Possibilities and limits of trust and foundation for the structuring of succession
Workshop by Natalie Peter on the occasion of the ISIS) seminar on 26 November 2020 entitled "Advance withdrawal, inheritance, division of inheritance and execution of wills in tax law".
Case 1 - The corporate foundation
Mr Muster is the third generation to run a company with 100 employees. He took over the business from his father and had to pay out his two siblings accordingly. As the main asset in his father's estate was the business and Mr Muster himself did not have sufficient assets of his own, he could not pay out his siblings immediately. However, they agreed to him staggering the equalization payment over 10 years or giving them shares for part of the equalization payment. Mr Muster continued to run the company successfully and was able to pay out his siblings within the agreed time.
Mr. Muster himself has 3 adult children who are at odds with each other regarding the continuation of the business. Mr. Muster would like to ensure that the family business is maintained in the long term with a uniform orientation and also against the will of individual family members.
He has heard time and again about corporate foundations and would like to know what exactly they are and whether the corporate foundation would be a suitable solution for him.
Case 2 - Contribution to an Anglo-Saxon trust
The facts of the case are the same as in case 1. Mr. Muster is thinking of transferring the company to a trust rather than a corporate foundation.
Case 3 - Irrevocable Discretionary Trust
Ten years ago, H set up an irrevocable discretionary trust into which he transferred some of his assets. He was the sole beneficiary of the trust income during his lifetime. The assets were not allowed to be distributed to him. He was also appointed by the trustee to take over the administration of the trust assets. Upon his death, his natural son is to become the sole beneficiary with respect to the trust assets and income. His stepdaughter (biological daughter of his predeceased wife from his first marriage) is not a beneficiary. The trustee has sole discretion as to whether and when to provide a benefit to the son. In a letter of wishes, H stated that it was his wish that no more than CHF 250,000 per year be distributed to the son.
In his will, H did not mention the trust. He stipulated that his son should receive 80% and his stepdaughter 20% of his estate.
H passed away on September 1, 2020.
- Are trust assets part of the estate under civil law?
- Do trust assets belong in the tax inventory?
- Does the stepdaughter have to pay taxes on the trust assets as well?
- What is the tax treatment of the trust after H's death?
- Would it make any difference if the trust deed or a by-law provided that the trust assets were to be distributed to the son on his 50th birthday?
Case 4 - Liechtenstein Foundation
V, a resident of Zurich, set up a family foundation under Liechtenstein law in 2010. He contributed securities worth CHF 20 million to the foundation.
During the lifetime of Founder V, he had the right under the foundation deed to issue a by-law and to regulate the beneficiary status therein. He was also authorised to amend the by-laws at any time.
From the death of the founder, on 30 June 2019, according to the by-laws last issued by V, T, the founder's only daughter, is to be paid 12% of the net assets of the foundation at the end of the previous year each year as at the end of February. The Board of Trustees, which is not bound by any instructions from the beneficiaries, may amend the by-laws at any time.
After the death of T, the Foundation must pay out a total of 12% of its net assets to his descendants each year at the end of February in accordance with the by-laws.
- Is this foundation to be recognised under civil law?
- What were the tax consequences of setting up the foundation?
- How were the assets and income of the foundation taxable during V's lifetime?
- What are the tax consequences of V's death?
- How are the assets and income of the trust taxable from V's death?
- How should the annual disbursements (12% of the foundation's net assets) be recorded for tax purposes? In particular: Can a tax-free repayment of a capital contribution be claimed on a pro rata basis? Is there an annuity?