The Treccani dictionary defines the word “trust” as ” the attitude, towards others or towards yourself, which results from a positive evaluation of facts, circumstances, relationships, that make you trust in specific possibilities, and that generally produces a feeling of security and tranquility “.
Trust is the backbone of the trust institution. Referring to it in a general way, the relationship of trust can be defined as that existing between a subject who has part of his assets in favor of a beneficiary (trustee), who is called to manage them in the best way possible under the directives given him by available at the time of transfer of assets.
As follows from the definition, the relationship of trust in the strict sense is based on the high level of confidence between the two parties. However, often those who are called to manage the assets are not natural persons but legal entities. Precisely, they are joint-stock companies, called “fiduciaries”, which deal with the management of assets entrusted to them by customers (settlers). The word “trust”, in a similar situation, refers to at least three different legal figures:
- The word “trust” can refer to the company itself, for this reason in English this companies are called “trust companies”. Therefore, it would be more correctly to speak about “fiduciary” to recall the English terminology.
- Secondly, the notion of trust can be also related to the managed assets. In that case it would be more correct to refer to the English term “trust fund”.
- Finally, it could refer to the trustee, that is to the one who deals with the management, which, however, being a legal person, is called “trust”, creating a high level of confusion.
According to the ratification of 1992 Hague Convention, the trust institution has acquired an increasing success in Italy. Following the milestones of the Convention, the legal relationship of the trust is established once the settlor confers the assets (by deed between living or mortis causa) to a trustee who enjoys the power and duties of the property law. However, the management of this patrimony is not arbitrary, but directed to a specific purpose identified by the settlor.
In other words, with the Trust, a subject (called settlor) gives the goods or rights under the “control” of another person (called a trustee) to benefit a third party (called beneficiary) or to achieve a specific purpose.
The settlor transfers the full ownership of the trust property to the trustee. It should be noted that there is no split ownership between the trustee and beneficiary.
The settlor, however, can maintain legal ties with the trust property in various ways: for example, its possible to transfer only the bare ownership of a property and reserve the exploitation, usage or habitation; may establish that trust property belongs to a company, of which he/she is the administrator; still, the power of decision-making may be reserved, providing in the trust act that the trustee can finance the business activities of the settlor or companies in which he has an interest, compatible, obviously with that of the beneficiaries and the purpose of the trust itself.
The trustee acquires the right of property and takes on some obligations. The first duty of each trustee is to properly administer the asset, in accordance with the law, with the trust act and with the prudent man criterion. Furthermore, the trustee is obliged to provide the beneficiary with all the relevant information and reports.
The beneficiary, subject to which the settlor intends to assign certain advantages, acquires a subjective legal position whose exact qualification depends on the solution of the problem concerning the ownership split.
Those who believe that the trust gives rise to a double property (qualifying the beneficiary as the substantial owner), concludes that the latter, in the event of failure of the trustee, can turn to the judge and request the transfer of the availability and ownership (even formal) of the trust property.
On the contrary, those who believe that the beneficiary is not the substantial owner of the trust property, concludes that the last mentioned is entitled to a right to claim that the trustee fulfills exactly all his obligations, including that of transferring ownership. In case of default, the beneficiary has the right, recognized by the art. 11, par. III, (d)), Conv.96, to the “claim” of the trust property.
The goals of the Trust can be classified according to whether they involve the family or business environment:
- Family environment:
- Protection of family assets: protect the family assets from risk (in family business or personal activities); protection of the assets of professionals, directors, auditors;
- Maintaining the children: providing for all the economic needs of the children for a long or short period and even after the death of the settlor: it can vary from the simple monthly maintenance to a specific and more complex needs (e.g. education, professional start-up);
- Protection of the “weak” subjects: guarantees social and financial assistance to the minor or disabled person. The extension of the fixed type of the assistance to the disabled person after the death of parents.;
- Future planning: the transfer of assets to the heirs guaranteeing conditions determined by the settlor, protection of the beneficiaries and posthumous decisions in case of uncertainty.
- Business environment:
- The split of the company from family assets: the separation of personal assets from those used for business activities. The protection of company from harmful events of the family of vice versa.
- The generational continuity: the objective of TRUST is to ensure the business continuity in the generational transition.
- Guarantee: the purpose of the TRUST is to act as the guarantee of the specific pre-defined obligations (Guarantee TRUST).
- Other purposes: shareholders’ agreements, M&A (escrow account), stock options and loan securitization.
The TRUST represents a valid planning and direct programming tool aiming to prevent the possible family friction leading to disintegration of corporate assets.
Thus, the advantages of the TRUST can be summarized as follows:
- The unified ownership of the investment
- Regulation, through the trust act, of the methods to manage and exercise the rights inherent to social investments;
- The segregation of holdings subject to the TRUST with the consequent indifference to the events of the individual subjects.
