In recent years, the Trust has become an increasingly popular instrument for wealth management and protection. At the same time, it has been subject to growing scrutiny from case law and the Tax Authority. However, the possibility for the settlor to establish a Trust in which they also act as Trustee, known as a “self-declared Trust,” raises questions regarding its validity, enforceability against third parties, and tax classification. Understanding the critical issues associated with this type of Trust is fundamental to avoid challenges of nullity, tax reclassifications, and actions by creditors. In this in-depth analysis, we examine the main points of concern, recent judicial rulings, and operational guidance for proper planning.
1. CRITICAL ISSUES OF SELF-DECLARED TRUSTS ↑
A self-declared Trust arises when the settlor, instead of transferring assets to a third party (Trustee), declares their intention to earmark specific assets from their own estate. This is achieved through the creation of a separate fund that the settlor themselves will administer as Trustee, according to the rules and purposes set out in the trust deed.
In this scenario, the effect of asset segregation is achieved by creating a binding purpose within the settlor-Trustee’s own estate, without any inter-subjective transfer of ownership. The defining element is the coincidence between the person establishing the Trust and the person managing it, regardless of the beneficiaries’ identity.
The structure remains the same even if the settlor is designated as a beneficiary or even as an income beneficiary during the life of the Trust. Case law has recognised the validity of self-declared Trusts in which the settlor is also a beneficiary, provided they are still alive at the Trust’s termination. However, the overlapping of roles (settlor, Trustee, and beneficiary) accentuates the critical issues and increases the risk that the arrangement may be deemed null or a sham Trust.
Nullity of Self-Declared Trusts
A self-declared Trust in which the settlor is also the sole ultimate beneficiary is considered at high risk of nullity. Case law consistently affirms that an essential element of a Trust is the settlor’s loss of control over the assets (the so-called “divestment of ownership”). If the settlor-Trustee manages the assets for their exclusive benefit, the genuine distinction between manager and recipient is lost. In such cases, the Trust may be considered null due to:
- Lack of purpose or unlawful purpose: if the sole aim is asset segregation to the detriment of creditors, without a legitimate interest worthy of protection other than that of the settlor;
- Absence of a constitutive element: if the loss of control is merely apparent, the Trust lacks one of the essential elements provided for in Article 2 of The Hague Convention.
Concrete Examples
The Court of Pescara, in Judgment no. 1374 of 18 October 2023, affirmed the nullity of a Trust that “does not involve any loss of control over the assets contributed by the settlor, who continues to manage and dispose of the assets in Trust, with the sole effect of making them immune to the claims of their creditors.”
Similarly, the Second-Degree Tax Court of Lombardy, in judgment no. 2786/16/23 of 20 September 2023, confirmed the tax interposition of a Trust established by three settlors. Of these, one also held the role of Trustee, alongside their spouse, while the beneficiaries were their children. In this case, the Court noted:
- Coincidence between settlor and Trustee, compromising impartiality;
- Absence of a protector, despite being provided for in the trust deed;
- Inconsistent management of real estate assets, used for family sustenance;
- Violation of statutory clauses, with income used for personal expenses;
- Irregular accounting, lacking supporting documentation;
- Contradictory clauses, allowing settlors to modify beneficiaries.
The Court concluded that the Trust had never achieved effective asset segregation and attributed the income directly to the settlors pursuant to Article 37, paragraph 3, of Presidential Decree 600/1973.
Furthermore, the Court of Appeal of Turin, in judgment no. 1148 of 21 October 2021, upheld a revocatory action against a Trust that prejudiced the rights of a creditor. The Court held that the segregation of assets had compromised the possibility of satisfying the debt. A revocatory action (Article 2901 of the Civil Code) allows a creditor to have a dispositive act declared ineffective if it causes damage to their claims (eventus damni) and if the debtor was aware of this (scientia damni). In the case of gratuitous acts such as a self-declared Trust, it is not necessary to prove bad faith on the part of the third party.
Conversely, according to Tax Authority Circular no. 61/E of 27 December 2010, a Trust is considered fiscally “non-existent” if the settlor retains the power to manage and dispose of the assets. In such a case, the income must be attributed directly to the settlor, as also confirmed by Tax Authority Reply no. 381 of 11 September 2019.
Tax reclassification can lead to the recalculation of taxes for individuals originally not considered taxable.
2. PUBLICITY AND ENFORCEABILITY AGAINST THIRD PARTIES ↑
In Italy, there is no central Trust Register. The publicity required for enforceability against third parties is achieved indirectly through the publicity regimes of the individual assets contributed:
- Immovable property: transcription of the deed of earmarking under Article 2645-ter of the Civil Code;
- Company shares: registration of the encumbrance in the Company Register;
- Registered movable property: annotation in the competent registers (e.g., PRA for vehicles).
A trust deed drafted as an authenticated private document has a certain date (Article 2704 of the Civil Code) but is not sufficient for enforceability against third parties. The segregative effect is only enforceable if the publicity formalities are correctly executed. In the absence of publicity, a creditor of the settlor can seize the asset as if it were still part of the personal estate.
