New Italian tax dispositions on trusts

Abstract

As part of a huge tax reform project carried out by the Italian government over the past years, a new Legislative Decree (No. 139/2024) was issued in October 2024 by the Italian legislator to provide a rationalization of Registration Tax, Inheritance and Gift Tax, Stamp duty, and other indirect taxes, excluding Value Added Tax. In particular, new dispositions on indirect taxation of trusts have been introduced, which will have relevant impacts on tax planning and estate planning for individuals. In light of this, new considerations regarding existing and new trusts deserve to be addressed.

A PREMISE ON PREVIOUS INDIRECT TAXATION ON TRUSTS

Before getting into the deep of what Legislative Decree No. 139/2024¹ has brought to the Italian tax system in terms of new regulations, it is worth representing a general overview of the previous indirect taxation on trusts.

The fact is that there have been many discussions between the Italian Supreme Court and the Italian Tax Authority on finding the correct taxable moment when dealing with trusts and with the application of Inheritance and Gift Tax.

On one side, the taxable moment was identified as the point at which there is an effective and stable transfer² of wealth to the beneficiaries, meaning that Inheritance and Gift Tax has to be levied at the time of the final distribution of capital to the beneficiaries.

In fact, the many case laws (more than one hundred³) issued by the Italian Supreme Court during the past few years have argued that a suitable manifestation of the capability to pay taxes, as per Article 53⁴ of the Italian Constitution, cannot be recognized when the trust assets are placed in trust by the settlor, but only when the trust assets are distributed to the beneficiaries.

So, only at the time of asset distribution, there would be—considering the immediate impoverishment of the settlor at the time of the setting-up of the trust—the prerequisite for the application of the Inheritance and Gift Tax.

On the other side,⁵ the taxable moment was identified as the moment in which the settlor places his assets and rights into the trust, regardless of the characteristics of the trust itself.

In light of this interpretation, the setting-up itself determines the emergence of the taxable condition, regardless of the actual enrichment of the beneficiaries (if any).

As a consequence, the Italian Revenue Agency was inclined to consider the subsequent devolution of the trust assets to the beneficiaries as irrelevant from a tax point of view.

After years of discussions and contentious in Italian courts around this matter, Circular Letter No. 34/E/2022 issued in October 2022 by the Italian Tax Authority, finally aligned its interpretation with the Italian Supreme Court’s case law.

With this document, the Italian Revenue Agency—by providing numerous clarifications on direct and indirect taxes—finally disavowed its previous orientation on the application of Inheritance and Gift Tax in relation to transfers made through trusts, identifying as relevant—for the purposes of the occurrence of the taxable event—the moment in which the actual transfer of wealth occurs through a stable and effective attribution of the assets and rights transferred to the trust in favor of the beneficiary.

In particular, it was generally confirmed that placing assets into trusts represents a non-taxable event for Inheritance and Gift Tax purposes and that Inheritance and Gift Tax is applied only upon the enrichment of the beneficiary, which occurs either upon the distribution of the capital to the beneficiaries or, even earlier, in case of beneficiaries acquiring a vested interest over the trust’s assets.

But it is notable to highlight that the mentioned enrichment must be real and effective, not merely potential.

In fact, the deed through which the settlor (or a third subject) places his assets and rights into the trust is not an expression of the effective transfer of assets to the beneficiaries.

This is why only the fixed Registration Tax,⁶ pursuant to Article 11 of the Tariff, Part One, annexed to Presidential Decree No. 131/1986, applies to that deed (if it is made in the form of a public deed or in the form of a notarized private contract).

Also, as per the clarifications in Circular Letter No. 34/E/2022, Inheritance and Gift Tax is applied only with reference to distributions of capital.

In fact, distributions of trust income⁷ are not subject to Inheritance and Gift Tax because that income has already been taxed on trust.

Within this interpretative framework, it is worth highlighting that Circular Letter No. 34/E/2022 points out that, although the stable attribution to the beneficiaries of the trust fund normally occurs when the trustee distributes assets to them, there are some cases in which the beneficiaries (‘unequivocally identified or identifiable’) can claim full and enforceable rights over the trust assets from the moment the settlor transfers his assets into the trust.

