Viewing posts categorised under: Trusts

Trusts and their treatment in Portugal

By Mark Quinn
This article is published on: 31st January 2022

31.01.22

Trusts in the eyes of the Portuguese authorities

Trusts are a legal arrangement for managing assets and there are many types of trusts. They are a construct of the common law system and have been used for centuries. Portugal, like much of Europe, has a code-based civil law system; conversely, the UK has a common law system. As such, Portuguese law does not recognise the status of trusts but this does not stop them from applying tax on any distributions received by a Portuguese resident beneficiary of a trust.

Trusts are a very common planning tool; however, they have increasingly become under scrutiny by tax authorities around the world because of their lack of transparency and use in abusive tax planning.

The area of trusts is huge, and we will focus here only on their treatment in Portugal. If you are considering a trust for any reason, you must seek advice from a suitably qualified person to ensure you achieve your objectives and fully understand any financial implications for you and/or your beneficiaries.

What are trusts used for?
There are many reasons why someone might set up a trust, such as:

Tax planning – settling assets into a trust can reduce or in some cases, remove an inheritance tax liability, assuming certain conditions are met
To control and protect family assets – the trust controls who can receive benefits, when and in what proportion. This can be valuable for beneficiaries who may not be able to responsibly manage large sums of money or need help in managing complex structures, or to say, protect wealth in the event of divorce
To protect minor beneficiaries or incapacitated beneficiaries – the protection of a trust can ensure minors or vulnerable beneficiaries are looked after, and the funds are used for their sole benefit
To pass assets to beneficiaries during or after your lifetime – you can settle assets into trust during your lifetime or on death, and importantly maintain a level of control over the gift. When assets are passed on via a will, there are no controls in place and the beneficiary can do as they wish with the gift
Avoid probate, allowing family members to access funds to pay inheritances taxes, or help with expenses before probate is granted
Unlike probate which is public record, trusts are private

The type of assets that can be put in trust are cash, property, shares and land.

How it is structured and who is involved?
The settlor(s) is the person settling the asset into trust. They can either be a beneficiary of the trust or excluded from benefiting from the trust.

The beneficiary(s) is who the settlor wishes to benefit from the assets held by the trust.

The trustees can be individual laypersons or professional trustees. There are pros and cons of each, but in both cases they must only act in the best interest of the beneficiary, responsibly manage the trust assets and cannot personally benefit from the trust. This is a legal obligation, and they are liable if they do not fulfil their duties.

The settlor decides how the assets in the trust can be used and how they should be managed, and this is recorded in the ‘trust deed’. It also details the powers of the trustees and how the trust might be changed or closed, in certain conditions.

You may also have a ‘letter of wishes’. This will have additional information that the settlor wishes the trustees to consider in administering the trust. This is not binding on the trustees, but they can be guided by this when making decisions.

I want to set up a trust and I am living in Portugal
A Portuguese tax resident can set up a trust.

They can choose to do this with any trustee (professional or individual) anywhere in the world. Some common jurisdictions are the UK, Channel Islands, Malta, Cyprus, Hong Kong and Gibraltar.

When choosing a jurisdiction, it is important to consider the robustness and suitability of the legislation in that country as this will impact the laws applicable to the trust.

The potential tax payable on establishing a trust will differ depending on the type of trust, the domicile of the settlor, and in some cases the jurisdiction it is established in.

Whether a trust is the right solution for you is dependent on many things, such as your objectives in setting up the trust, your domicile and residency, the residency of your beneficiaries, the type of gifts you wish to make, the cost and the tax implications for all parties involved.

There may also be better alternative solutions to a trust, for example, there are tax-efficient investment structures that you can use to replicate the benefits of a trust but without the punitive tax treatment.

We will not go into detail here as there are many variables but if you wish to explore this, please contact us.

Yes, I would like to talk to someone about setting up a trust

I am a beneficiary of a trust and I am living in Portugal; how will I be taxed?
Any Portuguese tax resident receiving a distribution from a trust will be taxed at 28% (or 35% if the trust is domiciled in a blacklist jurisdiction).

The whole distribution is taxed, irrespective of whether it is income or capital. This is obviously onerous and highly tax inefficient, therefore it is likely worth reviewing any trust structure you have established or are a beneficiary of.

A trust is not right for me; can I close a trust?
Whether or not a trust can be closed is dependent on the type of trust. Some are closed on the occurrence of a certain event and others can be closed by the trustee or beneficiaries.

There are usually strict rules and procedures that must be followed, but in most cases, it can be done.

