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Different
types of trusts
There are many different types of trusts which can be used for various
planning purposes but they are almost all unwritten by two basic
concepts. This is that they are either revocable or
irrevocable.
An irrevocable trust is simply a trust with terms and
provisions that cannot be changed by the person who set it up (the
settlor.) This is distinguishable from a revocable trust,
which is commonly used in estate planning and allows the 'settlor'
to change the terms of the trust and/or take the property/assets
back at any time in the form of income payments or lump sum
withdrawals.
This concept of irrevocable and revocable trusts are the defining factors
in the tax treatment of trusts in Italy and why, if you inherit a trust or
you set one up before moving to Italy, then it is worthwhile checking to
determine which type it is.
In general, the irrevocable trust (the one which CANNOT be modified
by the settlor), in Italy, is respected for income tax purposes. The
trust is deemed to be the owner of the asset (not the person) and
there is a legally defined separation between the person who set it up (
the settlor) and the beneficiaries of the monies from it. i.e. the
person who set it up can't take money and income out at will and change the
terms of the trust as and when they please. This is important in the
tax treatment which I will explain below.
Conversely, the revocable trust is ignored for tax purposes and the
'settlor' is treated as the owner of the assets and any income from the
trust, as if they still held them in their own name. The person who
holds the trust is also responsible for disclosing the assets in it to the
Agenzia delle Entrate each year, as if they owned them directly. Clearly
this is not very tax effective in Italy.
Tax treatment
The irrevocable trust is certainly the most tax
efficient of the two types of trust and the easiest one to declare in
Italy. The tax treatment is very simple in reality because the trust
itself is not taxed, although it must be declared on the Quadro RW each
year under the 'monitoraggio' section (and your % share in the
trust). Any income distributed from the trust is treated as the
income of the individual in the tax year in which it is distributed and
taxed at your highest level of income tax. (Capital Gains and non-earned
income tax of 26% do not apply to this type of financial structure.)
The revocable trust, by comparison, is another beast
altogether. This type of trust is generally looked through and the
assets in it are deemed to be in the ownership of the individual directly (the
settlor.) In other words, any assumed tax protection by placing
assets in trusts is removed because the trust itself can be altered. The
Italian authorities have a number of provisions, which if written into the
trust deed, could destroy the existence of the trust. These
include:
* The 'settlors' power to terminate the trust, causing a payment back
to the settlor or the beneficiaries;
* The power of the settlor to name themselves as a beneficiary;
* Provisions which subject the trustee to consent or approval of the
settlor i.e. effective control of the trust by the person who set it
up;
* The settlors powers' to terminate the trust early;
* The provision granting a beneficiary a right to a payment from the
trust;
* The provision requiring the trustee to take instructions from the
settlor for the purpose of administering the trust assets;
* The option to change beneficiaries;
* The settlors powers to distribute or lend income or assets
from the trust to persons designated by the settlor;
* Any other provision, determined by the settlor or beneficiary, which
appears to limit the administration and distribution powers of the
trustee.
Assuming one of these provisions is written into the trust deed, then
the protection of the trust invalidates the tax protection afforded by the
trust and the assets will be subject to same rules as those assets which
are held outside a trust.
Direct tax on assets in Italy is 26% capital gains tax and 26% on any
income distributions/dividends or interest payments derived from assets, in
the year in which they were realised. In addition, a tax of 0.2% on
the assets themselves as a wealth tax. The tax protection afforded
effectively flies out of the window.
What are the alternatives?
For ultra-wealthy individuals and companies there are always work rounds to
these issues and with enough money you can pretty much construct anything
these days to avoid taxes. However, this does not necessarily help the
average person who would also like some tax protection for hard earned
income and assets that you may wish to pass onto future generations.
The Investment Bond (Polizza Assicurativa Capitalizzazione) is a possible
solution. It meets a number of similar criteria such as:
* No Italian income and capital gains tax on the fund itself;
* Distributions are taxed at 26% on the proportional gain of the
withdrawal (in some respects this is better than the irrevocable trust in
which distributions are taxed at your highest rate of income tax);
* The option to name beneficiaries in the event of your death;
* Continuation options in the event of death;
* The possibility of regular withdrawals and/or lump sum withdrawals
and
* A global range of investment options;
* Lastly, the investment Bond itself is fully reported to the Italian
authorities and any taxes paid at source so you don't have the worry of
having to submit the information each year yourself or making
mistakes.
Summary
The lesson to be learned from this is, that before you do anything, if you
have a trust, are a beneficiary of a trust, have set up a trust yourself or
had one set up for you, then the first thing you need to do is get a copy
of the trust deed and look at your relationship / level of
involvement in the trust to determine exactly how it fits into your
tax affairs as a resident in Italy. If in doubt, consult a
professional.
I am going to elaborate on this subject of trusts in my next Ezine,
specifically in relation to UK private pensions and US IRA's and retirement
funds. These vehicles themselves are set up as trusts and therefore
have a specific tax treatment in Italy.
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