These are the cases in which the beneficiaries are able to request and also demand from the trustee the transfer of what they are entitled to based on the provisions of the trust deed.

In light of this interpretation, the general rule is in the sense that the Inheritance and Gift Tax must be applied at the moment of asset distribution to beneficiaries, but there are some special cases in which the relevant moment for tax purposes is still identified at the moment of the transfer of assets from the settlor to the trustee.

Also, Circular Letter No. 34/E/2022 clarifies that what is relevant for territoriality rules is the residence of the settlor and the place where assets are located at the time of the settlement of the trust.

Under this rule, if the settlor was not resident in Italy at the time of settlement and if he did not place any Italian-based assets into the trust, no Inheritance and Gift Tax should be due on trust distributions, even if, upon distribution, the settlor had relocated to Italy and the distributed assets were to include to Italian-based assets.

So, if Inheritance and Gift Tax is due, different proportional rates (ranging from 4% to 8%) and tax allowances (up to EUR 1,500,000) apply, depending on the degree of family relationship existing between the settlor and the beneficiaries at the time of distribution to the beneficiaries.

Also, Circular Letter No. 34/E/2022 clarifies situations related to existing trusts, specifying that if the Inheritance and Gift Tax had already been paid upon the addition of assets, no other Inheritance and Gift Tax must be paid at the moment of the final distribution to the beneficiaries, provided that the transferred assets and the beneficiaries have not changed.

Otherwise, Inheritance and Gift Tax paid upon the addition would be offset against any higher Inheritance and Gift Tax liability arising from the final distribution.

As an alternative, the taxpayer may claim a refund of the Inheritance and Gift Tax unduly paid on trust additions.

So, it should be noted that, since Circular Letter No. 34/E/2022 was also related to direct taxes and other indirect taxes, after its issuance, there have been some discussions regarding the correct application of its dispositions.

THE REFORM ON TRUSTS INTRODUCED BY LEGISLATIVE DECREE NO. 139/2024

First of all, it is notable to underline that Legislative Decree No. 139/2024, issued on 2 October 2024, is part of a huge tax reform project that has been carried out by the Italian government over the past year.

The aim is to simplify the Italian tax system, reduce the tax burden on individuals and businesses, stimulate investments and new hiring, and promote a more cooperative, dialogue-oriented relationship between taxpayers and the Italian Tax Authorities.

Considering those objectives, Legislative Decree No. 139/2024 includes provisions for the rationalization of Registration Tax, Inheritance and Gift Tax, Stamp duty and other indirect taxes, excluding Value Added Tax (VAT).

The fact is that the new provisions were partially anticipated in a previous draft, approved by the Italian Government in April 2024,⁸ and have already been the object of discussions, especially among trust and estate practitioners for what concerns, such as trusts and generational transfer matter.

In particular, trust matters cover a wide range of provisions and have finally found their legislative source in tax law, which is now Legislative Decree No. 346/1990, also known as the ‘Consolidated Law on Inheritance and Gift Tax’.

This represents a very important place of arrival and an official acknowledgement of the role of the trust in the Italian legal system.⁹

Having clarified so, the new provisions have been welcomed with both enthusiasm and some doubts.

In the following paragraphs, the main issue will be to describe and analyze those provisions so as to identify their real impacts on the trust industry.

Taxable event

Article No. 1 of Legislative Decree No. 346/1990 now provides dispositions on the taxable event.

In particular, it says that Inheritance and Gift Tax is applied to transfers of assets and rights by inheritance upon death, by gift or free of charge, including transfers resulting from trusts and other destination restrictions.

The newly introduced Article No. 2-bis provides a law disposition on territoriality rules for trusts.

So, when dealing with trust, Inheritance and Gift Tax is due in respect of all assets and rights transferred to the beneficiaries (in line with the principle of worldwide taxation) if the settlor is resident in Italy at the time of the ‘separation of assets’.

