The trust, an instrument enabling generational transition in business

The trust, an instrument enabling generational transition in business

By Vittorio Provera and Rebecca Pala

The issue of the generational handover of businesses and assets is relevant in an advanced economic context such as the Italian one, with the presence of very precise succession rules. Various instruments can be adopted in relation to the particular needs of business continuity. The aforementioned purpose is well pursued by asset separation agreements, i.e. the set of legal instruments that regulate the detachment of assets and rights from the assets of a subject, in order to form an separate patrimony, distinct from the remaining legal positions of the transferring subject. The settlor’s patrimonial sphere is now composed of separate patrimonial assets, which not subject to the general principle set forth in Article 2740 of the Italian Civil Code, according to which each party is liable for its debts with all its assets.

The asset segregation thus constituted is functional to the realisation of a predefined purpose worthy of protection, such as to justify the sacrifice imposed on the creditors of the transferring party, for the obligations incumbent on the latter connected to extraneous relations. The described objective is also obtained by the trust, an instrument – now well known to our legal system – of Anglo-Saxon origin. It entered our legal system with the implementation of the Hague Convention of 1 July 1985, ratified in Italy by Law No. 364 of 16 October 1989. Also with a view of generational handover, the trust presents itself as an effective instrument by means of which the persons who will take over the business may be identified in advance, but their actual entry may be postponed to a later date.

It is regulated in the following terms: the owner of certain assets (in English settlor), assigns to a third party (the so-called “trustee” of the trust) all the prerogatives and obligations, pertaining to the owner, with the commitment of the trustee to manage said assets for a purpose already established by the settlor, provided that it is lawful and not contrary to public order; all in the interest of one or more beneficiaries. Thus, we have two substantive actions (albeit technically brought together in a single act): (i) the allocation of assets to a trustee or administrator and (ii) the identification of the rules to be observed in the management of certain assets. The transfer of the settlor’s assets into the trust, administered by the trustee, is bound by an agreement between the two relevant parties, the so-called trust agreement. By virtue of this agreement, the trustee manages the transferred assets in the interests of the beneficiaries as well as in compliance with any limits imposed by the settlor. Both the objectives and limits, with which the trustee must comply, are regulated in the deed of trust, drafted before a notary, which is public and therefore enforceable.

As for the tax profile, the trust is a centre of imputation of economic relations, which is why it has tax subjectivity. Simplifying on this point, if the trust is set up in favour of established beneficiaries, the taxation will take place directly on these beneficiaries, since the profits deriving from the trust are cumulative with all the other income of the individual beneficiaries identified.

Given the considerable diffusion of the instrument, in recent years several credit institutions and operators in the private sector have created ad hoc services, capable of advising both professionals and clients on the best definition of the structure of the transaction and the management of the trust, in which the trust element is fundamental. In the corporate sphere, the trust proves to be useful to allow entrepreneurs, especially in companies with a strong family run business, a succession with limited impact on the continuation of the management of the business. The interested party, in fact, can confer the shares in their possession (representing the majority of the share capital), together with other assets, into a trust set up for this purpose. The trustee, as manager of the shares following the indications of the entrepreneur, will have to designate a director of the company, indicating – for example – one of the children of the same person who has shown greater managerial capacity and entrepreneurial interest; likewise, they could set up a board of directors, again following the indications of the entrepreneur. In the event of death, all other heirs will not be able to oppose such a designation, although they will benefit from the profits derived from the management of the business, as well as from any other assets at their disposal left by the entrepreneur.

In this way, situations of conflict of interest can be better governed; moreover, the assets transferred to the trust remain protected from the risks of aggression by third parties, for claims against the original transferor. A similar purpose can be pursued in the case of the transfer of real estate or shares in real estate companies to a trust, allowing its unity to be preserved even after the death of the person who set up the trust. Without forgetting that the trust allows one, if located in a jurisdiction that does not provide for the taxation of capital gains on the transfer of shares, to retain in the trust the proceeds of the transfer, then distributes them to the beneficiary in Italy free of tax as foreign trust income due to the presence of conventions that prohibit double taxation. Obviously, this instrument can also be used in less complex situations, when for example, a self-employed person wishes to allocate part of their assets for future needs of the family and any minors. Also in this case, the contribution of real estate and/or financial assets to the trust allows the same to be protected from risks arising from the professional activity, to guarantee continuity over time and to provide that the income and/or even certain assets can be used for family needs.

Already from these examples one can get an initial idea of the possible use of the instrument in which, however, it is essential that specialised and competent structures intervene in the establishment and management phase. As a result of the foregoing considerations, the particularly flexible nature of the trust clearly emerges, inasmuch as it is at the same time capable of preserving the need for unity of the business assets, without affecting the settlor’s economic and organisational decisions, who thus firmly retains control of the business.

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