In its Private Letter Ruling n. 355 of August 30, 2019 the Italian Tax Agency considered the tax implications, for Italian gift tax purposes, of a transaction involving the early termination of an irrevocable trust by way of mutual consent of the trustee, settlor and beneficiaries of the trust, with a return of the trust’s assets to the settlor.
The Tax Agency treated the termination of the trust as a gift of the trust’s assets to the settlor, which was subject to Italian gift tax.
The trust had been set up in Italy and was governed by the laws of Jersey. The trust had a term of thirty years, and the lineal descendants of the settlor were named as beneficiaries of the trust’s assets upon the expiration of the trust. The trust agreement provided that the beneficiaries were not allowed to early terminate the trust, without the consent of all other parties (namely, the settlor and trustee).
The relevant statutory provision of the governing law of the trust provides that “Without prejudice to the powers of the court under paragraph (4) and notwithstanding the terms of the trust, where all the beneficiaries are in existence and have been ascertained and none are interdicts or minors they may require the trustee to terminate the trust and distribute the trust property among them”.
Considering the limits and restraints to a unilateral anticipated termination of the trust by the beneficiaries of the trust as set forth in the trust agreement, the parties to the trust decided to early terminate the trust by way of mutual consent among all of the parties to the trust, namely the settlor, trustee and named beneficiaries, and return the trust’s assets to the settlor.
The taxpayer took the position that a transfer of assets to a trust is not a complete gift, until the assets are distributed to the beneficiaries, and, conversely, an anticipated termination of the trust, with a return of the assets to the settlor, before they are actually distributed to the beneficiaries, would just retore the parties into their initial positions and should have no effects for Italian gift tax purposes.
The tax agency disagreed and confirmed its position according to which a transfer of assets to an irrevocable trust for no consideration constitutes a final gift and is subject to gift tax, while no further tax is due at the time of the final transfer of the trust’s assets to the beneficiaries. As a result, according to the Tax Agency, an anticipated termination of the trust by way of mutual consent of settlor, trustee and beneficiaries, with the return of the trust’s assets to the settlor, costitute a “gift” of the trust’s assets to the settlor, which, in turn, triggers the gift tax.
The ruling is important, especially in a cross border context, whenever the parties to a non Italian trust with Italian assets decide to proceed with an anticipated termination of the trust, without being fully aware of the implications that the transaction may have in Italy. Similarly, in case of an Italian trust with foreign assets, the anticipated termination of the trust with a return of the assets to the settlor could trigger a gift tax in Italy, as well as in the foreign country in which the assets are located, in the event it follows the same approach as that pursued by the Italian tax agency. That would be, indeed, the exact result in the event on an early termination of an irrevocable trust holding assets in the United States.