Italy’s Cross Border Succession, Trust, and Estate Legal Tax Planning

If you move to Italy with a preexisting estate and trust plan in place as set up under your home country’s laws, an important issue you face is determining whether and how that plan is going to be recognized and treated and what its legal and tax ramifications are in Italy as your new country of residence. As an Italian resident and domiciliary, you will be subject to Italian inheritance and gift tax on your worldwide estate, and Italian law is the governing law of your inheritance. Italian law includes forced heirships rules which prevails over the disposition of a will and dictate the minimum share of your estate that is reserved to and must necessarily go to certain close family members upon tour death. The total estate on which the reserves shares are calculated includes all lifetime gifts, which include transfers of property to trusts treated as indirect gifts under Italian law. Only the remaining part of your estate can be freely disposed of under the will. By way of a properly drafted provision in the will, you can choose a foreign law as the law governing your inheritance, which would prevent the potential application of the Italian forced heirship rules, but the ability to choose a foreign governing  law of the inheritance can be limited or even prevented if you plan to do it after you have already settled down and established your closest connections and main interests in Italy.

On the income and inheritance tax side, Italy recognizes trusts established under foreign law in accordance with the Hague Convention on Trusts, of which it is a party, and operates its own domestic tax rules on trusts as enacted in 2006 and clarified over time by extensive administrative guidance issued in form of Circulars and Rulings by the Italian Tax Administration. The application of those rules to complex trust structures remains in general a daunting, yet exciting, challenge. Depending on the terms of the trust agreement, the tax ramifications of a trust in Italy may be dramatically different, from no taxation on the income of the trust and the distributions to the Italian beneficiaries, to full income taxation of the trust as a separate taxable entity or its the beneficiaries on a fiscally transparent basis and Italian gift taxation of the trust distributions to the Italian beneficiaries. Properly designed planning prior to the relocation or immigration into Italy may lead to one result as opposed to the other.

In these areas, we assist our clients with pre-immigration Italian succession and inheritance legal planning designed to make sure that the client’s succession plan is respected and carried out in Italy outside the scope of Italy’s succession law and forced heirship rules, and with sophisticated trust and estate tax planning designed to minimize the impact of Italian taxes on the income of the trust and distributions of trust income and principal to Italian beneficiaries.