- The maintenance of high degree of management flexibility of a company, enough to allow to uptake quickly and effectively complex strategic decisions, that at most can take a form of a company listing on the securities market, and ensure a correct business development.
With the TRUST, as already noted, the ownership control of the company is entrusted to the trustee. This allows to maintain the integrity of the ownership structures and, in the frequent case in which the trust is not the company but the social participations that represent it, to continue to entrust the management to the directors in office (until the latter they must not be replaced), in order to avoid any discontinuity with regard to the policy of the company.
Looking from the perspective of income, the beneficiaries may be the same entrepreneur and his/her family members; as for the final attribution of goods, it can take place in a pre-established or discretionary manner depending on what is established in the TRUST deed.
With this fact in mind, the task of the trustee is not only that to “guarantee” the continuity of the management in accordance with the indications coming from the founder of the company, but also of identifying, within the group of beneficiaries, the most suitable descendants to have a better control of the company.
Types of Trustees:
In the context of corporate practice, the type of trustees entrusted with syndicated actions is not a simple solution because it is perfectly possible to think of both bare trustees and full trustees.
The bare trustee, which is then the recurrent hypothesis in foreign voting trusts, is suitable for the realization of certain interests, being little more than a proxy, but benefits, like any trustee, of the segregation of assets produced by the trust. From a functional point of view, the bare trust would be at the limit of the conjunctive mandate, known from the technical-professional praxis and in the practice strengthened by the turn of the titles by proxy or by their heading to a fiduciary company.
The extra element that the TRUST realizes is the full transfer of ownership of the shares to the trustee and therefore the transition from mere legitimation to that of reality. It allows the isolation of the trust segregated participation from the claims of the creditors of the syndicated shareholders and of the trustee, the non-subjection of the same to the provisions of the criminal judge or of the creditors of the syndicate members such as seizure or pledge and finally the much greater coerciveness of the obligations of the syndicate members. In fact, the execution of the pact is no longer subject to the individual willingness that is changing according to the circumstances of individual members who could be defaulted, but nowadays the execution is entrusted to a third party and impartial, the trustee, who does not bear any solidarity interest in the position of the various constituencies of the voting union.
Typologies of TRUST:
Another aspect to that should be looked into detail is the typology of TRUST used:
It’s necessary to choose between the TRUST of beneficiaries, and the TRUST related to the specific purpose to be realized. Art. 2341 bis attributes specific objectives to the shareholder’s agreements (stability of the ownership structures and governance of the company), like:
- Management of the control exercise;
- Management of block unions;
- Prompt reaction to the hostile takeover.
For this last case, the purpose TRUST also ensures a unity in the action of contrast with respect to the takeover and, more importantly, an irritability of the pact that no civil instrument is able to offer. It is evident that the trustee must be endowed with a power and appropriate financial resources (to indicate professionals, publish advertisements in newspapers, write to small shareholders, etc.). The structure of the trust to manage a controlling shareholders’ agreement provides for the presence of more trustees for the greater reliance of “syndicated” members who must fully exercise all power inherent in the position of shareholder, i.e. the normal dynamics within the syndicate agreement must be transferred elsewhere, or within the group of trustees or by adding one or more protectors to them.
The founding act is decisive when choosing among the possible configurations, considering that the trustees can in some cases deliberate by majority or always be unanimously linked and that the guardians (also deliberating or majority or unanimously) can be granted power of varying extent, up to that of preventing any act of the trustees that does not comply with their interests. The duration of the act is usually established in 5 years and can be extended by a written deed, but it should also be mentioned that the trust may be terminated earlier by the decision of the trustee which therefore should possess a high level of discretion. Once the TRUST contract have been terminated, the trustee is obliged to transfer all the shares back to the original settlers (the syndicated shareholders) who do not get the assets as beneficiaries, but as the recipients of the trustee’s duties.
However, the structure of the TRUST is not necessarily trilateral, as the settlor can designate himself as the trustee (c.d. self-declared trust), or omit the indication of the beneficiaries (purpose trust). On the contrary, it may occur that the trust act establishes a forth figure, the c.d. guardian (protector), who is supervising the activity of the trustee, using sometimes the power of veto over the most important decisions. In order to prevent the establishment of a TRUST from triggering a chain of unlimited non-commissions substitutes, The Hague Convention requires the settlor to indicate the duration of the TRUST, except the cases of a TRUST with the specific purpose.
Possible utilization of a TRUST:
- TRUST as a personal asset protection tool.
