Analysis of the actions for recovery of the estate, hotchpot, and reduction in the context of trusts under Swiss law.
Frequently used as an estate planning tool, trusts offer the ability to derogate from standard succession rules — most notably by allowing the transfer of assets to beneficiaries to be phased over time. They are also presented as an effective alternative to the formalities typically associated with the administration of an estate, such as probate, the issuance of a certificate of heirship, or the joint management of estate assets by the co-heirs until the final settlement.
Assets settled into trust no longer form part of the estate of the settlor. They are intended to be distributed in accordance with the terms of the trust, in lieu of the statutory devolution of the estate, subject to the validity of the trust and the Swiss rules relating to equality among heirs and forced heirship rights. These aspects may be addressed through the action for recovery of the estate, hotchpot, and the clawback claim (action for reduction).
The action for recovery of the estate
The foregoing assumes, however, that the trust is valid.
Swiss law does not recognise the trust as an institution of domestic law. That said, trusts established under foreign law are automatically recognised pursuant to the Hague Convention on the Law Applicable to Trusts and on their Recognition (art. 11 para. 1).
The trust must be valid under its governing law (art. 8 of the Hague Convention on Trusts). The validity of a trust requires the satisfaction of three conditions (the three certainties rule; Knight v. Knight, Court of Chancery, 1840): certainty of intention (the settlor must have genuinely intended to create a trust, failing which the trust may be recharacterised as a sham trust), certainty of subject matter (the trust assets must be identifiable and effectively transferred to the trustee), and certainty of objects (the beneficiaries must be ascertainable).
Extensive powers reserved to the settlor over the trust — such as the power to decide on asset distributions or a veto right over investments — may indicate the absence of a genuine intention to create a trust. In such circumstances, a trust could be characterised as a sham trust (ATF 143/2017 II 350, para. 4.2; Rahman v. Chase Bank Trust, Royal Court of Jersey, 1991; Federal Supreme Court judgment 5A_436/2011 of 12 April 2012, concerning a discretionary trust governed by British Virgin Islands law that was characterised as a sham trust).
Should the trust be characterised as a sham trust, the trust assets would still be considered to form part of the settlor’s estate. It would follow that the trustee would hold the estate assets placed in trust without a valid legal basis. In such circumstances, an heir may seek the restitution of the relevant assets to the estate by way of an action for recovery of the estate (hereditatis petitio, art. 598 et seq. CC) against the trustee.
This action allows an heir to claim the remittance of estate assets from any person who, without being an heir, is in possession of them. The action also extends to assets deriving therefrom (real subrogation), namely assets acquired in replacement thereof (for example, securities acquired in replacement of other securities).
Prior to, or concurrently with, an action for recovery of the estate, an heir may apply for interim measures (art. 261 et seq. CPC ; and not the protective measures based on art. 551 et seq. CC (Federal Supreme Court judgment 5A_763/2012 of 18 March 2013, consid. 5) against the trustee, in particular an order prohibiting the disposal of assets. An advantage of such action is that it is subject to the exclusive jurisdiction of the courts of the deceased’s last domicile (art. 86 PILA).
Hotchpot
Where a validly constituted trust includes descendants of the deceased settlor among its beneficiaries, the rules governing hotchpot may apply.
General Principles Governing Hotchpot
Statutory hotchpot (art. 626 para. 2 CC) seeks to restore equality among descendants. It requires descendants to bring into account, within the estate, inter vivos gifts made by the deceased that constitute endowments. Statutory hotchpot presupposes the fulfilment of the following conditions:
(1) an inter vivos disposition. The classification of a disposition as inter vivos or mortis causa is governed by the law applicable to the succession (art. 4 of the Hague Convention on Trusts; art. 90 et seq. PILA). As a general rule, a disposition is inter vivos if it already affects the deceased’s assets during his or her lifetime. Conversely, it is mortis causa if intended to affect the estate of the deceased.
(2) the inter vivos disposition must constitute a gift, namely a transfer made without consideration and with donative intent (animus donandi); and
(3) the disposition must constitute an endowment, namely a disposition intended to establish, secure, or improve the descendant’s position in life. In this regard, only the intention of the deceased to confer an endowment character upon the gift is relevant. The jurisprudence of the Federal Supreme Court is, however, inconsistent on this point: luxury assets, as well as dispositions concerning objects or property intended for comfort or leisure, do not qualify as endowments. Thus, the endowment character was denied in relation to the gift of a motorboat intended for leisure purposes (ATF 76/1950 II 188 para. 8), as well as the gift of a precious stone valued at USD 500,000 intended to remain within the family estate (judgment 5A_512/2019 of 28 October 2019, para. 7.4);
(4) the deceased must not have exempted the beneficiary of the gift from hotchpot.
