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By Luigi Galante, Founder of Elite Office SA and the “Elite Fondations” occupational benefit institutions
The revised succession law which came into force on 1 January 2023 gives people greater freedom to dispose of their assets after their death. Up to one half of these assets can be left to persons who are not in the circle of legal heirs. Occupational benefits, which are not affected by this revision, offer even more flexibility in terms of estate planning. There is a basic principle to bear in mind: pension assets from occupational benefits disbursed as lump-sum capital are not included in the calculation base of the estate. In other words, the pension capital received by entitled parties and/or heirs (hereafter, beneficiaries) does not have to be shared with other compulsory or legal heirs. This rule alone confers a nearly unique advantage on occupational benefits in the context of estate planning. The circumstances associated with a member’s death are regulated differently from one occupational benefits institution to the next however, and certain institutions are more conservative than others.
We shall start this analysis by considering the significance of the regulatory provisions of a pension plan defining the beneficiary clause. Next we shall consider the possibilities this clause offers for favouring the surviving spouse or registered partner (hereafter, the spouse), underage children (under 18), or children under 25 still in training (hereafter, orphans), adult children (over 18 or in training), parents, siblings and other legal heirs, or a life partner. Then we shall consider voluntary contributions (hereafter, purchases of contribution years) made during marriage and their impact on the different matrimonial property regimes in the event of divorce. Lastly, we shall consider how lump-sum capital benefits are taxed.
The Federal Act on Occupational Retirement, Survivors’ and Disability Pension Plans and its implementing ordinances establish a framework for death benefits in favour of beneficiaries. However, the pension regulations of each occupational benefits institution define the exact scope of the benefits to be paid. To understand your rights, you must read the beneficiary clause carefully. Its provisions determine who the beneficiaries are, and their order of priority in a ladder sequence where the first catergory of beneficiaries excludes the next. The beneficiary clause determines if this order can be changed (and if so, how), the type of benefit payable (lump sum or pension), and the entitlement of each beneficiary.
Membership of more than one occupational benefits institution is becoming increasingly common. In which case, one needs to consider each set of regulations since all of them apply. It must be underscored that the beneficiaries of occupational benefits cannot be designated by a will or a contract of succession.
If you intend to favour your spouse by leaving them a lump-sum death benefit, a restrictive beneficiary clause could be a hindrance. Quite a few occupational benefits institutions only allow payment of one spouse’s pension (the surviving spouse must be responsible for child maintenance, or be older than 45 and the marriage must have lasted at least five years). If the pension is calculated based on the deceased’s salary, neither the savings contributions nor any purchases of additional contribution years will serve to improve the surviving spouse’s pension.
Hardly any institutions offer a choice between a pension and the accrued capital at death. Most only pay the portion of accrued capital that exceeds the spouse’s capitalised pension. The less restrictive institutions add the purchased contribution years to the accrued capital. And lastly, the most generous institutions allow the spouse’s pension to be cumulated with the accrued capital at death. Equally generous, but extremely rare are those that allow the spouse’s pension to be disbursed as lump-sum capital (actuarial calculation based on the spouse’s life expectancy) in addition to the accrued capital.
In the case of pension fund regulations which allow lump-sum capital to be paid to the spouse in lieu of a pension, or take into account the purchases in determining the pension paid to the surviving spouse, an effective way to favour the spouse would be to make substantial purchases of contribution years in an occupational benefits institution. This avoids the spouse having to share these amounts with other heirs. By way of reminder: purchases of contribution years are deductible from the member’s taxable income.
Another advantage of occupational benefits is that, compared with private insurance, higher sums can be insured at a markedly lower cost.
It is important here to distinguish between orphans and adult children. As a rule, occupational benefit institutions do not grant benefits to adult children. If that is the case, and if you wish to favour the latter, it makes no sense to grow your second pillar. Fortunately, other institutions offer the possibility of treating adult children and orphans on an equal footing, or even of giving the former preferential treatment over the latter. This is only possible if the occupational benefits institution offers flexible beneficiary clauses and the member files the relevant application in writing during his lifetime. Failing which, as a rule, the spouse and orphans will be the sole beneficiaries.
