Federal Council tasked with developing a Swiss maintenance foundation

The adopted motion aims to ensure that in future Swiss family foundations in the form of maintenance foundations can also be used as an instrument for estate and asset planning alongside foreign trusts and foundations.

Thus, after decades of inactivity, a long overdue change of heart seems possible for the first time.

1. Why is this decision important?

If the law is amended, Switzerland would finally provide its population with a Swiss instrument which, depending on the final wording of the amendment, could compete with Liechtenstein foundations/Anstalt and foreign trusts in terms of flexibility of content and time. On the one hand, the Swiss business location would be strengthened internationally, and some assets would probably be attracted. On the other hand, and this is often ignored in this discussion, the maintenance foundation might not only serve very wealthy individuals well, but also enable every family with surplus assets to provide their descendants with a certain degree of intergenerational security in the sense of a democratisation of estate planning.

2. Clarification of terms and the core of the dispute on which direction to take

A maintenance foundation benefits family members without preconditions from the income and sometimes also from its assets. It therefore enables the family to enjoy an improved standard of living. Maintenance foundations are currently prohibited or null and void in Switzerland.

Only family foundations pursuant to Art. 335 of the Swiss Civil Code (“CC”) are permitted, i.e. foundations that do not support its beneficiaries unconditionally, but serve exclusively to cover the costs of raising, equipping, or supporting family members. The CC also mentions ‘similar purposes’ as being authorised. This term could easily include economic purposes in the sense of satisfying general family needs. In fact, the term was initially understood broadly, but since the Second World War the Federal Court has basically ignored it and limited the permitted purposes to special needs that can only arise in certain life situations (setting up one’s own household, in an emergency situation, etc.). The pivotal issue for the Federal Supreme Court was the unconditional payment of funds, which would enable a ‘demanding lifestyle’. Such ‘unrestricted economic security for family members for generations to come’ was apparently what the CC wanted to prevent. The question ‘why?’ has been asked for decades.

In a 2009 decision, the Federal Supreme Court itself provided its assessment of these historical grounds for prohibition and found that the maintenance foundation was “not intolerably contrary to morality and the prevailing sense of justice in Switzerland” and that the arguments put forward at the time were no longer relevant today (i.e. the ‘puritanical’ abhorrence of patrician idleness and the widespread restriction of descendants’ freedom of ownership and disposal under the Ancien Régime due to the “cold hand” determining the estate distribution for generations to come). Apart from a few exceptions, the feasibility of a maintenance foundation is also advocated in the literature. In other words, a reconsideration of the ban on maintenance foundations was long overdue. The main arguments in favour of the (re)introduction of maintenance foundations are listed below:

• Anti-family foundation law. Foundations with an economic purpose are currently authorised in Switzerland. Founders can donate money to a freely definable target group for any (cum grano salis) definable purpose, unless it is to sweeten the lifestyle of their own family. This restriction to the detriment of one’s own descendants seems absurd.

• Today’s family foundation is ignored. Due to the restrictive interpretation of the family foundation, some lawyers have already expressly recommended that their clients do not set up foundations in Switzerland. The family foundation instrument is simply ignored in practice.

• Family maintenance permitted as long as it is set up abroad. In Switzerland, it is readily accepted that people in Switzerland can achieve the frowned upon goal of a maintenance foundation (at least under civil law) by setting up foreign trusts or foundations. The fact that maintenance foundations are prohibited via a Swiss foundation, but the same result is permitted in the form of foreign structures, is not an ideal situation. Sometimes it is still argued in a puritanical sense that a maintenance foundation would promote or enable a real self-service mentality among the beneficiaries. However, this is precisely the system advocated by foreign legal structures that are already recognised today. It is not clear why a structure such as the trust, which is rather alien to our understanding of the law, should be permitted, while the possibilities of the foundation which we are very familiar with are artificially restricted.

• Maintenance foundation closes the gap in estate planning. The desire for estate planning that goes beyond what is currently possible in terms of time and content is considerable in practice and by no means only affects so-called (ultra) high net worth individuals. The latter sometimes switch to foreign legal structures. It is true that the actual succession of a family business can be organised within the framework of the current legal system. However, this does not serve all families without their own business and in any case continues to restrict planning with regard to non-business assets. In addition, many parents want to prevent their offspring from possibly acquiring large assets before they have reached a certain level of financial maturity. There are of course inheritance law measures that can be used to delay access to parental assets until a certain age is reached. However, this is no substitute for the options offered by trusts and foundations, such as annual, and therefore always limited, distributions. The continuing popularity of Liechtenstein Anstalt/foundations and the success of the trusts offered by numerous countries illustrate the great demand on the market for more flexible solutions than those offered by Swiss foundation law.

• International context. The international competition between financial centers, which also involves courting wealthy individuals, continues to intensify. This is all the more reason not to unnecessarily weaken ourselves internally, but an incentive to offer a competitive alternative with the structures that already exist in Switzerland. The outflow of assets and/or control abroad cannot be in Switzerland’s best interest.

• Democratization of estate planning. The middle classes would also like to provide their descendants with a welcome financial padding over several generations. Due to the costs involved in switching to foreign structures and their maintenance cost, this foreign solution is not accessible to most families in Switzerland. As mentioned above, the reorientation of the family foundation as a maintenance foundation must also be seen in the context of a democratization of succession planning.

• Surprising attitude of the Federal Council. The Federal Council’s argument in its statement on the motion that the adaptation of the family foundation can only be implemented as part of a comprehensive revision of foundation law is not readily comprehensible. Foundations with an economic purpose are already possible today. The objective pursued with the maintenance foundation (unconditional maintenance) is well known and not complex. It is regrettable that the Federal Council did choose not to pursue possible solutions more energetically.

• Misuse concerns are not convincing. There are no apparent disadvantages of a maintenance foundation. Today, Swiss family foundations are not subject to state supervision. In other words, actual compliance with the restrictive definition of purpose is only visible to the beneficiaries and the foundation board, whereby both could be described as “interested parties” without blushing unduly. In this respect, it is not clear in what way a maintenance foundation should be more susceptible to misuse than the current family foundation or foreign trusts/foundations, which are also not subject to the control of the local authorities.

3. Outlook

Hopefully, the adoption of the motion will set a process in motion that will culminate in a new family foundation law that not only permits maintenance foundations per se, but also loosens the very rigid corset of Swiss foundation law to the necessary extent in favor of maintenance foundations (e.g. obligation of the foundation board to ignore later wishes of the founder that are not directly covered by the original foundation documents). The new law should also allow those elements, to which certain foreign competing products sometimes owe their considerable success and be formulated so clearly that no “moral correction” by the courts is to be feared.