Using trusts for succession purposes

• The trust is currently the most modern tool for succession planning in Italy, including for the generational transfer of a company.

• Revenue Agency Circular 34/2022 confirms that the trust is extraordinarily advantageous from a tax point of view.

• When owning assets in several countries, it is important to assess the trust from the perspective of international successions.

For many years now, trusts have no longer been just a typical Anglo-Saxon instrument. For example, in Italy following the ratification of the Hague Convention in 1989, trusts can now be legally established for a wide variety of purposes, one of the most notable of which is estate planning. This kind of trust is called an ‘internal trust’ when its main elements are Italian.

In short, trusts involve the transfer of assets (or part of them) to a trustee who then administers the trust assets for the benefit of the beneficiaries, named by the settlor.  At some time in the trust’s lifetime, the trustees transfer these assets to other beneficiaries, or even to the beneficiaries themselves, within a certain time period.

In the light of the fact that many trusts are located in tax heavens, many people wrongly assume that trusts only affect individuals who hold large estates and believe that a trust is normally structured to defraud tax authorities, thus making them an anti-establishment form of wealth planning. On the contrary, nowadays trusts can benefit from an extraordinarily favourable taxation, made even more advantageous by the latest case law and tax administration guidance.

Fears around the economic consequences of what appears to be a dispossession of the assets, as well as concerns about trustees abusing their powers are equally ungrounded, given that the task of constructing and looking after the trust is entrusted to highly qualified professionals.

As a matter of fact, trust regulation is derived from a foreign law.  This is because, while Italy recognises trusts as legitimate structures, it does not have its own set of trust regulations.  This being said, Italian law does not allow foreign regulations to conflict with the pillars of the Italian legal system.  Where there is a conflict, the trust will either be deemed to be invalid in Italy, or it will fail to satisfy the recognised parameters stipulated by the Hague Convention.

It is therefore the role and challenge of trust specialists to disentangle governing law, international law and domestic law.  As regards to the latter, this has become increasingly important by the day: the growing collection of Italian case law on this matter allows a skilled legal expert to understand and predict which clauses of a trust – while valid under the chosen foreign governing law – are likely to be construed as invalid in a litigation case brought in Italy.

In the same vein, due to the inherent link between trusts and succession, a trust can also be established under a will. This is particularly useful for those who do not wish to change the manner in which their assets are held during their lifetime, but who wish to regulate closely what will happen to their assets when they die, as well as to adopt a solution that ensures that their assets are protected for their heirs.

In addition, trusts are an excellent solution for entrepreneurs who are looking to implement or plan the devolution of their business to the next generation in a coordinated manner.  Trusts allow entrepreneurs to choose which of their descendants will inherit their business while at the same time guaranteeing income for the other heirs. One of the reasons why only 14% of family businesses survives to the third generation is precisely because of the lack of such estate planning by the family member running the business at the time.

Although the elements of a domestic trust must be Italian, there are cases where foreign nationals have assets in Italy and want to put these into trust, or where Italian nationals may want to put certain foreign assets into trust. In these cases, these individuals must make sure that the trust constitution aligns with any eventual international elements of their wider inheritance planning.  If not, they risk some terms of the trust not being recognised in the State where their succession proceedings are brought.

In conclusion, trusts can be an ideal instrument for settling (either in whole or in part) an individual’s international estate with a view to optimising and making the most of the different opportunities offered by the country of citizenship, or residence or where he/she decides to invest.