Case Study: A US Dynasty Trust Meeting a Swiss Bank

This is a fictional, anonymous case study. It is an illustration built to show how a bank in Switzerland may look at a US trust, not a record of a real client, a real bank or a real file. If you are searching for a case study of a US trust and a Swiss bank, the point to take away is simple: the bank is less interested in the label "dynasty trust" than in whether it can understand who stands behind the structure, where the money comes from and who is allowed to give instructions.

The situation in the example

Imagine a family whose founder built a business in the United States and later retired. Years ago, on the advice of US counsel, the founder created a dynasty trust under South Dakota law. A professional trustee based in that state administers it. The founder is the settlor, the children and grandchildren are discretionary beneficiaries, and a family friend serves as protector with a power to replace the trustee.

The trust has so far held its portfolio with a US custodian. The family now wants part of the portfolio held in Geneva, partly because some beneficiaries live in Europe and partly because they want a second banking relationship in a different legal system. The trustee agrees to approach a Swiss bank. Nothing about the trust is being moved: its governing law, its trustee and its seat of administration stay where they are. Only a banking relationship is being added.

This is a narrower question than choosing or changing a seat, which other pages of this site cover. Here the question is how a bank receives a trust that already exists. For the wider picture of how banking differs from one seat to another, see banking and custody for trust assets by seat.

Step one: does Switzerland recognise the trust?

A Swiss bank compliance team does not need a Swiss trust law to deal with a foreign trust. Switzerland signed the Hague Convention of 1 July 1985 on the law applicable to trusts and on their recognition on 3 April 2007 and ratified it on 26 April 2007. It entered into force for Switzerland on 1 July 2007. The Federal Office of Justice confirms that foreign trusts have been recognised in Switzerland since that date.

For the bank, the useful part is Article 2, which describes what a trust is: assets placed under the control of a trustee for the benefit of a beneficiary or for a specific purpose, forming a separate fund, with title in the trustee's name and a duty to manage and account. Powers reserved by the settlor, or the fact that the trustee is also a beneficiary, do not by themselves prevent the arrangement from being a trust. That matters here because South Dakota trusts often keep an active role for the settlor or a protector. A longer explanation is in the Hague Trusts Convention explained.

Under Article 11, a trust validly created under its applicable law is recognised as a trust. At a minimum, that means the trust assets are kept apart from the trustee's personal estate and the trustee can sue and be sued in that capacity.

Step two: the onboarding flow

The diagram below shows the order in which a typical onboarding conversation unfolds in this example. Real banks differ; the sequence is an illustration.

The account is opened in the name of the trustee acting as trustee of the trust, because under the structure of Article 2 title sits with the trustee. The bank therefore contracts with the trustee, but its checks reach through to the settlor, the protector and the beneficiaries.

Step three: what the bank asks for

In the example, the relationship manager sends a document request that looks familiar to anyone who has dealt with Swiss anti-money-laundering rules (AMLA, or LBA in French and GwG in German). The list typically covers:

• the trust deed and any amendments;
• the identity of the settlor, trustee, protector and each identifiable beneficiary;
• a description of how the trust was funded and the origin of the wealth;
• the trustee's own licensing or regulatory status in its home state;
• the tax status of the trust and the tax residence of the parties, including the documentation the bank needs for automatic exchange of information (AEOI, also called CRS) or for its US reporting duties.

Discretionary beneficiaries can create friction. A class of "descendants of the settlor" is not a list of names, so the bank will ask the trustee for the current persons who are likely to benefit, or at least for a clear description of the class, and for a commitment to update it. A letter of wishes is not binding, but a bank often reads it to understand the family's intentions; see letters of wishes and their legal weight across seats.

Step four: the questions the bank examines

Three questions come up repeatedly in this kind of file.

Who really instructs the account?

Only the trustee can sign, but a protector with power to remove the trustee, or a settlor with reserved powers, may in practice influence the trustee. The bank wants to know this and wants the instructions it receives to come from the trustee acting on its own judgment. How far reserved powers are respected depends on the governing law, and the position in South Dakota differs from that elsewhere. See protector and reserved powers law by jurisdiction.

Which law governs, and does it matter to the bank?

Under Articles 6 and 7, a trust is governed by the law the settlor chose, expressly or by implication. Failing a valid choice, the law with the closest connection applies, looking at the place of administration, the location of the assets, the trustee's residence and the purposes of the trust. If the chosen law does not know the institution of the trust, the choice has no effect and Article 7 applies. South Dakota is a trust-friendly law, so this is not in doubt in the example. The bank still notes that the governing law and the seat of administration are different questions; the distinction is covered in governing law versus seat of administration.

Is anything about the structure unusual?

Article 13 allows a state to decline to recognise a trust whose significant elements are connected essentially with states that do not have the institution of the trust. That is not the case here, since the trustee and the governing law are in a state with trust law. Article 15 also leaves the mandatory rules of the forum untouched, for example those protecting creditors, minors, spouses and forced heirs. A Swiss bank that holds assets for a trust is aware that a Swiss court might apply such rules if a dispute reached Switzerland. The family's situation, including where the beneficiaries live, decides how much that matters.

What this case does not show

The example avoids several things on purpose:

• It does not say that a bank will always accept a US trust. Each institution has its own risk appetite, and a bank may decline a structure it considers too complex or too opaque, even where the trust is lawful and recognised.
• It does not say how long onboarding takes, because that depends on the bank and on how complete the file is.
• It does not address the US or Swiss tax position of the family. That depends on the residence and citizenship of each person and calls for individual advice. For the US-specific constraints on a settlor, see US person settlor: seat choice constraints.
• It does not compare the Swiss and the US trust regimes in detail. For that, see Switzerland versus Delaware, South Dakota and Nevada trusts.

Privacy is a related point. Opening an account does not put the trust on any public list, but the bank holds the information and may have to disclose it to authorities under the rules that apply. Trust registers and privacy sets out what is disclosed where. For the broader strengths and limits of the country as a place to bank and administer trusts, read Switzerland as a trust seat.