estate planning

Cross Border Estate PlanningAn Italian PerspectiveLondon – 22 June 2010

Avv. Vincenzo SinisiAvv. Vincenzo SinisiSinisi Ceschini Mancini & PartnersSinisi Ceschini Mancini & Partners

Law OfficesLaw Offices

Via Pasquale Stanislao Mancini 2 – RomeVia Pasquale Stanislao Mancini 2 – RomePhone +39 06 3221485Phone +39 06 3221485

Fax +39 06 3613266Fax +39 06 3613266e-mail [email protected] [email protected]

Law applicable under Italian conflict of law rules

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The conflict of law rules are codified and are dictated by Law 31 May 1995, n. 218.

The conflict rules regarding inheritance are covered by Article 46 through 50 of Law 218/95 which cover:

Law applicable to inheritance rights Law applicable to the capacity to write a will Formalities for a valid will Succession rights of the State Jurisdiction

Law Applicable to Inheritance Rights3

The default principles provides that

inheritance rights are governed by the law of the country of which the deceased was a citizen at the time of the death, irrespective of the location of the assets.

In the event of dual citizenship, the applicable law is the law of the country with which the deceased had the closest connection, however if the deceased was also Italian citizen, Italian law will prevail (art. 19)

Inheritance Rights and Choice of Law4

The testator may derogate to the application of the law of citizenship with an express choice of law clause in the testament, however the only permitted alternative is the law of the country of residence at the time of the death

The applicability of the law of residence cannot derogate to the forced heirship entitlements in favour of heirs which are, at the time of the death: of Italian nationality, and resident in Italy

Division of inheritance5

If the estate is left undivided to the heirs, the division is subject, by default, to the same law which governs inheritance rights.

However, the heirs may however jointly decided to apply either :

• the law of the country the death eventuated; or

• the law of the country where the

majority of the assets are located.

Legal capacity to make a testament and law applicable to form

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• The capacity to make a testament, or to amend or revoke a testament is subject to the law of citizenship of the testator at the time the testament was made, amended or revoked.

• A testament is valid, as to its form, if in compliance with the laws of:• Country of citizenship at the time of making the

testament or at time of death; or• Country of residence or domicile at time of making of

testament or at time of death; or• Country were the testament was made.

Jurisdiction 7

• Italian courts will have jurisdiction over inheritance disputes when:

• The deceased was an Italian citizen at the time of death

• The death occurred in Italy • Most of the assets are located in Italy• Defendant is domiciled or resident in Italy or has

accepted Italian jurisdiction (except when the litigation involved real estate situated outside Italy)

• The litigation relates to assets located in Italy

Italian inheritance law and forced heirship rules Entitled parties

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When the deceased has relatives he/she is not entirely free to dispose of its assets, as Italian law reserves a portion of the estate of the deceased to certain relatives:

• Spouse• Children (and their offspring if children had died

or are unwilling to accept inheritance)• Parents and progenitors (only when no children

exist)

Those people are called “legittimari”.

A testament in violation of forced heirship rules is not, however, void per se, and a specific recovery action by the damaged heir is required.

Determining the assets of the Estate for forced heirship purposes

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The estate on which the entitlement is calculated includes:

• All assets owned by the deceased at the time of his death

Plus• All lifetime gifts made by the deceased, including

gifts to heirs and third partiesMinus• All debts of the deceased at the time of the death

All Assets, including past gifts are considered with reference to their market value at the time of the death

Shares of entitlement

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Family relationhip EntitlementSpouse only with no children. 1/2 to the spouse.

Spouse and one child 1/3 to the spouse 1/3 to the child

Spouse and 2 or more children 1/ 3 to the spouse1/ 3 to the children

Spouse and parents. No children 1/2 to the spouse1/4 to the parents

1 child with no surviving spouse 1/2 to the child

2 or more children with no surving spouse

2/3 divided in equal shares

Only parent(s) and /or progenitors 1/3 to the parents/progenitors

Challenging violation of forced heirship rules

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The legal action The action is aimed at revoking, in all or in

part, the testamentary dispositions or the gifts made in excess of the share that could be freely disposed of by the deceased

Legitimate plaintiffs The heirs which have a forced heirship

entitlement, and their successors, with some limitations for people who had received gifts

Parties All heirs and against the third parties who

received a gift, if the gift is to be revoked

11. Challenging violation of forced heirship rules 12

Timing

The heir who did not received the appropriate share of the estate may claim it within 10 years from the death of the deceased. The sending of a simple claim letter will case the start of a new 10 year term

Voiding dispositions in violation of forced heirship rules

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Revoking testamentary dispositions and gifts Testamentary dispositions, including LEGATI, are the

first ones to be revked. The revocation is proportional, without differentiating between heirs and legatees (art.558), however the testator may also indicate that certain dispositions must be preferred.