3. TAX ASPECTS ↑
A Trust is a taxable entity and, in most cases, is subject to the tax obligations prescribed for corporate income tax (IRES) payers. Tax Authority Circular no. 48/E/2007 states that a Trust, whether “transparent” or “opaque,” must:
- Annually submit its tax return;
- Obtain a tax code;
- If it carries out commercial activities, open a VAT number.
All compliance obligations are the responsibility of the Trustee. Failure to submit tax returns can be an indication of fictitiousness and strengthen the argument of simulation. The tax treatment of income depends on the classification of the Trust:
- Opaque Trust: the income (e.g., dividends) is taxed at 24% (IRES) at the Trust level;
- Transparent Trust: the income is attributed to the beneficiaries and taxed at 26%.
Transparency requires that the beneficiary is identified and holds the right to receive the income (Tax Authority Circulars no. 48/2007 and no. 34/2022).
Taxation and Indirect Taxes
Indirect taxes (inheritance/gift tax, registration tax, mortgage and cadastral taxes) are generally not due at the time of the Trust’s establishment or funding, but only upon the final transfer to the beneficiaries. However, it is possible to opt for “entry taxation,” to anticipate the tax burden and manage it at a more favourable time. This might be because it is calculated on the current value of the assets, or because there is concern that the Trust or beneficiaries may not have sufficient liquidity in the future to meet the imposition, or if future increases in current taxation are feared.
4. OPERATIONAL GUIDANCE ↑
Appointing a Trustee distinct from the settlor strengthens the legal validity of the Trust, ensuring a clear separation between personal assets and the Trust fund. This reduces the risk of challenges from third parties and revocatory actions. Entrusting the role to a professional Trustee offers further guarantees:
- Independent management in accordance with the trust deed;
- Accurate reporting and separate accounting;
- Impartiality in management, which reinforces the credibility of the Trust.
Furthermore, the presence of a guardian (protector) adds an additional layer of control, ensuring that management is consistent with the Trust’s objectives and the beneficiaries’ interests. Finally, it is essential to:
- Attend to publicity formalities;
- Establish and update the Register of Events;
- Maintain orderly accounting records;
- Regularly submit tax returns.
These elements are essential to ensure the correct configuration and effective enforceability of the Trust.
5. PROFESSIONAL EVALUATION, ESTABLISHMENT, AND MANAGEMENT OF TRUSTS ↑
The Trust is an important instrument that forms part of a broad set of methods for correctly managing asset protection and/or generational transfer. Sometimes it represents the only one capable of meeting specific needs.
Careful evaluation and planning, carried out at the correct times and in the right ways, without urgency and not during critical phases, is the basis of targeted, high-value-added advice. This, in addition to allowing adequate tax optimisation, brings many advantages to both the settlor and the beneficiaries from multiple perspectives.
CARAVATI PAGANI has for years assisted clients in the evaluation, establishment, and management of Trusts, in coordination with a proven and specialised team that includes tax consultants, lawyers, and collaborations with fiduciary companies.
FAQ – Self-Declared Trusts
Q. Is a self-declared Trust always valid?
A. No. It is only valid if there is a real separation between personal assets and earmarked assets, and if the settlor does not retain absolute control. Otherwise, it may be declared null or fiscally reclassified.
Q. How is a Trust made enforceable against third parties in Italy?
A. There is no Trust register. Enforceability is achieved through the publicity required for the assets contributed (e.g., real estate transcription, annotation in the company register).
Q. Does the Trustee acquire ownership of the assets?
A. Yes. In a traditional Trust, the Trustee becomes the legal owner of the contributed assets, with a fiduciary obligation to manage them according to the trust deed and in the interest of the beneficiaries. In a self-declared Trust, the settlor retains legal ownership because they are themselves the Trustee, but the assets are still earmarked and separated from personal assets if the Trust is valid.
Q. Who owns a Trust?
A. Formally, the legal owner is the Trustee, who holds the assets not for themselves but to pursue the purposes set out in the trust deed. Beneficiaries have an economic right or expectation but not legal ownership of the assets until they are transferred to them.
Q. Who is the Trustee?
A. The Trustee is the individual or entity appointed to administer and manage the assets in Trust according to the provisions of the trust deed, with fiduciary obligations towards the beneficiaries and duties of accountability and diligence.
Q. Can the Trustee also be a beneficiary?
A. Yes, it is possible. However, if the Trustee coincides with the settlor and is also the sole or primary beneficiary, the Trust may be considered null or fiscally non-existent due to a lack of effective divestment of ownership and impartiality.
Q. What is the taxation of a Trust?
A. It depends on the classification:
- Opaque Trust: income taxed at 24% (IRES) at the Trust level.
- Transparent Trust: income attributed and taxed directly to the beneficiaries. Indirect taxes are normally applied upon the final transfer to the beneficiaries.
Q. Is a guardian (protector) needed in a Trust?
A. It is not mandatory, but advisable: an independent guardian strengthens the impartiality and compliance of the Trust, reducing the risks of challenge.