The fact that the trustee is not resident in Italy, that the beneficiaries are not resident in Italy, or that the assets and rights are not located in Italy has no relevance.¹⁰

With this, the legislator intends to attribute relevance, for the purpose of identifying the assets and rights subject to Inheritance and Gift Tax, to the moment in which the settlor places assets and rights into the trust, regardless of the moment in which the effective taxable event occurs, which coincides with the transfer of the trust fund (both assets and rights) to the beneficiaries.

Differently, if the settlor is not resident in Italy at the time of the ‘separation of assets’, Inheritance and Gift Tax is due limited to the assets and rights existing in Italy that are transferred to the beneficiaries.

As a consequence, the legislator has consciously forgotten to dispose with reference to special cases.

For example, it is believed that an important and expressed clarification could have been made with reference to the situation in which the settlor transfers his residency after the transfer of assets and rights into the trust, but before the transfer of assets and rights to the beneficiaries.

So, the relevant residence that should be considered is the one at the moment of the transfer of assets and rights from the settlor to the trustee.

So, with regard to the taxable moment, the newly introduced Article No. 4-bis provides that Inheritance and Gift Tax must be applied at the moment of the transfer of assets and rights to beneficiaries, regardless of any assessment as to whether the beneficiaries have (or do not have) full and enforceable rights in relation to the trust fund prior to the final transfer thereof.

The rates and the tax allowances will be calculated and applied taking into account the family relationships between the settlor and the beneficiaries at the time of the distributions to the beneficiaries.

At the moment, rates and allowances for Inheritance and Gift Tax are as follows: 4% for transfers made to spouses or relatives in the direct line (of ascendants and descendants) to be applied on the total net value exceeding a share of EUR 1 million for each beneficiary; 6% for transfers to brothers or sisters to be applied on the total net value exceeding EUR 100,000 for each beneficiary; 6% for transfers to other relatives to the fourth degree or relatives-in-law up to the third degree to be applied to the total net value transferred, without application of any allowance; 8% for transfers to all other persons to be applied to the total net value transferred, without application of any allowance.

An additional allowance of EUR 1.5 million is provided for transfers to people with a disability recognized as severe according to the provisions given by Italian Law No. 104/1992.¹¹

For the sake of completeness, it is also worth mentioning that Italy still has a favorable regime in terms of Inheritance and Gift Tax compared to other European Union countries.

As provided, rates are low, and tax allowances are high.

No increase in rates and no reduction in tax allowances is expected in the near future.

Also, if assets and rights are placed into the trust by a third party (rather than the settlor), even if Legislative Decree No. 139/2024 does not provide a disposition on this case, it is reasonable to assume that the rates and tax allowances for the application of Inheritance and Gift Tax must be determined taking into account family relationships between that third party and the beneficiaries at the time of the distributions to the beneficiaries.

Therefore, in those cases, the family relationships between the settlor and the beneficiaries at the time of the distributions to the beneficiaries should not be considered.

The option for the application in advance of Inheritance and Gift Tax

What is really new and unexpected in Legislative Decree No. 139/2024 is that the settlor, or in the case of a ‘testamentary trust’,¹² the trustee, may opt to pay the tax either at the time of each act of disposition of the assets and rights or at the time of the opening of the succession (e.g. at the time of the disposition of the trust property).

The value of the assets on which Gift Tax should be calculated is the one at the time of each act of disposition of the assets and rights or at the time of the opening of the estate and also the rates and the tax allowances will be applied on the basis of the family relationships between the settlor and the beneficiaries at the time of each act of disposition of the assets and rights or at the time of the opening of the estate.

If the ‘category of beneficiary’ cannot be identified at the time of the transfer or at the opening of the succession, taxation is calculated by applying the highest rate (at the moment 8%), without the application of the tax allowances.

That (rare) case might occur when the trust deed gives to the settlor, to the trustee or to a third party the choice to identify the beneficiaries, even when they are not identified as a ‘category’ in the trust deed when the settlor places his assets and rights into the trust.

However, it can be quite complex to opt for the advance payment when there are trusts in which the beneficiaries can be modified by the settlor during the life of the trust.

Also, the relevant fact is that the legislator did not take the occasion to underline what ‘category of beneficiary’ means.