If you would like to discuss your personal situation, it would be our pleasure to analyse the options available to you.

Please complete the form below.

As a British citizen living in France who can look after my financial affairs if I become incapacitated?

By Tony Delvalle
This article is published on: 14th December 2018

14.12.18

There has been a huge rise in the number of lasting powers of attorney set up as dementia and Alzheimer’s have become the biggest cause of death.

Power of attorney arrangements allow an individual’s financial and health affairs to be looked after by someone else, the attorney, if they lose mental capacity in the future.

Several million “lasting” agreements have been registered since 2008, when they replaced “enduring” power of attorneys, amid concerns that the rules were too easy to abuse. There are two types of agreement – one covering finances and property, and another for health and welfare. Finance and property is far more popular.

The sharp rise in new agreements – which are set up on average when the donor is 75 – comes as the Office for National Statistics reveals deaths from dementia and Alzheimer’s accounted for almost one in eight deaths in 2015 – a total of 61,686 people – overtaking heart disease as Britain’s biggest killer. It is steadily on the increase.

Many people are still exposed as the majority of people have not appointed a power of attorney. It is possible for someone to take control of your financial or welfare decisions after an individual becomes mentally incapable, this can be a lengthy and complicated process with extra cost, which can cause distress at an already difficult time.

Without power of attorney, friends and family have to retrospectively apply to the Court of Protection and prove why they should assume responsibility. This process incurs court fees and can take up to 16 weeks, leaving money locked into accounts until a decision is made. Add to this an international dimension and it is certainly a complicated problem.

As a British citizen in France you can do either a UK lasting power of attorney or a French mandat de protection future. The choice between which one is best will depend where you intend to live now and the future and where is the main part of your estate.

Let’s look at the UK and French legal systems available in cases of incapacity. The two different types of lasting powers of attorney in case of incapacity in England are Health and Welfare, and Property and Financial, whereas in France there is only one the mandat de protection future.

UK Health and Welfare covers

Daily routine
Moving into a care home
Life sustaining treatment

UK Property and Financial covers

Managing bank or building society account
Collecting benefits or a pension
Selling their home

French Mandat de protection future covers all aspects of a persons financial and health well being.

1) As a British citizen living in France, which law would govern the administration of your estate in case of incapacity?
– French law will be applicable under the provisions of the Hague Convention

2) What does French Law use to protect people from incapacity? The Mandat de protection future is one choice and covers all aspects of a persons financial and health well being.
* Trusteeship
* Guardianship

3) Could you prepare for a physical or mental incapacity by appointing somebody you trust to administer your estate, pay your debts, manage your income in France?
Yes of course.

4) Would that power of attorney be applicable and enforceable abroad?
Yes it would be efficient in most countries and in 100% of the countries who ratified the Hague Convention such as England and Wales. In other words you could prepare a LPA or mandat de protection future and both should be applicable.

5) Does the French power of attorney have a limited scope? Can the attorney sign a deed of sale on your behalf?
a) Notarial mandate (notarial deed extend the power of the guardians up to the possibility of selling the estate)
b) Mandate not supervised by the Notaire (mere administration by an appointed trustee + the Judge)

So both are legal and which one is best for you may depend on a number of factors. What your assets are, where they are held and in what way, jointly, individually, what you want from them, inheritance planning etc.

The most important thing is to do something. Taking good legal and financial advice before you do to see what is best for you and avoid potential future problems when you least need them is imperative.

Trust in me!

By Gareth Horsfall
This article is published on: 13th March 2018

13.03.18

Quite recently I was watching the Disney movie Jungle Book with my son. I am sure that you remember the film. You may also remember the snake in the film, named Kaa, who tries on a couple of attempts to eat the ‘man cub – Mowgli’. If you happen to watch the film again you will see that he sings a song to hypnotise Mowgli, that song is called ‘ Trust in Me’.

Like alot of things in life, there are things that trigger the grey matter to start working at a rapid rate and the lyrics to ‘Trust in me’ seemed to resonate with my grey matter on that day. It was all the talk of ‘TRUST’.

You may have been aware of all the talk of offshore trusts in the Panama Papers. Well, you will be grateful that I am not going to go into that in any detail because for most of my clients it has very little to do with them. However, what might affect you is if you hold a trust in the form of a pension, specifically a UK private pension, an IRA, 401K or other US based retirement fund and/or a trust which has been set up in another country which might have the objective of protecting your estate from inheritance tax and or using a trust to pass assets on to family members in the event of your death.

What is a trust?

