the testamentary instructions of this descendant (A) or, if there is no will, to the next of kin (B).

3.4 "The 2024 Family Trust"

Lucy's father also set up "The 2024 Family Trust" last year. The trustees are two independent corporate trustees. Should one of the appointed trustees no longer wish to perform his duties, the settlor has reserved the right to appoint another corporate trustee, whereby the requirements for a new trustee are set out in the trust deed.

The settlor has not reserved any control rights in the trust deed. However, he can exchange assets at any time.

The trust deed provides for special withdrawal rights. Under these rights, the wife can request payments from the trustee within 60 days or by December 31 of the year at the latest if further assets are transferred to the trust. These payments are limited in order to prevent gift taxes from being incurred on this amount in the USA. 

If the assets deposited in the trust exceed the wife's right of withdrawal, the descendants can submit a written request for payment of the surplus within 30 days or on December 31 at the latest. However, these amounts that can be paid out are also limited for the same reasons. 

After the father's death, the assets that the descendants could have claimed but have not yet claimed must be separated and held in a separate trust. The trustee should distribute income from the remaining trust assets to the wife on a quarterly or more frequent basis. The frequency and amount are at the discretion of the trustee. The trustee may also distribute assets to the wife or descendants. After the death of the wife, the remaining assets are to be divided and distributed to one trust per descendant. The income of the trust should then be distributed quarterly to the beneficiaries as soon as they have celebrated their 25th birthday. In addition, it is at the discretion of the trustee to distribute trust assets to the beneficiary. The descendants should then specify in their will to whom the assets are to be distributed after their death. 

3.5 Question

How are these trusts treated for tax purposes in Switzerland?

Case 4: FL family foundation becomes a charitable foundation

4.1 Facts of the case

Mrs. Looser has no children and lives in the canton of Zurich. Her husband died years ago. Together they had set up a Liechtenstein foundation and transferred a large part of their assets to this foundation. According to the by-laws, the Looser spouses are the sole beneficiaries. 

It was Mrs. Looser's wish that the foundation become charitable after her death. She expressed this wish to both the Board of Trustees and the executor. However, this wish was never recorded in a letter of wishes or included in the by-laws.

Mrs. Looser passed away in the spring. In accordance with Mrs. Looser's wishes, the Board of Trustees amended the Articles of Association so that the Foundation became charitable upon her death. The supervisory authority in Liechtenstein recognized these changes and the tax authorities granted the foundation tax exemption from the date of Mrs. Looser's death.

4.2 Question

What are the tax consequences in Switzerland?

Case 5: Life annuity from a foundation

5.1 Facts of the case

Hans Dürst, a resident of Zurich, set up a family foundation under Liechtenstein law in 2002. He contributed securities worth CHF 20 million to the foundation. 

During the founder's lifetime, the foundation deed gave him the right to issue a by-law and regulate the beneficiaries therein. He was also authorized to amend the by-laws at any time. 

After Hans Dürst's death on June 30, 2024, 12% of the Foundation's net assets at the end of the previous year is to be paid out to his only daughter Andrea annually at the end of February in accordance with the last contribution statute issued by Hans Dürst. The Board of Trustees, which is not bound by any instructions from the beneficiaries, may amend the by-laws at any time.

After T's death, the foundation must pay out a total of 12% of its net assets to her descendants each year at the end of February in accordance with the by-laws.

5.2 Questions

• What were the tax consequences of setting up the foundation? 
• What were the tax consequences of Hans Fürst's death?
• Can a tax-free repayment of a capital contribution be claimed on a pro rata basis if the foundation is not transparent? 
• Is there a life annuity to the daughter?