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CivilGiada RussoGiovanni GigliottiSilvia BiscegliaSuccessions and Generational ChangePrivate (clients) eye: trusts and inheritance rights. The risk of a trust being ‘reduced’ to protect the settlor’s heirs

ABSTRACT: Succession planning through trans-national acts must keep an eye on possible infringements of the heirs’ rights according to their respective national law. In the Italian legal system, for example, a trust may affect the heirs’ reserved share giving rise to unexpected lawsuit.

 

The trust in the Italian legal system

According to the Convention on the law applicable to trusts and on their recognition concluded on July, 1st, 1985 in the Hague (the ‘Convention of Hague’), the term ‘trust’ refers to the legal relationships created – inter vivos or on death – by a person, the settlor, when assets have been placed under the control of a trustee for the benefit of a beneficiary or for a specified purpose.

In the Italian legal system, no national law regulates trusts. However, Italy has signed and ratified the Convention of Hague, thus recognising the validity of trusts. Therefore, an internal trust, set up by Italian citizens and concerning assets located in Italy, whose element of internationality is the governing law, is generally allowed.

 

The trust as autonomous and segregated assets

The assets in trust constitute a separate fund and are not a part of the trustee’s own estate, so that they are autonomous and segregated, bound to the achievement of the purpose of the trust.

Therefore, trustee’s personal creditors cannot seize trust assets, except to satisfy debts incurred by the trustee for purposes related to the trust. For example, neither the trustee’s creditors, nor settlor’s creditors, nor those of the beneficiaries can, on a general basis, ask for the seizure of the assets in trust.

Thus, a trust can be used to segregate personal assets. This has proven to be useful where the parties are contemplating a smooth generational handover.

 

The limits to the separation effect of trust assets: the “revocatory action” and the need to protect the settlor’s legitimate heirs

In the Italian legal system, when a trust is fraudulently established, the settlor’s creditors may take legal action to have the trust deeds declared ineffective to them (the so-called “revocatory action”). In other words, through the revocatory action, creditors may obtain the possibility to ask for seizure (or conservative actions) of the assets in trust, as if those assets had never been removed by the settlor’s estate.

Furthermore, when the settlor’s succession is governed by Italian law, a trust cannot affect the rights that the law grants to the so-called legitimate heirs: Italian law indeed reserves a share of the deceased estate to the legitimate heirs (e.g. the spouse or civil partner, the sons and their descendants, and in certain circumstances, the ascendants of the deceased). The reserved share cannot be infringed by donations or testamentary wills. When an infringement occurs, legitimate heirs can challenge the infringing acts through a proper action: the so-called “action of reduction”.

Infringed legitimate heirs can also bring the action of reduction against a trust, since article 15 of the Convention of Hague prohibits the use of trusts to elude the application of mandatory rules of national legal systems, expressly including those on inheritance, wills and necessary succession.

 

The trust and the action of reduction: the judgment No. 5073 of February 17th, 2023, of the Italian Corte di Cassazione (the ‘Judgment 5073/23’)

According to Judgment 5073/23, when a settlor sets up a trust to transfer assets to his heirs after his death, any such trust implies a donation (and more specifically, an implicit, or indirect, donation).

Consequently, it is possible to set up a trust theoretically affecting the legitimate heirs, and such a trust will be valid, but the legitimate heirs have the right to ask (and possibly sue) the trustee to return the infringing portion of the assets in trust to the deceased’s estate.

The legitimate heirs can bring the action of reduction even if they are beneficiaries of a trust, if such trust infringes their reserved share. This may occur, for example, when the trustee is bound to exercise its discretionary duties to identify the beneficiaries and/or their interests, and the identification affects the legitimate heirs’ rights (especially when, as in the case at hand, “the discretionary trust does not guarantee the legitimate heir to obtain a certain and determined share of the estate, as provided by law”).

With Judgement 5073/23, the Corte di Cassazione has also clarified that the infringed heirs must bring the reduction action against (i) the trustee, when the trust execution is still ongoing; or (ii) against the beneficiaries, if the trustee has already assigned the trust assets.

 

Conclusions

A trust may satisfy a wide range of needs of a person, such as inheritance, family, business, financial, security, and charitable needs. This is the reason why many people adopt the trust not only as a segregation instrument, but also as a wealth management instrument and in succession planning (often keeping an eye to generational handover of the family business).

However, if the purpose of the trust involves Italian inheritance matters, it is advisable to keep an eye also to the possible effects in relation to the reserved share, in order to prevent unhoped-for and time-consuming actions the infringed legitimate heirs may bring to preserve their rights.

 

 


 

Photo: Wassily Kandinsky, Ohne Titel, 1923, – Wikimedia Commons