Living trust: what it is, how it works and what it is used for

The term ‘living trust’ is used to refer to a trust set up during the settlor’s lifetime to allocate certain assets to a specific purpose or for the benefit of one or more beneficiaries.

Under Italian law, however, ‘living trust’ is not the name of a specific legal institution governed by the Civil Code. The term refers to a trust established inter vivos, which is recognised in Italy under the Hague Convention of 1 July 1985, ratified by Law No. 364 of 16 October 1989.

It is important to understand this distinction because this instrument has its own specific characteristics and must not be confused with a matrimonial property fund, a restriction on the use of assets or other arrangements used to organise and allocate assets.

What is a living trust?

The term ‘living trust’ generally refers to a trust set up whilst the settlor – that is, the person establishing it – is still alive.

The founding document sets out the fundamental rules: what objectives are to be pursued, who is to administer the assets, who may benefit from them, for how long and under what conditions.

The assets set aside for this purpose are managed in accordance with the provisions of the instrument and the applicable governing law. One of the key features is that they are kept separate from the personal assets of the person responsible for their management.

It is therefore not simply an account or a ‘fund’ into which to deposit money. Various types of assets may be involved, and the instrument can meet needs relating to asset management, wealth planning and estate planning.

Living trust and testamentary trust

The distinction relates, first and foremost, to the point at which it is established.

The first is established during the settlor’s lifetime. The so-called ‘testamentary trust’ – a term used to refer to a trust created by will – is, by contrast, established by a provision in a will.

This difference affects the point at which the instrument takes effect, the allocation of assets and the relationship with the succession.

How a trust fund works

The process can be summarised as follows: the settlor identifies certain assets and stipulates that they are to be administered in accordance with a specific plan, in the interests of the beneficiaries or for the purpose set out in the instrument.

Management is entrusted to the trustee, who holds title to the assets but may not use them freely as if they were part of their own personal assets. They must administer them in accordance with the established rules and the obligations arising under the applicable law.

This separation between ownership, management and the intended use of assets is one of the key features of this instrument.

Settlor, trustee and beneficiaries

The main parties involved are:

• settlor: the person who establishes the trust and transfers certain assets to it;
• trustee: the person who holds title to the assets and manages them in accordance with the established rules;
• beneficiaries: the persons in whose interests the assets may be managed and to whom income or assets may be allocated in accordance with the provisions of the instrument.

The trustee is sometimes referred to, in more general terms, as a fiduciary administrator. However, their role must be assessed on the basis of the specific rules governing trusts and should not be confused with that of other fiduciary figures provided for or utilised under Italian law.

In some organisations, there may also be a guardian – also known as a ‘protector’ – who is granted certain powers to oversee the trustee’s actions.

What items can be disposed of?

Assets placed in trust may be of various kinds. They may include, for example, cash, movable property, immovable property, shareholdings and other property rights compatible with the chosen structure.

It is important to distinguish between the act of laying down the rules governing the instrument and the transfer of assets. The former establishes the programme; the latter involves the actual allocation of specific assets to that programme.

The transfer of a house or other property

A house or other property may also be contributed.

In this case, ownership of the property is transferred to the trustee, who must manage it in accordance with the established purposes and rules. Although the property is registered in the trustee’s name, it remains separate from their personal assets.

The transfer must comply with the formalities required for property transactions and the obligations relating to registration in the land registers. For further information on the checks and formalities involved in these transactions, please refer to the page dedicated to property transfers.

Objectives and succession planning

A trust set up inter vivos can be used to organise the management of certain assets over time and to lay down precise rules in advance regarding their administration and disposal.

Depending on the specific circumstances, it may meet the needs of:

• asset management and planning;
• generational transition;
• estate planning;
• management of property or shareholdings;
• protection of the interests of children or other family members;
• protection of vulnerable people or people with disabilities;
• the preservation and centralised management of certain assets.

However, the choice must be based on the specific objective and a comparison with the other available tools.

The allocation of assets to children

Assets may be allocated in the best interests of the children, setting out how they are to be managed over time and under what conditions they may be transferred to the beneficiaries.

The document may, for example, set out the procedures and timeframe for managing the estate, and the conditions under which a child may receive income or specific assets.

Where there are minor children, people with disabilities or other specific family circumstances, it is advisable to consider this option within the broader context of the tools available for safeguarding the family’s assets.

Living trust and succession

A trust may be used for inheritance purposes, but it does not allow the mandatory rules designed to protect those entitled to a compulsory share to be disregarded.

Legitimate heirs are those persons to whom the law reserves a share of the estate: the spouse, the children and, in certain circumstances, the ascendants.

If the disposition of assets results in a gift that infringes upon the share reserved for them, the legal remedies provided for by law to protect them may be invoked, including an action for reduction.

Put simply, placing certain assets in a trust does not automatically exempt them from the rules governing compulsory inheritance.

The implications for succession must therefore be assessed as early as the planning stage, taking into account the settlor’s family circumstances and the rights of those involved. The firm’s website also features a section dedicated to wills, succession and trusts, providing information on notarial services relating to estate planning, wills, gifts and other instruments for intergenerational wealth transfer.

Asset protection, segregation and creditors

One of the key features is asset segregation. This means that the assets held in trust are kept separate from the trustee’s personal assets and must be used for the specified purposes.

Separation of property does not, however, mean that assets are always protected from creditors.

The effects on the settlor’s creditors also depend on the circumstances in which the transaction took place. In particular, the instrument may not be used to unlawfully remove assets from the reach of creditors.

Where the relevant conditions are met, the creditor may make use of the remedies provided for by law, including an action to set aside. This allows the creditor, provided the conditions laid down by law are met, to have a transaction that has prejudiced the creditor’s claims declared ineffective as against them.

