Dynasty Trust for Business Shares, Generational Transfer, and Protection of Mandatory Inheritance Rights
Authors: Carlo Cicala and Vincenzo Papi
It is common for entrepreneurs to use a dynasty trust for business shares to plan the generational transfer of the company. Let’s explore how a trust can be reconciled with the protection of mandatory inheritance rights under Italian law.:
It is important to note that the transfer of a business share that ensures effective control of the company to descendants is exempt from proportional tax. This is a specific tax incentive provided for the generational transfer of the company.
However, it may happen that an entrepreneur, in the presence of several descendants, chooses only some of them to continue running the company and excludes others. In this case, there is a risk that, upon the opening of the succession, the excluded descendants may initiate an inheritance dispute. Such a dispute can last many years and jeopardize the future of the company.
The problem does not arise if, quantitatively, everyone receives the portion of the estate that is legally reserved for them by law. This reserved portion is known in Italian law as “legittima.”
In the Italian legal system, to determine the share due to these mandatory heirs, the value of the transferred assets is considered at the time of the opening of the succession (i.e., at the death of the entrepreneur).
It may therefore happen that any transfer made during the entrepreneur’s lifetime as a gift (through a donation, a family pact, or a trust) is challenged upon death.
Consider a business share transferred during the entrepreneur’s lifetime which, over a few decades, has tripled in value.
To resolve this issue, one can resort to the family pact or the operational flexibility of the trust. The trust deed can, in fact, stipulate that the trustee has the task of satisfying those entitled to the mandatory share, taking into account the value of the assets (previously contributed to the trust) determined at the time of the opening of the succession. Therefore, those entitled to the mandatory share will have no interest in initiating legal proceedings (and will have no right to do so due to the lack of interest in acting) as their claims will be satisfied by the trustee.
The structure of a dynasty trust, established while the settlor is still alive and intended to produce effects also (but not only) after his death, has been deemed compatible with our legal system by the United Sections of the Court of Cassation, such that – with due precautions – it can also be used to facilitate the generational transfer of the company.