An overview of the use of the foundations in estate and succession planning: current limitations and prospects for reform.
The Use of Foundations
A Swiss foundation is a private law entity established to permanently dedicate assets to a purpose defined by its founder. In this respect, it serves a similar function to that of a trust.
A foundation is a legal entity independent of its founder. Unlike a trust, it has legal personality in the same way as other legal entities. It belongs to itself, has neither members nor owners. The foundation holds the assets derived from its founder’s endowment. It is governed by a board of directors, which is responsible for managing those assets to achieve the purpose of the foundation. The beneficiaries, the scope of the benefits and the conditions thereof are set out in the foundation deed or in a separate set of regulations.
Foundations established under foreign law, particularly those incorporated under the law of Liechtenstein or in offshore jurisdictions, are regularly used for estate and wealth planning purposes.
Swiss foundations are widely used for charitable purposes. By contrast, their use for estate and wealth planning remains non-existent in Switzerland.
The Prohibition of Maintenance Foundations
Swiss foundations are rarely used for estate and wealth planning purposes. This is because Swiss law strictly limits family foundations to specific purposes, namely covering the costs of education, supporting family members in establishing themselves, or providing financial assistance, and similar purposes (art. 335 para. 2 of the Swiss Civil Code).
A family foundation is only permissible where its purpose is limited to addressing specific, concrete, and exceptional needs, such as meeting expenses arising from an accident or illness, funding education, or supporting personal projects.
Under current law, the Swiss Civil Code prohibits family entails, understood as the successive transfer of a dedicated pool of assets within a family. A direct consequence of this prohibition is the nullity of maintenance foundations – that is, foundations whose purpose is to grant their beneficiaries the enjoyment of the foundation’s assets and income. This prohibition was introduced to prevent the accumulation of inalienable property and to protect the foundation’s beneficiaries from a life of idleness.
In a 2009 landmark ruling, the Federal Supreme Court found that this prohibition was rooted in moral, indeed puritanical considerations that have since become outdated (ATF 135/2009 III 614 consid. 4.3.1).
These considerations led the Federal Supreme Court to conclude that the prohibition on family entails in Switzerland does not preclude the recognition in Switzerland of a maintenance foundation validly established abroad – in this case, a foundation incorporated under the law of Liechtenstein (application of mandatory provisions of Swiss law pursuant to art. 18 of the Federal Act on Private International Law).
Paradoxically, a Swiss resident may establish a maintenance foundation under Liechtenstein law – the validity and effects of which will be recognized in Switzerland – whereas it would be impossible for that same resident to establish such a foundation under Swiss law.
Prospects for reform
On 27 February 2024, the Swiss Parliament passed a motion seeking to lift the prohibition on maintenance foundations, in order to facilitate estate and wealth planning within families.
This motion would provide an alternative to a Swiss-law trust, whose introduction failed in 2023 owing to a lack of political consensus, most notably over the proposed tax treatment.
Trusts established under foreign law are nonetheless recognized in Switzerland pursuant to the Hague Convention on the Law Applicable to Trusts and on their Recognition. It is therefore possible to establish a trust under foreign law and to appoint a Swiss trustee. Since the entry into force of the Federal Act on Financial Institutions (FinIA) on 1 January 2020, the activity of trustee in Switzerland has been subject to prior authorization from the Swiss Financial Market Supervisory Authority (FINMA).