ZURICH, June 1 (Reuters) - Trust firms offering rich people a way to pay less tax are springing up in Switzerland, making business easier for wealth managers, but raising fears the unregulated sector might cause reputational problems.
A change in Swiss law that will facilitate the use of trusts has led to a surge in the number of such entities, which own assets -- anything from equity, art collections, real estate or even race horses -- on behalf of others.
“An awful lot of people are moving in, saying they’re going to be a trustee and that’s it,” said Stephanie Jarrett, a partner at law firm Baker & McKenzie in Geneva.
“When you bear in mind that the trustee is the legal owner of the assets, this could be quite worrying,” she said.
Trusts are an important way to lower the tax burden for wealth managers who say their clients want to legally avoid taxes rather than simply hide their money away.
In a trust, the so-called settlor or grantor transfers the ownership of an asset to the trustee, who holds the assets and distributes income or capital to the beneficiaries, for instance the settlor’s family members.
In some cases, that could mean children do not have to pay taxes when inheriting assets from their parents, because the ownership remains within the trust.
Wealthy individuals and companies use trusts either created by specialised firms, or by their banks. Typically, millions of dollars worth of assets are involved.
Pressured by its powerful banks, Switzerland has signed the Hague Convention which now enables its courts to use foreign law to resolve disputes over trusts, an Anglo-Saxon construct largely unknown in continental European law. This has made the setting up of trusts in Switzerland more attractive.
“It certainly serves the interest of the financial industry in the first place, though not exclusively. The authorities were also in favour,” said Thomas Mayer at the Swiss justice ministry, who helped create the change in rules.
Swiss-based trustees have to obey strict anti-money laundering rules, Mayer said, but no watchdog is protecting their clients. Nobody knows how many trust creation firms there are, although estimates run into the hundreds.
“If you want to be the centre of the private banking world, you’ll need to be setting high standards,” said Baker & McKenzie’s Jarrett.
Singapore, a rising competitor to Switzerland’s financial industry, and offshore financial centres like Jersey, Guernsey, the Bahamas and Bermuda already have trust regulators, Jarrett said, outstripping Switzerland.
But apart from worries on regulation, banks and some of the better-established trust companies welcomed the changes brought about by the ratification of the Hague Convention.
"Tax and inheritance planning certainly are more important than they were 40 years ago. Our wealth management advice includes those two fields," said Guy Simonius at Swiss private bank Julius Baer BAER.VX.
Children from one wealthy family living in different countries with various tax systems are a typical example of clients that may want to set up a trust, usually in a low-tax offshore country, to lower inheritance tax. “How do you manage that? And in that case trusts are very interesting, because in large parts of the world they are very attractive from a tax point of view,” said Simonius.
A crackdown from finance watchdogs is making it harder to deploy undeclared cash and a new generation of financially savvy clients, who often are entrepreneurs, is asking its banks to minimise taxes without breaking the law.
“In the old days it was just ‘give me the money, put it in a suitcase. We’re the trustee, we won’t tell anyone about it.’ But that’s not tax-planning, because it’s breaching a lot of rules,” a senior executive at a Zurich-based trust firm said.
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