By way of example: a self-employed person with his own business who wishes to favour his adult son who works with him can substantially grow his pension assets. To do so, he will need to modify the beneficiary clause and allocate the entire lump-sum death capital to his son. This approach is very interesting for the son, who inherits the business at his father’s death and can thus ensure its continuity, but especially for the member himself, because his purchases of contribution years are tax-deductible.
Occupational benefits institutions that allow members to favour their adult children and exclude their spouse and orphans (see above) also allow members to favour siblings and parents in equal or unequal shares, by analogy. In most cases, these choices are only possible if members file a written request during their lifetime. Otherwise, the spouse and orphans are often the sole beneficiaries by default.
For example, an employee who wishes to favour her brother and father could substantially increase her pension assets. To do so, she will need to modify the beneficiary clause and allocate the entire lump-sum death benefit to them in equal shares. This strategy has considerable advantages for her father and brother at her death, but it also has advantages for her as a member since all the sums invested for the purchase of contribution years are tax-deductible.
Failing all the above beneficiaries, the legal heirs remain. Certain occupational benefit institutions even allow members to designate the legal heir of their choice – an aunt or a grandchild, for example – during their lifetime. Only a portion of the lump-sum death benefit is payable to them, the rest vests with the institution.
Life partnerships, with or without children, are increasingly common. When a life partner is placed on an equal footing with the spouse in the order of beneficiaries (first position), the partner will inherit the entire lump-sum death benefit provided the life partnership was uninterrupted and had lasted at least five years at the member’s death, or if the couple has at least one child. In that case, no other beneficiary can be designated. It is a fact that life partners are much better protected than spouses, orphans or adult children (see above). This is a curious situation considering that, under the Swiss Civil Code, life partners are not recognised any rights, in particular in the matter of inheritance. If the regulations stipulate that the beneficiary life partner must be designated in writing during the member's lifetime and the occupational benefits institution is not notified of the partnership before the member’s death, no lump-sum death benefits will be paid to the life partner.
If the pension regulations place the life partner in third position in the order of beneficiaries (after the spouse and the orphans), the orphans could be fully favoured to the partner’s detriment. If there are no orphans, the life partner is the one and only beneficiary. This is a significant advantage favouring the life partner provided that, if the regulations so require, the partner was designated as such by the member during the member’s lifetime.
Under the participation regime, in the event of divorce, if the purchases of contribution years were financed from the acquests (property acquired during marriage), they will be divided between the parties in equal shares. If the purchases were financed from the member’s own property, the member is entitled to all the contribution years purchased.
Under the community of property regime, whether the purchases of contribution years were financed by joint property or separate property, the division will be fifty-fifty in favour of each spouse.
Under the separation of property regime, all purchases of contribution years go to the spouse who financed them. However, contrary to what one might expect, if the purchases were financed by income assimilated to acquests under the matrimonial participation regime (e.g. income from employment), the division will be fifty-fifty in favour of each spouse.
In the event of the member’s death, it does not matter which estate (separate property or common property) financed the purchases of contribution years, only the regulatory beneficiary clause, as possibly modified by the member, is applicable.
All lump-sum capital deriving from occupational benefits in favour of one or more beneficiaries is taxed at one fifth of the rate set by direct federal tax and by the cantonal and municipal tax scales. For example, a lump-sum death benefit of CHF 3 million paid to a beneficiary in the Canton of Vaud will be taxed at approximately CHF 270,000, regardless of the degree of kinship between the member and the beneficiary. If the same amount were paid by way of inheritance, the tax would amount to approximately CHF 1,500,000 for a life partner and CHF 750,000 for siblings.
There can be no in-depth estate planning without a comprehensive review of the applicable pension regulations. This cannot be limited to a simple perusal of the beneficiary clause, it must take into account all and any discretionary leeway granted to the member by the clause, as well as the formal terms and conditions set out therein. As explained above, it is possible to significantly favour one beneficiary over another, including to the detriment of the compulsory heirs or a life partner. The purpose is not to encourage members to use their occupational benefits to disfavour their heirs, but to exploit the available legal tools in order to favour certain beneficiaries. At the same time, substantial tax savings can be achieved, both by the member (during their lifetime) and by the beneficiaries (at the member's death). It is important to plan ahead knowing that such plans may be modified to allow for changes and developments in a member’s assets and relationships.