How Does a Trust Fund for Inheritance Work?

As interest grows in effective ways to manage inheritance in Italy, many families—especially those with aging parents—are exploring tools like the living trust. This form of trust fund helps secure and allocate family assets while individuals are still alive, offering a flexible alternative to traditional wills and the often complex process of probate in Italy.

This article breaks down how a living trust works, who it’s suitable for, and how it fits within the broader scope of Italian inheritance law and estate planning in Italy.

What Is a Living Trust?

A living trust, also known as a revocable trust, is an estate planning tool commonly used in Anglo-Saxon legal systems and recognized in Italy under the 1985 Hague Convention, made enforceable in 1992. It allows a person (the settlor) to manage and allocate their assets during their lifetime, with the assets being passed on to beneficiaries upon death without triggering a traditional succession process.

Key Parties Involved

1. Settlor – The individual who creates the trust and transfers assets into it.
2. Trustee – A person or company appointed to manage the trust according to the settlor’s instructions.
3. Beneficiaries – Those who will receive the assets after the settlor’s death, such as children or other heirs.

How It Works: Step-by-Step

• Establishment: The settlor creates a trust deed identifying the assets involved, the trustee, and the beneficiaries, as well as rules for managing and distributing the assets.
• Management: During the settlor’s lifetime, the trustee manages the assets. In a revocable trust, the settlor can amend or dissolve the trust.
• Succession: Upon the settlor’s death, the trustee distributes the assets based on the instructions, bypassing Italian probate proceedings.

Main Advantages

• Avoids the complexities and delays of probate in Italy.
• Allows for the customized distribution of assets.
• Helps in protecting heirs, such as minors or individuals with disabilities. ● Offers asset protection from potential creditor claims.
• Provides continuity in asset management during incapacity or illness.

Trusts Within the Framework of Italian Inheritance Law

Although Italian law does not explicitly provide for domestic trusts, a trust can still be valid in Italy if it is governed by foreign law, such as English trust law. These are recognized under international agreements and can serve similar functions as local legal structures.

However, Italian succession law enforces “legitimate shares,” which protect the rights of certain heirs—such as children—who must receive a minimum portion of the inheritance. These rules cannot be bypassed by establishing a trust.

Inheritance and Estate Taxes in Italy

The trust’s impact on taxation depends on the residence of the trustee, the location of the assets, and the method of transfer. Generally, inheritance tax in Italy is based on the value of the assets and the familial relationship between the settlor and the beneficiaries.

For instance:

• Inheritances between parents and children are taxed only on amounts exceeding €1 million per heir at a 4% rate.
• Larger exemptions apply when transferring assets to disabled individuals.

This is important when considering how Italian estate tax laws interact with trusts.

Real-Life Example: Mario and Lucia

Mario and Lucia, a retired couple with two adult children, Anna and Paolo, establish a revocable living trust to manage their estate. Their assets include two apartments, a €1 million securities portfolio, company shares, and bank accounts.

Key elements:

• Trust deed created with a notary, governed by English law.
• Trustee is a professional Italian fiduciary company.
• During their lifetime, they benefit from the income generated by the trust.
• Upon death, Anna receives assets structured to support her disabled child, while Paolo receives other parts of the estate.

This structure allows the couple to:

• Avoid potential family disputes.
• Ensure efficient succession.
• Provide specialized support for their grandchild.
• Avoid traditional inheritance proceedings in Italy.

Cautions and Legal Constraints

While trusts offer flexibility, they must comply with Italian inheritance rules, especially concerning legitimate shares. Additionally, careful tax planning is necessary to avoid unexpected burdens, particularly when assets exceed exemption thresholds or are being distributed among multiple heirs.

Conclusion

A living trust can be a powerful estate planning tool for managing inheritance in Italy, especially for families seeking to protect vulnerable beneficiaries, ensure smooth succession, and reduce legal and financial complications. For U.S. citizens inheriting property in Italy or for those inheriting property in Italy in general, understanding how foreign law trusts can be utilized is key to building an effective strategy.

However, setting up a trust requires:

• A notarial deed,
• Adherence to Italian succession law,
• Selection of a qualified trustee,
• And attention to the tax implications of cross-border estate planning.

For some, especially those interested in donation in Italy or selling inherited property in Italy, a trust might provide clarity, control, and long-term protection.

VGS Family Lawyers is a law firm that specializes in family law matters such as inheritance, separation and divorce, child custody, and more.

In case you need assistance, please write to: info@vgslawyers.com.