Gifts are revoked only if the revocation of the testamentary dispositions is not sufficient to safeguard forced heirship entitements. Gifts are revoked in reverse chronological order, starting from the most recent one

An alternative approachFamily Agreements (Patti di famiglia)

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Introduction to death duties in Italy 15

Inheritance taxes, previously abolished, were reintroduced in Italy in 2006 with a rate ranging between 4% and 8%. In addition to inheritance taxes, if the Estate includes immovable properties, or registered movable properties, certain transfer taxes are also due

Territorial scopeIf the deceased was an Italian resident, the relevant taxes are due on all assets. If the deceased was not an Italian resident, inheritance taxes are due only on Italian assets. Transfer taxes are always due on Italian assets only

Determining the value of assets 16

Value is determined at the date of the death, which is the date on which succession tales place

For real estate located in Italy, reference is made to tax value, which is normally quite lower than actual market value

For real estate located abroad, use of tax value accepted by foreign tax authorities is permitted. The tax office will normally rely on the value reported in the inheritance tax return

Debts are deducted . Debt that are not strictly related to a specific assets are used to redice proportionally each share of inheritance

Tax Burden: Spouse and children

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Type of asset Inheritance tax

Cadastral tax Registration tax

Real estate 4% 1% 2%

Other properties

4% ------ --------

Exemptions 1.000.000 EUR ------ -------

Tax Burden: Brothers and Sisters

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Other properties

6% ------ --------

Exemptions 100.000 EUR ------ -------

Tax Burden: Other relatives up to 4° degree and

relatives in law up to 3° degree

19




Other properties

6% ------ --------

Exemptions ---------- ------ -------

Tax Burden: Unrelated heirs

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Other properties

8% ------ --------

Exemptions --------- ------ -------

Tax Burden: Special Exemptions

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Ground for exemption Exemption

Heir with Handicap No inheritance tax for first 1,5 million

Residence Home for one of the heirs

Cadastral and recording tax 168 Eur Only

Family Agreements Not subject to taxation

Government bonds Not subject to taxation

Avoiding double taxation

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Domestic rule (when no international treaty exists)When the deceased a resident of Italy, taxes are levied on worldwide assets. Article 26 of the Inheritance Tax Act provides that Italy will recognize a tax credit for inheritance taxes paid abroad, in the country where the assets are located, up to the amount of the Italian tax proportionally charged on those assets.

Internationl ConventionsItaly has a very limited network of seven inheritance tax treaties)

International conventions on inheritance23

Countries with inheritance tax treaty with Italy Denmark France Greece Israel Sweden United Kingdom USA

Main Treaty provisions (Italy /UK) 24

Italy/UK Convention of 15 February 1966 (copy in the materials)

It does not deal directly with the issue of which country may levy inheritance taxes and provides rules to identify domicile of deceased in case of conflicting

provisions of UK and Italian law to identify the situs of properties subject to inheritance

when deceased is domiciled in Italy or UK to avoid double taxation

It applies only to taxes applicable to the inheritance itself, and not to the transfer taxes levied when receiving an asset because of inheritance

Determining Domicile (Italy/UK)25

Article 2 of the convention dictates the relevant principles.

Each country will apply its own law to determine whether the deceased was domiciled in its own territory.

Note that concept of domicile is not the same in all countries

In case of conflicting rules, the following criteria will apply, in order to determine domicile:

Permanent residence at time of death If resident in both countries, preference is given to country

with closest personal and economic connections (vital interest centre)

If vital interest centre was in both countries, or it cannot be identified, preference is given to usual living place

If leaving in both countries, citizenship will apply

Determining Situs (Italy/UK)26

Article 4 of the Convention: Real estate ……………………………….Location of real estate Company holdings ………………………Place of incorporation Bank deposit…………………………….. Location of bank branch Money and other movable properties……Location of assets Receivable ………………………………..Location of debtor Patents…………………………………….Place of registration Copyright…………………………………Place of exercise Other non specified properties………….. Domicile

Situs is very important as taxation for non resident people depends on situs of property

Article 3 indicates that rules in Article 4 will not cause levy of taxation if that property would not be subject to taxation in that country under its own domestic rules on situs

Avoiding Double Taxation(Italy/UK)27

Usually no taxes are levied on assets located in other country

If taxes are levied, the state will give a credit for the amount already paid in the other country, where the properties are located, however the tax credit cannot exceed the tax applied by the first country.

Use of Trust28

Italy has ratified the 1985 Hague Convention on Trusts Article 1, para. 74 and 75 of Law 296/2006 amended

the consolidated tax code and regulated for the first time income tax for trusts, including non resident trusts

Tax legislation now distinguishes between trusts with no identified beneficiaries, which are treated as

commercial company (if involved in commercial activities) or as non commercial entities, if not involved in commercial activities, and

Trusts with identified beneficiaries, where the trust income is attributed, for tax reasons, directly to the beneficiaries

Use of Trust (transfer taxes)29

Tax Office Circular of 6 August 2007, no. 48/E has clarified impact of new rules on transfer of assets to trust and inheritance taxes. According to the new rules, the transfer of Italian assets to a trust must be treated as a gift.

Gift taxes are same as inheritance taxes (with the consequence that when the beneficiary is a close relative (spouse or children) of the settlor, and teh beneficiaries of the trust are identified, the same deductions and benefits provided for direct gift shall apply.

No inheritance tax will be due upon death of settlor (controllare per reintestazione ai beneficiari.

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