A trust is basically an agreement between three parties:

The trustee holds the assets, legally, on behalf of the ‘settlor’, who ensures that they are distributed in accordance with the settlor’s instructions. This can save time, reduce paperwork and in some cases avoid inheritance taxes. When something sounds this good, why haven’t we all got one? Because in Italy things are never that simple.

Trusts in Italy
Before I start with the analysis of how trusts are treated for taxation purposes in Italy, I would like to caveat this by writing that if you have a trust and are unsure of its tax treatment then you may wish to seek the advice of a trust lawyer who specialises in this field. The information I have learnt here covers a range of trust tax law, in Italy, which is specific to about 99.9% of clients, but it may not be appropriate for everyone. It is a very complicated area and may need specialist advice.

The issue of trusts in Italy was best summed up by an Italian lawyer who I was asking about this topic some years ago and I asked what is the law surrounding trusts in Italy His reply has stuck in my mind….”there is no real law of trusts in Italy because no one trusts anyone”. If you think about it, he is right. You are effectively giving your assets to another party, on the basis of trust, to distribute them on your behalf. That works well in the UK and the US where trust law is written into the framework of society and universally accepted. However, in Italy, where corruption, fraud and a slow legal system exist there would be little recompense if the ‘trusted’ individual/company ran off with your money.

Different types of trusts
There are many different types of trusts which can be used for various planning purposes but they are almost all unwritten by 2 basic concepts. This is that they are either revocable or irrevocable.

An irrevocable trust is simply a trust with terms and provisions that cannot be changed by the person who set it up (the settlor). This is distinguishable from a revocable trust, which is commonly used in estate planning and allows the ‘settlor’ to change the terms of the trust and/or take the property/assets back at any time in the form of income payments or lump sum withdrawals.

This concept of irrevocable and revocable trusts are the defining factors in the tax treatment of trusts in Italy and why, if you inherit a trust or you set one up before moving to Italy, then it is worthwhile checking to determine which type it is.

In general, the irrevocable trust (the one which CANNOT be modified by the settlor), in Italy, is respected for income tax purposes. The trust is deemed to be the owner of the asset (not the person) and there is a legally defined separation between the person who set it up ( the settlor) and the beneficaries of the monies from it. i.e the person who set it up can’t take money and income out at will and change the terms of the trust as and when they please. This is important in the tax treatment which I will explain below.

Conversely, the revocable trust is ignored for tax purposes and the ‘settlor’ is treated as the owner of the assets and any income from the trust, as if they still held them in their own name. The person who holds the trust is also responsible for disclosing the assets in it to the Agenzia delle Entrate each year, as if they owned them directly. Clearly this is not very tax effective in Italy.

Tax Treatment

The irrevocable trust is certainly the most tax efficient of the 2 types of trust and the easiest one to declare in Italy. The tax treatment is very simple in reality because the trust itself is not taxed, although it must be declared on the Quadro RW each year under the ‘monitoraggio’ section. (and your % share in the trust) Any income distributed from the trust is treated as the income of the individual in the tax year in which it is distributed and taxed at your highest level of income tax. (Capital Gains and non earned income tax of 26% do not apply to this type of financial structure)

The revocable trust, by comparison, is another beast altogether. This type of trust is generally looked through and the assets in it are deemed to be in the ownership of the individual directly.(the settlor). In other words any assumed tax protection by placing assets in trusts is removed because the trust itself can be altered. The Italian authorities have a number of provisions, which if written into the trust deed, could destroy the existence of the trust. These include:

The ‘settlors’ power to terminate the trust, causing a payment back to the settlor or the beneficiaries
The power of the settlor to name themselves as a beneficiary
Provisions which subject the trustee to consent or approval of the settlor i.e effective control of the trust by the person who set it up
The settlors powers’ to terminate the trust early
The provision granting a beneficary a right to a payment from the trust
The provision requiring the trustee to take instructions from the settlor for the purpose of administering the trust assets
The option to change beneficiaries
The settlors powers to distribute or lend income or assets from the trust to persons designated by the settlor
Any other provision, determined by the settlor or benficiary, which appears to limit the administration and distribution powers of the trustee

Assuming one of these provisions is written into the trust deed, then the protection of the trust invalidates the tax protection afforded by the trust and the assets will be subject to same rules as those assets which are held outside a trust.

Direct tax on assets in Italy is 26% capital gains tax and 26% on any income distributions/dividends or interest payments derived form assets, in the year in which they were realised. In addition a tax of 0.2% on the assets themselves as a wealth tax. The tax protection afforded effectively flies out of the window.

