A family trust is a type of trust used in estate planning. It combines a living trust with a revocable trust. A family trust is established by the creation of a trust deed by which the trustor transfers assets to a trustee who manages the assets and distributes trust benefits to one or more trust beneficiaries in accordance with the terms and conditions laid out in the trust deed.
The beneficiary of a family trust is normally a member of the trustor’s family. As a living trust, a family trust is created while the trustor is still alive. Because the trust is revocable, the trustor may change the beneficiaries and the terms and conditions of the trust if they so choose. They may also close the trust and regain ownership of their assets, allowing for flexibility and enabling them to open a new trust with different trustees if circumstances change.
Family trusts are primarily used for wealth protection, and are typically designed to benefit the trustor. By placing assets in a family trust, the trustor reduces their personal wealth in exchange for benefits paid out during their lifetime to a member of their household or – in some jurisdictions – even to themselves.
This type of trust is beneficial, for example, in jurisdictions which do not allow seizure of assets held in a trust by creditors. In this arrangement, individuals looking to protect their assets from confiscation by creditors because ownership of assets is transferred to a trustee and the assets are no longer the trustor’s property. The trustor still benefits from the assets because a member of their family or themselves receive benefits from the trustee as laid out in the trust deed.
In some jurisdictions, placing money in a trust also brings tax advantages in that it reduces the personal wealth of a taxpayer. By designating family members with low personal wealth as trust beneficiaries, wealthy individuals can distribute wealth between family members and thus avoid being placed in a high wealth tax bracket. In Switzerland, assets held in revocable trusts count towards the trustor’s personal wealth. Only assets held in irrevocable trusts count towards the trust beneficiary’s personal wealth. This largely nullifies the wealth tax benefits of revocable trusts for trustor’s residing in Switzerland.
Family trusts may also be used to reduce inheritance taxes or gift taxes levied when assets are transferred from an individual to their spouse, children or grandchildren. A family trust may also form part of a for retirement plan. In this use case, a trustor places a large amount of assets in a trust in order to convert a lump-sum into a steady income stream paid out during their retirement.
Family trusts as defined by common law are not compatible with Swiss civil law, and therefore are not currently created under Swiss law although foreign trusts created under common law are widely managed in Switzerland.
However, family trusts perform a similar function to that of Swiss permanent life insurance policies with living benefits and Swiss life annuities. In the case of insurance policies like permanent life insurance and life annuities, ownership of assets is transferred to an insurance provider in exchange for predefined benefits paid out to the insurance beneficiary. The role of the insurance company, in this case, is very similar to the role of a trustee, with the role of a policyholder being similar to that of a trustor and the role of an insurance beneficiary being similar to that of a trust beneficiary.
Both Swiss permanent life insurance policies and Swiss life annuities allow for the option of the policyholder and the insurance beneficiary being the same individual. In the case of Swiss permanent life insurance, tax privileges may apply when assets are invested in a pillar 3a insurance policy. This is possible if the insurance beneficiary is a member of the policyholder’s immediate family. It is worth noting, however, that permanent life insurance policies typically have high administrative fees.