In its ruling no. 267, dated March 27, 2023 (Risposta-n.-267_2023.pdf), the Italian Tax Agency addressed a case involving a trust where the Settlor reserved the power to revoke and replace the Guardian and retained certain powers related to the shares of a company he transferred to the trust, including the power to appoint the majority of the company’s directors and the company’s auditors. The Guardian, in turn, held significant powers to advise the trustee, direct some of the trustee’s decisions regarding the administration of the trust, and the power to amend and terminate the trust. In a 2015 ruling, the Tax Agency determined that such a trust would be considered interposed and disregarded for all tax purposes.
In Italy, a trust is considered interposed when the Settlor directly or indirectly maintains a sufficient level of control over the administration and enjoyment of the trust’s principal and income, resulting in the Settlor still being treated as the owner of the trust’s principal and income for both income and inheritance tax purposes. The taxpayer modified the trust and submitted a new ruling request.
With the amendments to the trust agreement, the Settlor relinquished his power to change or add new beneficiaries, issue recommendations to the trustee, and vote for the election of the company’s directors and auditors. The amended trust agreement also mandates the consent of a beneficiary (or the majority of the beneficiaries in case of disagreement among them) for the Settlor’s decision to revoke and replace the Guardian. The Settlor designated his descendants as the sole beneficiaries of the trust. Notably, the power to replace the Guardian did not necessitate that the Settlor appoint a new Guardian who is independent of and not subservient to the Settlor.
In ruling no. 267, the Tax Agency determined that the amended trust should still be considered interposed and consequently disregarded for all tax purposes. According to the Tax Agency, a trust where the trustee acts upon the direction of the Guardian, and the Settlor possesses the unconditional and unlimited power to replace the Guardian, subject only to the consent of a beneficiary, remains under the substantial, albeit indirect, control of the Settlor. As a result, the trust assets are part of the Settlor’s estate and subject to inheritance tax, and the income generated from the trust property is directly taxed to the Settlor.
In light of this ruling, taxpayers should reevaluate their trust planning structures and ensure that the combination of provisions governing the powers of trustees, trust advisors, trust protectors, guardians, and other individuals or entities involved in the administration of the trust, distribution of trust principal and income, and changes to or termination of the trust, are appropriately drafted and coordinated to avoid the risk of the Settlor ultimately being considered the dominus of the trust, causing the trust to fail in achieving its objectives.