Statutory Hotchpot in the Context of a Trust
In the context of an inter vivos trust, the settlor transfers assets to the trustee, who is required to manage and apply them for a purpose previously defined by the settlor in favour of one or more beneficiaries. A trust may be revocable or irrevocable, depending on whether the settlor has reserved the right to revoke it and recover the assets transferred into trust. It may further be discretionary or fixed-interest: it is discretionary where the trustee has discretion as to the distributions to be made to the beneficiaries; it is fixed-interest where the beneficiaries have a vested right to such distributions.
The transfer of assets by the settlor to the trustee is not subject to hotchpot, as the trustee is neither a descendant nor an heir. By contrast, distributions made by the trustee to the beneficiaries, where they are also descendants of the deceased settlor, may, depending on the circumstances, be subject to the obligation to account in hotchpot, unless the deceased has exempted them therefrom.
Recent Federal Supreme Court Case Law
According to the jurisprudence of the Federal Supreme Court (ATF 151/2024 III 361), the assets of an irrevocable trust do not form part of the estate, irrespective of the tax treatment of the trust. The same applies to a revocable trust: upon the death of the settlor, it becomes irrevocable, since the settlor can obviously no longer revoke it.
The assets of a discretionary trust cannot be directly attributed to the beneficiaries, since they hold no vested right to receive distributions. They hold merely an expectancy in this respect. The mere fact of being designated as a beneficiary cannot be regarded as a gift subject to hotchpot. This conclusion is not undermined by the fact that, according to general life experience, the trustee will comply with the settlor’s original intentions. Statutory hotchpot in respect of assets held in trust pursuant to art. 626 para. 2 CC is therefore excluded.
Likewise, the designation of trust beneficiaries conferring upon them a vested right to the distribution of income and/or capital (fixed interest trust) is subject to hotchpot. In this regard, the Federal Supreme Court judgment provides no guidance as to the valuation of the amount subject to hotchpot. It may be conceivable to calculate such amount by capitalising future income.
By contrast, distributions made by the trustee to descendants during the settlor’s lifetime are in principle subject to hotchpot pursuant to art. 626 para. 2 CC.
This conclusion is consistent with the jurisprudence of the Federal Supreme Court, according to which gifts made through a legal entity of which the deceased was the sole shareholder are subject to hotchpot, provided that the other conditions of art. 626 para. 2 CC are met (judgment 5A_425/2020 of 15 December 2022). Accordingly, the same treatment applies to gifts received during the settlor’s lifetime, as well as to the designation of trust beneficiaries holding a vested right to the distribution of income and/or capital.
The aforementioned judgment ATF 151/2024 III 361 related not to a trust, but to a Liechtenstein fiduciary entity (Treuunternehmen). The Federal Supreme Court nevertheless held that, given the similarities between this institution and the trust, the legal principles developed for trusts could be transposed to the case at hand.
Reconciling Statutory Hotchpot with the Hague Convention on Trusts
The Federal Supreme Court did not apply the Hague Convention on Trusts, as the Treuunternehmen falls outside its scope, notwithstanding the characteristics common to both institutions.
In the context of a trust, the application of the rules on statutory hotchpot (art. 626 et seq. CC) to distributions made by a trust may come into conflict with the Hague Convention on Trusts, which requires Switzerland to recognise the effects of the trust.
Article 15 of the Convention does reserve the mandatory provisions of domestic law from which no derogation is permitted, in particular in matters of wills, devolution of estates, and especially reserved shares. However, the rules on hotchpot are default rules: the testator may unilaterally order or exclude hotchpot, and an heir may avoid it by disclaiming the inheritance. It could therefore be argued that the rules on statutory hotchpot do not carry the mandatory character required by article 15 of the Convention and are consequently excluded by the Convention.
The Modification of the Scale of Values
The Federal Supreme Court did not rule on whether the creation of a trust — in particular where it is established in favour of certain descendants — may be construed as expressing the deceased’s intention to derogate from the principle of equality, thereby excluding the rules on statutory hotchpot.
Where the deceased has made testamentary dispositions departing from the rules of intestate succession, it would be inappropriate to rely on succession rules from which the deceased deliberately intended to derogate. In such circumstances, there is no reason to supplement that intention, nor to seek to restore an equality among heirs that the testator manifestly never intended. This is referred to as a modification of the scale of values (ATF 124/1998 III 102, para. 5; judgment 5A_769/2023 of 9 April 2024, para. 4.1).