Especially bearing in mind that in the draft approved by the Italian Government in April 2024, the legislator used a different term.

So, in the previous draft, the reference was to the situation in which the ‘beneficiaries were not identified’.

Anyway, as a consequence of exercising the option for the advance payment described, future transfers of assets and rights to the beneficiaries will not be subject to taxation, and taxes paid by the settlor or trustee will not be refunded if there will be (for any reason) no transfer of those assets to the beneficiaries.

This lack of refund is necessary ‘to avoid interpretative uncertainties as to the effects of the advance payment’ and the tax paid ‘must be considered paid outright’.

In order to give an example, it should be considered the case of a trust that terminates because there is no trust fund left.

It is clear that, since there is nothing left to distribute to the beneficiaries, there would be no increase (and so no enrichment) in their assets at the end of the trust.

Thus, if the settlor (or the trustee) opted for the advance payment of taxes, any attempt to recover those taxes would be in vain.

Similarly, in the event of the existence of additional beneficiaries belonging to a certain category, with respect to those existing when the settlor transferred his assets and rights into the trust (in respect of which the total amount of the applicable exemption had been determined), it will not be possible to re-determine the ‘total’ exemption and claim a refund of any excess tax paid.

Also, it should be noted that the legislator recognizes¹³ the possibility to opt for this advance taxation mechanism for existing trusts as well.

The choice is on settlors (if still alive) and on trustees (in case of testamentary trust).

For the purposes of calculating the tax due, it should then be necessary to take into account the Inheritance and Gift Tax already paid by the settlor or by the trustee when the settlor endows his assets and rights into the trust (according to previous Italian Revenue Agency’s opinion on the correct taxable event).

Considering that Circular Letter No. 34/E/2022 recognized the possibility of ‘considering the taxes already paid at the time of the transfer into the trust as a reduction from any tax due at the time of the future distribution to beneficiaries’, this sort of atypical tax credit would appear to be entirely compatible with the application of the new advance payment regime.

In this regard, the legislator strongly invites the Italian Tax Authority to issue a document as soon as possible specifying how to opt for this tax solution.

Anyway, if the settlor or the trustee (in the case of a testamentary trust) opts for the advance payment taxes, there is a subsequent need to give separate evidence—within the trust’s accounts—of the contributions that have already been taxed from those for which it will be applied the general rule of ‘payment at the distribution of assets and rights to beneficiaries’.

As a consequence, the trustee must prepare adequate documentation with evidence of the tax treatment applied to each transfer of assets and rights.

The aim is to be able to subsequently apply the correct tax treatment at the moment of the distribution of assets and rights to the beneficiaries.

Another issue that is worth analyzing is the situation in which the trust fund changes during the life of the trust due to the trustee’s management of assets.

For example, a property put in trust by the settlor can be sold by the trustee, if he owns this power, and then the trustee can use the money deriving from the sale to make new financial investments.

Also, the value of the property put into the trust by the settlor might be changed, both in terms of an increase in price or in a decrease, at the time of the transfer of those assets to the beneficiaries.

Although Legislative Decree No. 139/2024 is silent on these cases and does not provide a wide range of options but only a general rule, it is reasonable to consider that those changes in the assets and rights within the trust fund cannot be relevant in terms of application of the new taxation.

In fact, it should be considered as there is the complete extinction of the tax liability with the choice expressed by the settlor or by the trustee (in the case of a testamentary trust) to make advance payment of the Gift Tax.

Also, if the marriage between the settlor and one of the beneficiaries ends after the transfer of assets and rights into the trust by the settlor, and the advance payment took into account the marriage relationship between the two, no relevance should be given to this change when the assets and rights will be distributed to that beneficiary.

In fact, if the settlor decides to proceed with the advance payment of Gift Tax, he assumes both risks and benefits of that choice if things change after that decision.

It would not be fair to ask for more taxes if the situation changes after the decision made by the settlor or the trustee (in the case of a testamentary trust).

In light of the above, it is clear that new choices of tax planning will be required by the settlor or the trustee.

The role of the trustee

As known, the trustee has many powers and duties.

The Italian legislator has decided to give him more.

