This decision increases legal certainty and provides a better framework for trusts in Switzerland. It therefore consolidates the basis for more widespread use of trusts in Switzerland in the future.

1.    Facts

G.A. ("the deceased") passed away in 2013, leaving behind three children and three grandchildren (children of his predeceased daughter). The heirs initially reached an agreement, with the grandchildren assigning their inheritance shares to the deceased's children in exchange for compensation.
Later it was discovered that the deceased had established a Liechtenstein "trust" (actually a trust reg. i.e. an enterprise/Treuunternehmen), which at the time of his death held assets exceeding 1 million Swiss francs. While the deceased was the sole beneficiary of the trust during his lifetime, his two sons were designated as secondary beneficiaries after his passing. After the trust assets were added to the estate inventory, the grandchildren filed a lawsuit against the other heirs (the deceased's children) demanding a declaration that the trust assets form part of the deceased’s estate and requesting a redistribution of these assets accordingly (Nachteilung/répartition). 

Their claim was rejected at first, partially upheld on appeal, but ultimately dismissed.

2.    Supreme Court Ruling

Although the assets in question were part of a Liechtenstein trust reg. and thus an enterprise (and not exactly a trust within the meaning of the Hague Trust Convention), the Supreme Court applied trust principles by analogy. 

a)    Irrevocable Discretionary Trusts do not form Part of the Estate

The lower court had classified the trust as revocable, arguing that the deceased, despite his irrevocable renunciation, retained control over the trust assets. The respondents supported this assessment with tax-related arguments, claiming the trust assets had been inventoried and subsequently taxed as part of the deceased's taxable estate. This meant, in their view, that the trust assets belonged to the deceased for inheritance law purposes.

The Supreme Court, however, ruled that the assets had been removed from the deceased's estate due to his irrevocable renunciation of any rights to the trust and its assets. The Board of Trustees therefore had full discretion as to the nature, scope and payment modalities of the distributions. These factors justified classifying the trust as irrevocable and discretionary. The Supreme Court further emphasized that the trust's legal qualification under succession law may well differ from its tax treatment, ultimately ruling that – despite having been taxed – the trust assets did not form part of the estate.

b)    Beneficiary Designation as Inter Vivos Gift 

Contrary to the lower court's classification of the beneficiary designation as a disposition upon death (which would require compliance with certain formalities), the Supreme Court stressed that the crucial factor in determining whether the granting of a beneficiary status is a gift inter vivos or upon death was the timing of the legal transaction’s effectiveness – whether it takes effect during the deceased’s lifetime or only upon death. By drawing parallels to beneficiary clauses under insurance law, the Supreme Court concluded that the deceased had initiated the trust, funded it with his assets, and designated secondary beneficiaries for the event of his death, all during his lifetime. Therefore, the Supreme Court ruled that the granting of a beneficiary status to his two sons was an inter vivos gift, exempting it from the formal requirements which apply for dispositions mortis causae.

c)    Irrevocable Discretionary Trusts and Duty of Hotchpot

Finally, the Supreme Court addressed the question whether the two sons' beneficial rights in the trust were subject to a duty of hotchpot. Since the trust in question was considered an irrevocable discretionary trust, the Supreme Court concluded that granting of a beneficiary status alone did not trigger a duty of hotchpot under Article 626 of the Swiss Civil Code (ZGB). However, the Supreme Court confirmed that distributions made to beneficiaries/heirs during the settlor's lifetime are generally subject to hotchpot, as are beneficial rights in fixed interest trusts.

3.    Key Takeaways and Outlook

This groundbreaking decision provides much-needed clarity on how trust assets are treated in Swiss estates. While the case did not involve a trust as defined in the Hague Trust Convention, the principles of trust law were applied by analogy, setting an important precedent for future cases involving trusts.

The Supreme Court also reaffirmed its position that asset transfers to trusts are generally subject to clawback claims (Herabsetzung/réduction) in accordance with Article 522 of the Swiss Civil Code, though it did not delve further into the issue in this case. Consequently, it remains to be seen how the Supreme Court will approach clawback claims involving asset transfers to trusts in future decisions.