Trust Matters Update – May 2015

The Trust Matters Update is a periodical summary of cases, case comments, consultations, publications, legislative developments, legal updates, articles and news in the area of trust law and related issues.

1. Can ‘internal’ trusts really be considered invalid?

In a recent ruling of 28 February 2015, the Court of Udine declared two ‘internal’ trusts invalid, that is, that they had no features making them extraneous to the Italian legal system, except for the applicable law chosen by the contracting parties (Jersey law).

The trusts were declared invalid not because they were deemed ‘sham’, or constituted in breach of any fundamental provision of the Italian legal system, but owing to ‘the legal impossibility of the [Ed.’s note: their] object, insofar as it aims at creating a form of asset segregation not envisaged, and not permitted, by our legal system’.

The Court of Udine’s decision thus purports to cancel, in an extremely unconvincing manner, twenty years of progress in case law and legal doctrine concerning trusts.

In fact, it is patently clear that the ‘abstract’ reason for the institution of the Trust, namely the ‘segregation’ of a settlor’s assets, is completely legitimate and deserving of protection from our legal system. Of course, as an ‘abstract’ contractual instrument, a Trust may be used to achieve a variety of practical purposes, and thus the ‘concrete’ reason for the operation pursued by the settlor may also be illicit, thus invalidating a given Trust. However, it would never seem acceptable to find for the generic invalidity of the institution as a whole, as the Court of Udine did.

2. A trust constituted in the interests of the (inexistent) children of a settlor who is not even married or living with a partner on a stable basis, is invalid

With its decision of 11 March 2015, the Court of Reggio Emilia declared as invalid, owing to certain characteristics designed to elude the provisions of Article 2740 of the Italian Civil Code, of a trust with which the settlor in question segregated certain assets at a time of clear financial insolvency, and thus with the sole intent of prejudicing the interests of its own creditors.

The settlor’s elusive intention is proven, according to the Court of Reggio Emilia, also by the trust’s ‘completely fanciful and unattainable’ aims, designed to preserve the assets that had been transferred to the trust ‘in the interests of the (inexistent) children of A.A., who at present is not even married and, at least as far as the records are concerned, is not even living with a partner on a stable basis’.

3. A trust that grants the settlor ample power to amend the trust deed, cannot be recognized as such

A trust that permits the settlor unlimited power to revoke, amend or modify any of the provision of the trust, is not recognized by our legal system, since it is in conflict with Article 2 of the Hague Convention of 1 July 1985 (implemented in Italy by Law no. 364 of 16 October 1989, which came into force on 1 January 1992), requiring that assets segregated in a trust be placed under the control of the trustee(s). This was the reasoning expressed by the Court of Reggio Emilia in its decision no. 38683 of 21 October 2014.

Basically, according to the court, even when the law governing a trust – in the case in question, Jersey law – grants the settlor the opportunity to reserve the right to amend the provisions of the trust, said right can never be completely discretionary and unlimited, since otherwise the trustee(s)’s management would be “excluded almost completely”, to the point where the suspicion could arise that the trust is a “sham”.

4. An heir who claims breach of forced heirship rights, is not bound by the clause extending jurisdiction contained in the trust deed

With decision no. 14041 of 20 June 2014, the Joint Chambers of the Italian Supreme Court of Cassation set down a number of clear principles regarding the enforceability of the clause of extension of jurisdiction contained in the trust deed against the settlor’s heir.

In the view expressed by the Judges of the Supreme Court, the clause of extension of jurisdiction included in a trust deed may be binding not only on the settlor, but also on the trustees and beneficiaries of the trust, even if such persons have not personally signed said clause, each time any rights or obligations pertaining to the trust and its operation are questioned.

Therefore, if the settlor’s heir brings legal proceedings in his/her capacity (whether real or alleged makes no difference) as a beneficiary of the trust or as the settlor’s heir, said person would also be bound by the clause of extension of jurisdiction to the foreign courts.

Vice-versa, if the heir brings legal proceedings claiming the invalidity of the trust, and thus demanding a reserved share of the estate, the clause of extension of jurisdiction contained in the deed claimed to be invalid, could in no way be binding on said heir, who may have recourse to the ordinary principles of allocation of jurisdiction in order to bring the dispute before the Italian Courts.

5. The proportional tax of 8% is payable at the time the trust is constituted, a controversial decision of the italian supreme court of cassation

With two orders of 24 February 2015, nos. 3737 and 3735, the Italian Court of Cassation intervened, citing the fact that Section 47 of Italian Decree Law no. 262/2006, whereby the legislator introduced the duty on inheritances and donations ‘on the constitution of allocation restrictions’, must also be applied to trusts, specifying that said tax (levied at 8%) should be levied not at the moment when the trustee distributes the trust’s assets to its beneficiaries, but rather at the very moment the trust is established.

6. Voluntary disclosure of the trust

‘Voluntary disclosure’ is an instrument permitting tax payers who illegally hold assets abroad, to regularize their position by spontaneously reporting, to the Tax Authorities, any breach of their monitoring obligations, their obligations regarding income tax, VAT and minor taxes, and any other obligations, committed up to 30 September 2014. Voluntary disclosure may also concern those trusts considered to be of an offshore or intermediate nature.