With the ongoing consolidation of the trust industry driven by private equity firms, wealth owners often ask which criteria should they select their trustee. There is added complexity as standard products and services don't live up to customized solutions' requirements in most cases.
We have a home bias, but Switzerland offers individualized trustee services in the world's largest cross-border wealth management ecosystem.
Today, we speak with Marc Blumenfeld, a Zurich-based trust and financial regulation advisor, about Swiss trustees, private trust companies, their regulatory framework and how wealth owners can find their ideal trust services provider.
Thanks, Marc, for taking the time to have a chat with Centro LAW. What is your field of expertise, and why should wealth owners work with Swiss trustees?
Since 2008 I've worked with private clients and as the general counsel of one of the largest Swiss trust companies. In 2018 I founded a Swiss compliance service provider specializing in trust and non-profit matters. We advise and train trust companies, financial institutions, and non-profits on Swiss regulatory compliance.
Switzerland has been a leading fiduciary services center for more than 100 years, which developed mainly in the wake of Switzerland's rise as a top private banking hub.
Switzerland fully collaborates in international tax transparency, and the banking secrecy, as it was historically known, had been abolished years ago. Nevertheless, Switzerland remains a top-tier jurisdiction for trustee services, corporate services, and fiduciary services.
In my view, one of the main reasons is that Switzerland is not a tax haven, even if recently the US President made a statement to the contrary. Switzerland is an onshore country with a modern tax system and has been abiding by the OECD principles for many years. Numerous tax treaties are in place, often for decades.
Furthermore, Switzerland offers political and financial stability, high sensitivity to privacy, a well-educated workforce accustomed to providing cross-border services in many different languages, and a highly developed legal system.
In recent years, this combination fuelled a new trend for wealthy families to set up their own single family offices and private trust companies in Switzerland.
The trustee services sector is diverse, with providers ranging from single practitioners operating domestically to large bank-owned trust companies with a global footprint. The industry is increasingly professionalized.
In addition to the Swiss branches of STEP (Society of Trust and Estate Practitioners), Swiss trust companies are now organized in the Swiss Association of Trust Companies (SATC). Both organizations became much more visible in recent years, and the trustee industry successfully emancipates itself from banking.
For example, alongside the Swiss banking association, the two organizations are now regularly part of the political and legislative debate in trust matters.
Switzerland is a civil law jurisdiction, and trusts are usually governed by common law. How does this affect the setup and administration of trusts?
As mentioned above, the rule of law is enforced in Switzerland through a sophisticated legal system accustomed to deal with international cases. Since 2007, the Hague Treaty on the Recognition of Trusts is in force in Switzerland, offering additional legal certainty for Swiss professional trustees and their clients.
The Swiss tax treatment of trusts is determined by a specific circular of the Swiss tax federation, and there is a considerable body of case law that has developed for more than a century.
In effect, this framework allows trusts to be governed by foreign law and the legal consequences adjudicated by Swiss courts based on the respective foreign law. Swiss trustees either have in-house foreign law experts or maintain a network of foreign lawyers to assist them and their clients on foreign trust law.
Because of these particular issues regarding international private law, a Swiss trustee's client should pay close attention to the trust's governing law and jurisdiction clauses.
Furthermore, any potentially conflicting provision of the engagement letter, terms, conditions, or similar contractual agreement with the Swiss trustee should be carefully analyzed.
At Centro LAW, we believe that financial regulation is an essential factor to protect wealth owners when working with financial intermediaries. How are trustees regulated in Switzerland?
In the past, trustees were subject to Swiss Anti-Money Laundering regulation only. Since January 1, 2020, professional trustees are subject to prudential supervision and require a license from FINMA, the Swiss Financial Market Supervisory Authority.
Swiss trustees are now regulated similarly to professional trustees in jurisdictions like Liechtenstein, the Channel Islands, Singapore, Hong Kong, and the Caribbean. SATC and STEP were welcoming this additional regulation.
