Testamentary trust: assets in Italy transfer to the trustee without paying inheritance taxes

Testamentary trust inheritance taxes

A Testamentary Trust is created in accordance with the instructions in a person’s Last Will and Testament. Differently from a living trust, the testamentary trust starts having effect after the settlor’s death, and so is the trustee appointed.

A testamentary trust can be a good way to leave assets to a specific loved one (usually a spouse). It will also ensure assets are only distributed to the beneficiaries upon the trustee’s death.

However, what happens if the testamentary trust includes properties in Italy?

And, what if the trustee is also the legitimate heir, and therefore required to pay taxes in Italy?

Testamentary Trust and Italian Inheritance Tax Law: No succession taxes for the spouse/trustee

In this case study, an American citizen placed his estate in a testamentary trust in the United States. He appointed his wife as trustee. The trust included real properties in Italy.

According to Italian inheritance law however, the wife was also a legitimate heir to her husband’s estate. As such, she would be required to pay inheritance taxes on her share of real properties in Italy.

This issue has been long debated with the Italian IRS (Agenzia delle Entrate) and was ultimately resolved in favor of the trustee/heir: inheritance taxes are not due, as long as the trust is operating and are due only when assets are distributed to the final beneficiaries.

However, the additional complication in such a case lies in the fact that in Italy, the trust does not hold real property to its name, but in the name of the trustee. Consequently, there is confusion between the trustee’s name and heir’s name.

At the end, the case was concluded with real properties put in the name of the trustee (wife of the deceased) without paying inheritance taxes. She will manage the estate, also to her benefit, and the assets will be distributed upon her death.