Inheritance and Succession: how to navigate the maze of wills and legitimates

In family capitalism, the term succession has always aroused suspicion and concern. But ensuring continuity in family wealth, or even more so for business wealth, has always played a key role, and the evolving regulatory framework accentuates the importance of proper planning and professional support.  The issues of generational transition on the one hand, and those of estate and gift succession with its tax implications on the other, have returned to the headlines with major inheritance cases such as those resumed in the news for the Del Vecchio and Berlusconi families that have brought to light rules and loopholes.

Then again, in a country like Italy known for high taxation, caution about inheritance-related aspects remains high even if in reality the path of the IRS in this direction is less bumpy than in other areas of Europe. One only has to look at last year's Tax Revenue Bulletin published by the Mef to see that the inheritance and gift tax item does not reach 1 billion euros, or less than 0.20 percent of total revenue. In contrast, Germany collects about 8 billion euros each year from this type of tax and France almost double that amount with more than 15 billion euros.

The inheritance tax was introduced in the newly formed Kingdom of Italy in 1862. Over the years it had various vicissitudes and in its current version dates back to 1991, albeit with some further vicissitudes. In fact, after an initial substantial tax relief at the end of the year 2000, the "Berlusconi II" government to abolish the tax, except that it was "resurrected" (a unique case in Italian history) in 2006 by the "Prodi II" government, albeit in a reduced form and with significant exemptions.

Decree Law No. 262 of 2006 reintroduced the tax in its former measure ("2000" version), articulated with a €1 million exemption for transfers made in favor of a living spouse or relatives in the direct line (ascendants and descendants): from that figure upwards there is a 4 percent rate to be applied on the total net value. The rate becomes 6 percent for transfers in favor of siblings from 100,000 euros. Inheritance in favor of other relatives up to the fourth degree and for collateral relatives up to the third degree, on the other hand, has no deductible and the rate is always 6 percent. Finally, for all other estate beneficiaries, the rate is 8 percent, with no deductible applied. However, if the beneficiary has a disability, the deductible rises to 1.5 million.

While Italy ranks dead last in terms of tax, personal and business taxes, it is catching up on the inheritance tax front. In fact, the median inheritance tax in OECD countries is higher, at around 15 percent, with peaks of 30 percent in Germany, 34 percent in Spain, and 40 percent in Britain, while in France it is as high as 60 percent. However, there are also those who are better off, such as Sweden, which abolished it in 2004.

"Faced with succession aspects, it is not useful to focus on mere taxation, but based on the needs and goals of the person concerned, it is also useful to know the options offered by company law that today allow business assets to be passed on with a maximum degree of personalization and elasticity, while respecting the quotas that the law reserves for certain special categories of heirs including children and spouses," explains Marzio Albonico, chairman of Generfid, a Banca Generali Group fiduciary.

The Berlusconi case, the latest among many excellent cases, has as mentioned brought the succession phenomenon to the forefront: the combination of the various instruments available, starting with the simplest ones such as the will and the insurance policy, and arriving at the more sophisticated ones, such as family holding companies and trusts, which help in the planning process, efficiently.

In 2006, the "family covenant" was introduced into our legal system. This is the possibility for an entrepreneur to manage the generational transfer of his or her business by transferring the business or shares in the capital of the "family company" to one or more descendants, without there being any dispute at the inheritance.

This is an important innovation in the system of inheritance law: indeed, "family" businesses are quite common in our country. Although it greatly affects the substance of the entrepreneur's testamentary succession, the family covenant is typically a contract between living persons, involving the immediate transfer of the family business.

The family holding company is an increasingly common choice for Italian families, especially entrepreneurial ones or those with large movable and real estate assets, who wish to manage and protect their wealth. The use of this instrument allows for several advantages including facilitating the generational transition by including future generations in the corporate structure with differentiated administrative powers (up to the exclusion of concrete powers), avoiding interference by individuals, part of the family, but not endowed or not yet endowed with the entrepreneurial skills to carry out the business at the operational level.

The generational transition in the family holding company can take place exempt from inheritance and gift tax, but the conditions for the application of the exemption regime require careful checks as it applies to the continuity of the business activity.

The trust is also an increasingly considered tool, especially in the most complex cases, and has been benefiting since October last year from an interesting tax interpretation by the Internal Revenue Service, which allows assets to be placed in trust with substantial tax exemption, postponing the application of inheritance and gift tax until the time when the assets finally leave the trust to be assigned to the beneficiaries. Of course, taxes should be calculated on the basis of rates and deductibles existing at the time of assignment, taking into account the relationship between settlor and beneficiary.

"There are no better choices than others: each individual has unique dreams and needs, expectations and desires, and the task of the expert is to find the right mix among all possible paths. However, there is certainly a worse path: that of pretending nothing is happening, of putting it off, of not deciding. From our privileged observatory we can assure that very often it is a guarantee of furious quarrels, unnecessary costs, interruption of family relationships," Albonico concludes.