Considering the segregated effect of the TRUST, this institution is particularly useful to protect the personal assets of both parties (settlor and beneficiary) from the claims made by the creditors of the parties involved in the transaction. The law n. 364/89, ratifying The Hague Convention, expressly provided that the assets constituted in the TRUST represent a separate asset, both with respect to that of the trustee, and towards the settlor, who has thus definitively “stripped” of the assets conferred. Therefore, the creditors of the latter will not be able to consider the goods brought in Trust or the Trust itself as making (still) part of the debtor’s assets. Naturally, the aforementioned legislation cannot harm the creditors’ reasons, to which it is in any case reserved – subject to the conditions – the avoidance action, and the precautionary measures of attachment attached to it, for the eventuality that the deed of disposal is made in fraud to the same creditors.
2. Trust as a planning tool for generational passage.
Family businesses is the area in which the development of TRUST system is the most successful. The reason is found in the unity of the entrepreneurial actions through the conferment of trust in the shares / social actions. In particular, the TRUST allows to satisfy some primary needs:
- Protection of the company assets with respect to non-parties or unwanted members of the family.
- Protection of the integrity of the corporate assets, in the presence of a multiplicity of heirs, often in potential conflict with each other.
- Tool for the selection, among the heirs, of the successor at the helm of the company.
- Maintaining the governance
In these cases, the trustee will have the dual role of guarantor of the continuity in the management of the transferred company, and of the selector – within the group of beneficiaries – of the one considered as the most suitable to continue the entrepreneurial activity. In this context, its frequent that the trustee is identified as a trust company, in order to guarantee the high quality standards required in the medium-long term that is necessary for the formation of the new generation.
3. Other uses of the Trust:
- Self-declared TRUST and personal separation of spouses.
In some cases, the TRUST instrument has proved to be useful to segregate the assets in the interest of the minor children of a couple. These are some hypotheses of TRUST c.d. self-declared (in which the settlor coincides with the trustee), established during the personal separation of the spouses, to ensure the necessary continuity of the segregated effect, originally created through a balance sheet.
- TRUSTs and shareholder agreements: i.e. voting trust.
With regard to uses in the corporate area, the voting trust consists in the establishment of a TRUST to which all syndicated shares are conferred in order to strengthen the legal protection of a shareholders’ agreement. The trustee will have the primary task of voting in the assembly, in accordance with the will of the majority formed in the voting union. In this way the risk that a union participant will vote in the meeting in a different way will remain substantially excluded. Unfailing assumption is the loss of ownership of the shares, which must be transferred to the trustee so that the latter can obtain registration in the Register of shareholders and the subsequent voting right.
- TRUST to guarantee a bond loan.
As an alternative to mortgage, in corporate area the TRUST was used to issue a debenture loan. The issuing company, owner of some leased real estate units, give the aforementioned properties to a New-co, and then establish the related shares in trust; this in order to avoid the delays that would have resulted from the registration of a mortgage and consequent enforcement procedure, for the eventual recovery of the credit. In this way the trustee was instructed to:
- ensure that the administrative body of the New-co maintains the leased assets and collects the fees;
- ensure that the New-co does not distribute dividends.
At the same time a guardian was set up to protect the interests of bondholders, in order to make these securities particularly attractive on the market, due to the effective guarantee provided.
- Trusts and financial transactions: purpose loans and project finance
Moving on to the more structured transactions, it is worth to mention that TRUST is linked to the relationship between the financing bodies and the companies that are financed. In this context it is frequent the need for banks to insert a destination clause of sum borrowed, the failure of which is due to termination of the contract. In order to reinforce the aforementioned limit of destination and to prevent the borrowed sum from becoming part of the assets of the borrowing company, the financing operation can be structured through the establishment of a TRUST to which the sum is assigned. The memorandum provides that the trustee receives the capital borrowed directly from the bank and uses it exclusively for the business activity agreed upon, then proceeds to repay the loan installments and the subsequent re-transfer of the assets granted as collateral to the borrowing company.
A similar mechanism governs the operations of project finance, where the guarantee of the granted financing is made, in a preponderant or totalitarian way, by the expectations of the lending institution regarding the ability to generate sufficient cash flows to repay the loan. In these cases, the bank assumes the role of trustee, collecting the proceeds of the activity realized through the financing, taking care of the collection and distributing them between the bank and the financed company.
The TRUST and Direct Taxes:
More precisely, from 1 January 2007 the Trust is classified in letters b), c) or d) of article 73, paragraph 1, of the Tuir 917/1986, as “commercial” or “non-commercial” entity, depending on whether the company perform primarily or not a business activity.
The “subjectivisation” of the Trust allows to determinate a uniform tax base which is a civil configuration of the Trust. It allows, therefore, to exclude possible differentiations in the determination of income depending on the type of civil law adopted: thus, if the trust is commercial, income (whether directly taxable by the trust or to be attributed to the beneficiaries) must be determined according to the rules of “business income”; if the trust has a non-commercial object, the income (of the trust or to be attributed to the beneficiaries) must be determined according to the rules of non-commercial entities and, for example, by applying the rules on “capital or financial income” (withholding tax as a substitute tax or imposition), “withholding income”, “other income” and so on.