What are the alternatives?
For ultra wealthy individuals and companies there are always work rounds to these issues and with enough money you can pretty much construct anything these days to avoid taxes. However, this does not necessarily help the average person who would also like some tax protection for hard earned income and assets that you may wish to pass onto future generations.

The Investment Bond (Polizza Assicurativa Capitalizzazione) is a possible solution. It meets a number of similar criteria such as:

No Italian income and capital gains tax on the fund itself
Distributions are taxed at 26% on the proportional gain of the withdrawal (in some respects this is better than the irrevocable trust in which distributions are taxed at your highest rate of income tax)
The option to name beneficiaries in the event of your death
Continuation options in the event of death
The possibility of regular withdrawals and/or lump sum withdrawals and
A global range of investment options
Lastly, the investment Bond itself is fully reported to the Italian authorities and any taxes paid at source so you don’t have the worry of having to submit the information each year yourself or making mistakes

Summary
The lesson to be learned from this is, that before you do anything, if you have a trust, are a beneficiary of a trust, have set up a trust yourself or had one set up for you, then the first thing you need to do is get a copy of the trust deed and look at your relationship / level of involvement in the trust to determine exactly how it fits into your tax affairs as a resident in Italy. If in doubt, consult a professional.

I am going to elaborate on this subject of trusts in my next Ezine, specifically in relation to UK private pensions and US IRA’s and retirement funds. These vehicles themselves are set up as trusts and therefore have a specific tax treatment in Italy.

Trusts – and French residency

By Katriona Murray-Platon
This article is published on: 28th November 2017

28.11.17

I remember during my legal studies, Trust law was not a popular subject. The French authorities do not like Trusts either. They don’t understand them, they mistrust them (pardon the pun). Interestingly Trusts originated in France, in Normandy, during the crusades. Crusaders entrusted their property to trusted third parties to manage until their return and the “trustees” had to pay the income to the crusader’s family. However today, the French authorities view Trusts as a way to hide assets (to avoid Wealth Tax for example) whereas from a UK perspective Trusts are a very useful way of managing assets for people who cannot manage them themselves and/or require protection. They are very often used in wills but when the beneficiary, settlor or trustee decides to go and live in France they may have forgotten all about the Trust and have no idea about the reporting obligations for Trusts in France.

Things are even more complicated by the notion of “deemed settlor”. When a settlor dies, the beneficiaries are deemed to be the settlor of the trust assets. Article 885 G ter of the French Tax Code states that the settlor or the “deemed settlor”, if their assets exceed the wealth tax threshold, must include the net value of the assets of the trust in the assessment of their assets on 1st January of the tax year.

Trusts are very often managed by solicitor’s firms and may contain investment portfolios. If a beneficiary is resident in another country the Trust falls under the requirement to report under the Common Reporting Standard Automatic Exchange of Information rules introduced by the OECD (please see my colleague Derek’s article).

There are two declarations which have to be filed. One for every event i.e. when the trust is created, amended or terminated, which must be filed in the month following the event. The other declaration is annual and must be made by the 15th June of each year and show the assets in the Trust as at 1st January of the same year. There is no income tax return for the Trust itself but beneficiaries should declare the income they receive from the Trust (whether it is dividends, interest, proceeds from sales of shares or rent from a property within the Trust) on their annual tax return form. If distributions are made to the beneficiaries, it may also be worth filing an event return mentioning the amounts distributed throughout the year.

Both of the Trust declarations require details (names, dates of birth, addresses etc) of each and every settlor, trustee and beneficiary whether or not they are French tax resident. It is the Trustees responsibility to file the information and the Trustee who will be liable for failure to declare, late declarations and for any penalties.

Since 8 December 2013, Trustees who failed to comply with their reporting requirements could have been fined €20,000 or 12.5% of the total value of the assets held in the trust, whichever was higher. For declarations due before this date the fine was only 5% of the assets in the trust or €10,000.

In March 2017 the French Constitutional Council ruled that the 5% or 12.5% penalties were unconstitutional with effect from 1st January 2017. The €20,000 fine does still apply however and can be cumulative, applying to each return that has not been filed on time.

With the Common Reporting Standards currently being enacted by the UK (including Jersey, Guernsey and the Isle of Man) and France, I believe that there will be a lot more questions from the French tax authorities in the near future and in particular regarding undeclared bank accounts and trusts. Whilst the French tax authorities ask nicely the first time, if they suspect that assets or income have not been declared they do have the power to apply these fines. To better understand your tax obligations as regards Trusts, please do not hesitate to contact me.