For this reason, when discussing asset protection, it is more accurate to refer to the effects of asset segregation and earmarking, rather than viewing the trust as a mechanism capable of making assets indiscriminately immune to claims.

Revocable and irrevocable trusts

The structure may be revocable or irrevocable, depending on the governing law and the provisions set out in the instrument of incorporation.

In the first case, the settlor may, within the permitted limits, reserve the right to revoke the trust. In the second case, this right is not provided for.

However, it is also necessary to consider any other powers that the settlor may retain. If the settlor retains a degree of control that effectively undermines the trustee’s independence, questions may arise as to the effectiveness of the arrangement.

For this reason, the US model of the revocable living trust cannot be automatically transposed into the Italian context without taking into account the chosen governing law and the specific characteristics of the instrument.

Duration of the trust

There is no single term that applies to all trusts.

The duration of the trust depends on the applicable governing law, the purposes for which it is established and the provisions set out in the instrument of incorporation.

The 90-year time limit provided for in Article 2645-ter of the Civil Code for the separate legal concept of a restriction on the disposal of immovable property or movable property entered in public registers should therefore not automatically be applied to this instrument.

A restriction on use and a trust are not the same thing and are governed by different rules.

Living trust, family trust and restriction on the use of assets

Trusts, family trusts and restrictions on the use of assets allow, in different ways, for specific assets to be earmarked for a particular purpose. However, they are not equivalent legal arrangements.

The matrimonial property fund is governed by the Civil Code and allows certain assets to be set aside to meet the family’s needs.

The restriction on the use of assets provided for in Article 2645-ter of the Civil Code allows, where the relevant conditions are met, for certain assets to be earmarked for the pursuit of interests worthy of protection relating to people with disabilities, public authorities or other bodies or natural persons.

A trust, on the other hand, is structured in such a way that the assets are entrusted to the trustee to be administered in accordance with the terms set out in the trust deed.

The choice cannot, therefore, be based solely on the general aim of protecting one’s assets. It is necessary to identify the specific interest to be pursued and to ascertain which solution is legally appropriate.

Establishment of a living trust and the role of the notary

The establishment of the fund – understood in this context as a trust set up between living persons – begins with the definition of a specific programme.

The trust deed sets out the key elements: the governing law, the purpose, the parties involved, the powers and duties of the trustee, the beneficiaries, the duration of the trust, and the arrangements for the management and disposal of the assets.

For this reason, the notary does not assume the role of trustee and does not manage the assets. Their involvement relates to the structuring and legal formalisation of the transaction in cases where this is required or appropriate in relation to the acts to be carried out and the assets involved.

At this stage, it is also possible to assess the suitability of the instrument in relation to the objective being pursued, as well as its relationship to succession, the rights of compulsory heirs, family circumstances, the nature of the assets and other available instruments.

When does the notary get involved?

The notary’s involvement does not necessarily take the same form in every trust. It depends on the structure of the transaction and the nature of the acts that need to be carried out.

When immovable property or rights in immovable property are transferred, the formal requirements laid down by law and the obligations relating to the registration of immovable property must be complied with.

The notary carries out the necessary checks for the deed, verifies the legal aspects of the transaction and takes care of the formalities required in the public registers.

A preliminary assessment also makes it possible to determine whether a trust is the appropriate instrument for the specific need, or whether other arrangements might be more suitable, such as a matrimonial property fund, a restriction on the use of assets, a will or, where the relevant conditions are met, a family agreement.

Set-up and running costs

There is no standard cost that applies to every procedure.

The costs depend on the complexity of the structure, the number and nature of the assets, whether there are any properties or shareholdings, the work required to draw up the documents, and any subsequent management costs.

The trustee’s remuneration may also be a factor, particularly where the role involves ongoing administrative duties.

To determine the actual cost, it is therefore necessary to know the details of the transaction and the assets involved.

Tax aspects of a living trust

Tax considerations must be taken into account right from the design stage.

The legislation distinguishes between the various stages of the transaction and takes into account, amongst other factors, the establishment of the trust, the transfer of assets, the generation of income and the subsequent transfer to the beneficiaries.

The taxation of income also depends on the nature of the arrangement and the status of the beneficiaries.

It is therefore incorrect to automatically assume that setting up a trust fund confers a tax advantage. Taxation and civil law implications must be examined together on the basis of the specific circumstances.

Advantages of a living trust and its main limitations

One of the main advantages of a living trust is the ability to set out precise rules in advance governing the management and allocation of specific assets, even over a long period.

Depending on your needs, it can enable you to organise your assets, plan for the transfer of assets to the next generation, safeguard the interests of specific beneficiaries and ensure continuity in management.

However, this flexibility comes at the cost of greater complexity. Setting up such a structure may involve initial and ongoing costs, and must comply with the rights of creditors and statutory heirs, as well as the applicable tax regulations.

Its usefulness must therefore be assessed in the light of actual needs and compared with other available tools.

Discuss the most suitable solution with the notary’s office

The establishment of a trust requires a prior assessment of its purposes, the assets to be placed in the trust, the beneficiaries, and the transaction’s financial, succession and tax implications.

The Doria Saglietti Scerbo Notarial Practice assists clients in assessing and drawing up wealth and estate planning arrangements.

• Padua Head Office: Corso del Popolo, 8/C – 35131 Padua | Tel. 049 655 080

• Vigonza Office: Via Bachelet, 5 – 35010 Vigonza (PD) | Tel. 049 628 807

• Grantorto Office: Via Umberto I, 55/2 – 35010 Grantorto (PD) | Tel. 049 655 080

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FAQs on the living trust