The legislator operates for taxation purposes a further distinction, between:
- “Transparent” TRUSTs, i.e. Trusts with identified income beneficiaries;
- “Opaque” TRUSTS, i.e. Trusts without identified beneficiaries
This distinction is exclusively relevant to identify the subject on which to impose the tax obligation (the trust itself or the beneficiaries). However, as was already mentioned, it doesn’t assume any importance with reference to the methods to determine the tax base.
In the “transparent” Trust, in fact, the income is taxed on the beneficiary, “as capital income”, regardless of the material perception of the same.
In the “opaque” Trust the income is taxed directly and exclusively by the Trust.
In the case when the deed of incorporation specifies that the part of the income is allocated to capital and part is allocated to the beneficiaries, with a mixed configuration (so-called mixed TRUST), the provisioned income will be taxed on the part of the Trust, while the one that is attributed to the beneficiaries will be allocated to the latter.
This means that after determining the income of the TRUST, the trustee will indicate the part of it attributed to the trust on which the IRES will be absolved, as well as the part imputed for transparency to the beneficiaries on which the latter will pay the income tax. This is the hypothesis of the simultaneous pro-quota application of IRPEF and IRES. On the practical level, this situation has certain advantages: it allows the company to maintain its flexibility without becoming rigid in limited structures.
If the TRUST then has as its object the exercise of commercial activities, it is also obliged to keep the accounting records required by Article 14 of Presidential Decree no. 600/1973 or by the art. 20 of the same DPR, if it is qualified as a “non-commercial entity”.
The Trust is also required to fulfill the obligations related to IRAP. The examination of the methods of taxation of income produced by the Trust does not fully respond to the issues related to direct taxation. There is the necessity to examine the tax consequences that are produced by the “settling” subject at the time of the contribution of assets in Trust, i.e. when the institution is set up.
If the transferring person is an entrepreneur, and the transfer to a Trust has as its object a company, the transfer can take place under a tax neutrality condition, naturally provided that the trustee takes the business complex to the same “fiscally recognized values” for the settlor. If, on the other hand, the entrepreneur transfers to the Trust individual assets belonging to the company, these assets at the time of assignment in Trust leave the business sphere to be destined “for purposes unrelated to the operation of the company”, thus determining income components (revenues / capital gains) to be subjected to direct taxation.
In the case of a non-entrepreneur, the deed of first assignment of assets to the Trust represents a free transfer to all purposes; as such, the absence of compensation does not lead to the emergence of any taxable matter for the purposes of income taxation, nor to the settlor non-contractor, or to the Trust or the trustee. With the transfer of participatory securities, the trustee acquires the last fiscally recognized cost of the investment. However, if the securities are held as part of an administered relationship, the authorized intermediary applies the related taxes.
The TRUST and Indirect Taxes:
Although the new fiscal discipline is dictated only to the effects of direct taxes, the systematic choice made by the fiscal legislator to identify the trust – organization as a natural taxable subject does not remain indifferent even to the effects of indirect taxes.
- Trust Establishment Act
The Revenue Collection Agency has confirmed that the Trust Act with which the settlor expresses the willingness to constitute the Trust that does not also contemplate the transfer of assets in the Trust (assets available at a later date), if drawn up by public deed or with authenticated private deed, it must be subject to the fixed registration tax as an act without a patrimonial content. However, the subsequent deed by which the settlor binds the assets in the Trust is qualified as a shop free of charge that must be subject to the tax donation.
- Device Act
In fact, the assignment of goods in the trust (or the established restriction of destination that results from it), representing a shop free of charge, must be subjected to the reintroduced tax on successions and donations in proportional terms (according to the provisions set out in Article 2, paragraphs 47 to 49, of Decree-Law No. 262 of 2006), be it arranged by will or by deed inter vivos.
With regard to the application of these taxes, the Agency reaffirms the distinction between Trusts with and without identified beneficiaries. In the first hypothesis, making a definitive transfer from the settlor to the beneficiaries, for the purpose to determine the applicable rates, the degree of kinship between these subjects must be verified. In the purpose trust, that is designed to achieve a certain objective, without indication of final beneficiary, the tax will be due at the rate of 8 %, provided for the destination restrictions in favor of “other subjects”.
Of course, for indirect tax purposes, problems similar to those observed for direct taxes, such as the simultaneous devolution of assets to identified and non-identified beneficiaries, can also arise. In this case, the relative share of assets transferred must be distinguished.
Any eventual Acts of purchase or sale of goods made subsequently by the Trust are subject to independent taxation, according to the nature and legal effects that characterize them.