The financial market regulation pursues two primary purposes: consumer protection and protection of the Swiss financial market.
In my view, the new regulation will be beneficial for both the clients and the Swiss trustees. Due to the stricter regulation, the sector is becoming more professional overall.
Trustees who have been in the industry for many years may have to re-invent themselves to a certain degree. For example, it may be advisable to reconsider the business model. It may be beneficial to separate the trustee and corporate services more clearly from the portfolio management and investment advisory services.
Also, I expect that some service providers will focus on what they know best and procure ancillary services for their clients from a third party.
What is interesting for family offices, which often operate in the blurred area between trustee services, portfolio management, and investment advisory, is that the law offers a "family ties" exemption.
Single family offices and private trust companies will usually be within the ambit of these statutory exemptions.
There is a continually growing interest in private trust companies. What's your view on them?
At first glance, it's most compelling to operate your own trust company. As mentioned above, the regulation allows for private trust companies' exemption from supervision.
However, I would expect some private trust companies not to use such exceptions because they want to be organized in a professional "state-of-the-art" manner.
In my view, the viability of a private trust company needs to be carefully assessed for each specific case. As an alternative, it may make sense to combine a professional trustee with a single family office, supervising the trustee, for example, as a protector.
The family office, in addition, could control investment managers or banks regarding their performance or assume investment management responsibilities itself.
Suppose a family opts for a private trust company. In that case, it is advisable to appoint sufficiently qualified and experienced persons to the board and make sure that there are adequately qualified resources available for the discharge of the daily tasks of the private trust company.
Like a Swiss family office, a Swiss private trust company requires economic substance, offering exciting tax planning opportunities.
Another critical topic to take care of is the various regulatory obligations. This includes, in particular, Swiss Anti Money Laundering duties and tax reporting.
However, Swiss regulation allows for specific tasks to be outsourced, and there is a choice of several specialized service providers.
In short, setting up a private trust company is probably the easiest part. The challenge is to run it in a way beneficial to the family, manage the particular risks coming with this setup, safely navigate the various regulatory duties, and allow the governance and framework to develop and adjust to constant change.
In general, what advice do you have for wealth owners when selecting their trustees?
Trust is an essential element when choosing your trustee. However, there is a well-known saying: trust is good, but control is better.
If you consider setting up a trust or replacing the existing trustee, you may want to look at it as a procurement case. For you, it is probably a very personal decision as you are entrusting a significant portion of your family wealth to a third party.
But for the trustee, it is business, and it should be. Irrespective of the personal nature of the relationship, you are still procuring trustee services. Thus, take a professional approach and perform extensive due diligence on the trustee, potentially supported by independent advisors.
It should, among other things, clarify the ownership structure, solidity and reputation, regulatory and compliance track record. As well as potential conflicts of interest, operational standards, staff experience and fluctuation, and finally, pricing. The intention is for a long-term relationship and, therefore, worth the effort.
Prior to engaging a specific trustee, you should have all trust and service provision documentation reviewed by an experienced independent advisor and make sure you establish sound trust governance, including adequate reporting parameters.
A protector, naturally, may play a key element in supervision. However, supervisory functions may also be required at the level of companies held by the trustee.
The trustee should provide regular accounts and reports to the beneficiaries or the protector. Robust governance enables them to act timely and, if needed, replace the trustee before any damage is inflicted on the trust fund.
About Marc Blumenfeld
Marc is the founder and managing director of a Swiss compliance, regulatory and legal services provider specialized in the trust and corporate industry. He is a Swiss attorney with over ten years of experience in wealth planning, trustee, and corporate services working for law firms and independent and bank-owned trustees. Marc holds a law degree from the University of Zurich, an LL.M. from the National University of Singapore, and a STEP Diploma in International Trust Management. As a board member and in-house counsel of different organizations, he has extensive experience in the non-profit and sports sectors.