In fact, Legislative Decree No. 139/2024 provides that the trustee may opt to pay Gift Tax in advance on the contribution of assets and rights already placed into the trust by the settlor, without waiting for the transfer of assets and rights to the beneficiaries.

With this, the trustee is clearly entitled to decide on the tax planning strategy with regard to the trust and to evaluate, on the basis of the type of trust he is dealing with, the best option in the exclusive interest of the beneficiaries (if the trust has beneficiaries) or, more in general, the best decision considering the trust’s purpose.

This is one of the reasons why it is advisable that new trust deeds include provisions on the matter so that the trustee could act with plenty of power.

Also, with regard to other powers and duties expressly given to trustees, something has to be said in relation to filing and sending of the declaration of estate to the Italian Revenue Agency.

This consists in a fulfillment requested by law¹⁴ after an individual’s death: the heirs, or other specific subjects, must submit the declaration of estate within 12 months from the date of opening of the succession, which generally coincides with the taxpayer’s date of death.

The legislator¹⁵ also includes trustees (in the case of ‘testamentary trust’) among those obliged to submit it.

Furthermore, the 12-month deadline within which the declaration of estate must be submitted applies for trustees from the date, subsequent to the date of the settlor’s death, on which they received legal notice of their appointment.

However, it might be useful to reflect on a case in which the trustee dies before filing and submitting the declaration of estate, with a new trustee subsequently being appointed.

First of all, in this case, it would be advisable for the individual (or entity) appointed as trustee to evaluate all the elements before accepting the office of trustee.

Then, it is reasonable to assume that the 12-month deadline remains the same as indicated for the previous trustee.

In light of what is described, it is evident that the trustee plays a relevant role in decisions related to tax planning and in relation to fulfillment required by law.

This leads to a general and wider consideration that underlines the importance of appointing as a trustee a subject (an individual or an entity) with specific knowledge in the field, both in trust laws and in domestic laws.

As represented, considering that dispositions of law might change it is important that the trustee is always prepared and aware of how to deal with new changes.

Other indirect taxes on trust

If the trust fund consists of properties (or rights on them), Mortgage and Cadastral Taxes must be applied pursuant to Legislative Decree No. 347/1990,¹⁶ both when they are put into the trust by the settlor (or by a third party) and when those properties (or rights) are transferred to the beneficiaries.

As per Circular Letter No. 34/E/2022, no proportional Mortgage and Cadastral Taxes (only fixed one) must be applied when properties are placed into the trust or at the time of any replacement of the trustee.

In fact, they must be applied when there is the ‘actual transfer of those properties or rights’ to the beneficiaries.

On the other hand, fixed Mortgage and Cadastral Taxes must be applied in those cases in which the trust fund is transferred back to the settlor following the beneficiary’s relinquishment of his position.

It should be also noted that trust deeds formed out of Italy, as well as deeds related to the disposal of assets formed outside of Italy, must be registered with a fixed rate if the beneficiaries are residents in Italy.

Also, in accordance with the territoriality criteria, the registration is mandatory if assets and rights are located both inside and outside of Italy if the settlor is resident in Italy, while the registration is mandatory only if assets and rights are located in Italy if the settlor is not resident in Italy.

CASE STUDIES

Trusts in which no inheritance and gift tax is due

In light of the purpose of this article, it is also worth mentioning cases in which no Inheritance and Gift Tax is due.

With this, the reference is to trusts in which neither the settlor nor the trustee produces any gratuitous enrichment to the trust beneficiaries.

For example, there are trusts in which, after their set-ups, the assets and rights in the trust fund might be transferred back to the settlor himself.

There are several reasons why such a case may occur: the first one is a situation in which the trust can be revoked by the settlor (when admissible) or another is a situation in which the trust can be terminated by the trustee before its final term due to the absence of beneficiaries (so-called ‘resulting trusts’).

Also, there is no enrichment if the settlor appoints himself as beneficiary (exclusively or jointly with others) or when the trustee decides to exercise his power of resettlement (if given) without transferring assets to the beneficiaries.¹⁷

So, in those cases, no enrichment and no effective transfer of wealth are realized to trust beneficiaries, and as an inevitable consequence, no Inheritance and Gift Tax is due, even if Legislative Decree No. 139/2024 does not provide any specific disposition on this matter.