A modification of the scale of values excludes statutory hotchpot. In such circumstances, distributions made by the trust would not be subject to hotchpot, unless the deceased has explicitly ordered it.
The Intention to Give
Donative intent (animus donandi) is one of the conditions required for the application of statutory hotchpot. In the context of a discretionary trust, however, the settlor voluntarily relinquishes control over the assets upon the creation of the trust, without definitively determining their allocation. Accordingly, donative intent — or even an intention to maintain equality among heirs — should be considered absent.
The Action for Reduction
Assets held in the name of a fiduciary entity or a trust may be subject to reduction pursuant to art. 522 et seq. CC, as the protection of reserved shares under Swiss law is not defeated by the recognition of trusts (ATF 151/2024 III 361, para. 8, unpublished, judgment 5A_89/2024; see in particular art. 15, 16 and 18 of the Hague Convention on Trusts).
The Action for Reduction in General
Certain transfers of assets are added to the existing estate assets to the extent that they are subject to reduction (art. 475 CC). The amount of the reserved share — being one half of the statutory share (art. 471 CC) — is thus calculated on the distributable estate to which are added the transfers enumerated in art. 527 CC, namely:
(1) inter vivos gifts made by way of advancement of inheritance in the form of endowments where they are not subject to hotchpot (art. 527 no. 1 CC).
Art. 527 no. 1 CC refers to the transfers contemplated by art. 626 para. 2 CC, namely those not subject to hotchpot where (i) the beneficiary of the transfer does not succeed — by reason of prior death (art. 542 para. 1 CC), renunciation (art. 566 CC), unworthiness to inherit (art. 540 CC), or disinheritance (art. 477 CC) — and no hotchpot by representation applies (art. 627 CC), (ii) the beneficiary is a descendant who would otherwise be subject to statutory hotchpot but has been exempted therefrom by the deceased, or (iii) the beneficiary is an heir other than a descendant and the transfer constitutes an endowment;
(2) transfers made by way of early settlement of inheritance rights (art. 527 no. 2 CC). This covers the case where the deceased paid consideration to an heir in exchange for the latter’s renunciation of the succession by means of an onerous renunciation agreement (art. 495 CC). Such consideration is subject to reduction to the extent that it exceeds the reserved share of the renouncing heir (see art. 535 and 536 CC);
(3) transfers that the deceased was free to revoke, and those made within the five years preceding death, with the exception of customary gifts (art. 527 no. 3 CC);
(4) transfers made by the deceased with the manifest intention of circumventing the rules governing reserved shares (art. 527 no. 4 CC). This provision is applied restrictively; the intention to prejudice must be established with complete clarity (see ATF 140/2014 III 193, para. 2.2.1);
(5) finally, art. 82 CC provides that a foundation may be challenged, in the same manner as a gift, by the heirs or creditors of the founder. This provision merely reiterates the ground for reduction set out in art. 527 no. 3 CC (see ATF 90/1964 II 365, para. 3c).
The Action for Reduction in the Context of a Trust
A trust is a legal relationship whereby the settlor entrusts assets to one or more persons, the trustee, who is required to manage those assets and apply them for a purpose established in advance by the settlor (definition based on Federal Supreme Court judgment 5A_30/2020 of 6 May 2020, para. 3.1).
The trust relationship involves a separate fund (see art. 11 of the Hague Convention on Trusts) over which the trustee holds a “legal title” — which may be understood as a title of effective control independent of any right of ownership. The trustee must administer this separate fund exclusively in the interest of the beneficiaries and in accordance with the trust instrument (“equity compels the trustee to hold, manage and distribute… in strict accordance with the terms of the trust and the fiduciary duties imposed upon him”).
The trustee’s title of effective control over the separate fund is tempered by the personal and proprietary rights of the beneficiaries therein. The beneficiaries have, in particular, personal rights (in personam equitable rights) against the trustee to ensure compliance with the terms of the trust, but also proprietary rights in rem, namely tracing, through which they may seek restitution to the trust of assets improperly transferred by the trustee to a third party acting in bad faith and in which they hold an “equitable interest” (see art. 11 let. d of the Hague Convention on Trusts). Finally, the beneficiaries may in principle unanimously terminate the trust or vary its terms (Saunders v. Vautier, 1841).