Also, the trust can be used as an instrument to secure a certain debt situation.

A debtor (who will coincide with the settlor of the trust) may—on its own initiative—transfer a certain portion of its assets into the trust.

As a result, the trustee will manage the assets and the debt position in the event of the settlor’s failure to fulfill its obligation, to guarantee the satisfaction of the settlor’s creditors.

Both in the case in which the trust has the settlor’s creditors as beneficiaries and in the case in which there is a purpose trust (and so there are no beneficiaries), there is no intent from the settlor to produce any gratuitous enrichment for the beneficiaries but only to oblige to a legal fulfillment.

So, in those cases, no Inheritance and Gift Tax is due when the assets are transferred into the trust, nor when the assets are subsequently transferred to the settlor’s creditors.

Existing trusts

If, on one hand, new trusts will be set up considering new dispositions and effects, the existing ones need to be re-evaluated by the trustee.

In particular, the existing trusts in which no Inheritance and Gift Tax has been paid when the settlor transferred his assets and rights into the trust might find a good opportunity with the new regulation.

In those cases, the choice will be on the settlor (if still alive) or on the trustee (if the trust can be defined as a ‘testamentary’ one).

But before taking this decision, it is important to consider the trust structure, how the beneficiaries’ position is built, how the trust fund is composed and how the trust is qualified by the Italian Revenue Agency from a tax point of view.

In this regard, trusts can be qualified as ‘transparent trusts’, for example, trusts with ‘identified’ beneficiaries who are entitled to receive the trust’s income.

‘Identified’ income beneficiaries are defined as specific persons or a class of persons who, under the terms of the trust agreement, have the right to receive distributions of income from the trust.

In such a case, the trust income is directly attributed to the beneficiaries on an accrual basis, regardless of its effective distribution to the trust beneficiaries.

But trusts can also be qualified as ‘opaque trusts’, for example, trusts where beneficiaries are not identified and have no right to claim the trust’s income (e.g. pure discretionary trusts).

In such a case, the trust income is subject to taxation in the hands of the trust, which is treated as a separate taxable entity, and it can be distributed to trust beneficiaries with no additional income tax on those distributions.

So, as a consequence, if there is an ‘opaque trust’, it would be advisable to compare the tax advantages if advance payment is applied on assets and rights already transferred into the trust by the settlor, and as a consequence, if the trust then becomes a ‘transparent trust’.

So the considerations should be based on the type of income the trust produces and on the tax rates and tax allowances available for trust beneficiaries for Inheritance and Gift Tax.

The tax calculations are useful to see which are the pros and cons of opting or not for the advance payment of Gift Tax.

With those reflections, the aim is to point out that, before taking any decision, the suggestion is to take care of all the aspects that characterize each specific case.

CONCLUSIONS

In light of all the considerations described in this article, Legislative Decree No. 139/2024 has to be appreciated because it has finally provided many clarifications on the indirect taxation of trusts, which will help and guide the next tax and estate planning.

On the other hand, as underlined in the previous paragraphs, some clarifications from the Italian legislator or the Italian Tax Authority are highly expected soon to better apply some dispositions on trusts.

In the meantime, trustees and taxpayers should be aware of the new changes and effects.

Author Biographies

Stefano Loconte is the founder and managing partner of Loconte&Partners, and a lawyer specializing in Trust Law, Corporate Law, Commercial Law, Tax Law, International Law and Business Contracts. He is also Professor of International and European Tax Law, Trust Law and Islamic Finance at the University LUM—Giuseppe Degennaro University in Bari, Italy, and the Chair of STEP, Italy. Email: [email protected]

Beatrice Molteni is a lawyer and a senior associate of the global wealth management team of Loconte&Partners. She specializes in estate and tax planning for private clients seeking asset protection, both for Italian and international clients. Also, she assists clients wishing to transfer their residency to Italy and is an affiliate member of STEP, Italy. Email: [email protected]

Footnotes