The judgment ATF 151/2024 III 361 merely states that assets held in the name of a fiduciary entity or a trust may be subject to reduction pursuant to art. 522 et seq. CC, as the protection of reserved shares under Swiss law is not defeated by the recognition of trusts (see, in particular, art. 15, 16 and 18 of the Hague Convention on Trusts), and that there is no doubt that such transfers of assets are, in principle, subject to the action for reduction (unpublished para. 8 in judgment 5A_89/2024).
Potentially subject to reduction are (i) the transfer(s) from the settlor to the trustee and (ii) distributions made by the trustee to the beneficiaries.
The Trustee as Defendant
The transfer of assets by the settlor to the trustee during the settlor’s lifetime unquestionably constitutes an inter vivos transaction, such that a reduction of the settlor’s transfer to the trustee may be contemplated under the various grounds set out in art. 527 CC (see ACJC/663/2015 GE of 5 June 2015, para. 10.3, concerning a matrimonial clawback within the meaning of art. 208 CC).
Whether the trust is revocable, irrevocable, discretionary, or fixed-interest, the trustee does not have the status of an heir within the meaning of this provision. It follows that, pursuant to art. 527 no. 1 CC, the settlement into trust — more precisely, the transfer to the trustee — would not be subject to reduction.
The transfer by the settlor to the trustee in the context of a revocable trust appears to be subject to reduction under art. 527 no. 3 CC, on the ground that it constitutes a freely revocable gift (this scenario is moreover mentioned in the Federal Council’s message of 29 August 2018 on the revision of succession law, FF 5865, p. 5932).
The same applies to the transfer by the deceased settlor to the trustee of a trust — whether revocable or irrevocable — established within the five years preceding death (art. 527 no. 3 CC).
Finally, the creation of a trust by the settlor may have had no purpose other than to circumvent the rules governing reserved shares, in which case a reduction of the transfer from the settlor to the trustee pursuant to art. 527 no. 4 CC may be contemplated.
The Beneficiaries as Defendants
Regardless of the nature of the trust (revocable, irrevocable, discretionary, or fixed-interest), the amounts actually distributed to the beneficiaries are subject to reduction pursuant to art. 527 no. 1 CC. In accordance with the jurisprudence of the Federal Supreme Court (aforementioned judgment ATF 151/2024 III 361), the fact that the gift is made indirectly, through the trustee, does not affect its reducible nature.
Likewise, regardless of the nature of the trust, if the distribution was made within the five years preceding the death of the settlor, a reduction pursuant to art. 527 no. 3 CC may be contemplated.
Finally, regardless of the nature of the trust, if the trust was created with the manifest intention of avoiding the rules on reserved shares, distributions made to the beneficiaries may be subject to reduction pursuant to art. 527 no. 4 CC.
Assets held in a discretionary trust that have not yet been distributed to the beneficiaries are not subject to reduction in the hands of the beneficiaries, as they only have an expectancy to receive distributions rather than a vested right (see the aforementioned judgment ATF 151/2024 III 361 on hotchpot). Such assets should therefore be subject to reduction at the level of the trust itself.
Necessary Joinder of Parties
The action for reduction is a constitutive claim seeking the creation, modification, or dissolution of a specific right or legal relationship affecting multiple persons, thereby requiring the necessary joinder of all parties to the trust — including the trustee and the beneficiaries (ATF 140 III 598 para. 3.2, on necessary joinder arising from constitutive actions).
It follows that both the trustee and the beneficiaries must participate in the proceedings, namely by being joined as defendants in the action for reduction. This necessary joinder reflects the respective rights and prerogatives of the trustee (title of effective control) and the personal and proprietary rights of the beneficiaries. In this regard, it should be accepted that the trustee’s standing to be sued — as well as the grounds for reduction — must be inferred from the position of the trustee vis-à-vis the beneficiaries.
In practice, proceedings must therefore be brought against all parties to the trust.
Order of reductions
The reduction of inter vivos dispositions is carried out in reverse chronological order (art. 532 para. 2 no. 3 CC). Where several inter vivos dispositions were made simultaneously, they are reduced pro rata (art. 523 and 525 CC). The order of reduction is of particular significance, as the forced heir may obtain reductions only in proportion to his forced share with respect to all reductible dispositions. Should the forced heir fail to seek the reduction of a particular disposition, he shall be deemed to have waived that right; nevertheless, such disposition shall be imputed against his forced share.
Jurisdiction
The action for hotchpot, when combined with an action for partition of the estate, as well as the action for reduction, lies within the jurisdiction of the court of the succession forum, namely the court of the deceased’s last domicile (art. 86 para. 1 PILA).