Main Characteristics
In continental law, an Anglo-American trust is traditionally described as a legal relationship in which a person (settlor) places assets under the control of another person (trustee), who is obliged to hold and manage these assets for the benefit of a third party (beneficiary). Therefore, three parties are usually involved in the trust:
- the settlor, who establishes the trust and transfers the assets into the trust
- the trustee, who holds the legal ownership of the trust assets and manages them, and
- the beneficiary, for whose benefit the trust was created and who holds the equitable ownership of the trust assets.
However, this does not necessarily mean that three distinct persons must always be involved in the trust: the settlor may appoint themselves as trustee and may also at the same time be the beneficiary, i.e. when the trust is established for their own benefit and interest.
The assets placed under the trust are separate from the trustee’s personal assets. Therefore, the trustee’s creditors have no recourse against the trust assets, nor against the income derived from them or any substitutes for the original assets. The trust itself does not have legal personality: it is the trustee who holds the legal title to the trust assets, deals with third parties, and, if necessary, takes legal action. A trust is also not a contract, it is a concept of property law.
People set up trusts for different reasons. They do this to ensure smooth asset transfer, avoid probate, protect assets from creditors, and minimize taxes. Trusts provide financial security for dependents, allow controlled distribution of wealth, and help manage incapacity by appointing a trusted individual. They also support business continuity, charitable giving, and offer privacy. Additionally, trusts assist in managing international assets and ensuring legal compliance.
No Belgian Legal Concept
In Belgian law, a trust is not a native legal concept. Our civil law system is also not familiar with the associated principle of the coexistence of legal ownership (held by the trustee) and equitable ownership (held by the beneficiary).
The law applicable to a trust is, in principle, the one chosen by the settlor (choice of law). This choice can be made explicitly or may be implied from the provisions of the trust deed. The chosen law then governs the establishment, interpretation, administration, consequences, and termination of the trust. On the other hand, if the trust concerns, for example, the acquisition or transfer of property rights related to the trust assets, these matters would be governed by the law of the country where the assets are located instead.
Belgian tax authorities do acknowledge foreign trusts, but they scrutinize their use, particularly in tax and estate planning. Trusts are often viewed through the lens of their discretionary or fixed structures, with the tax treatment varying depending on the nature of the trust and the distributions made.
Different Types of Trusts
As mentioned, a trust involves a settlor transferring assets to a trustee, who manages them and makes distributions to beneficiaries. There are different types of trusts:
- Discretionary Trusts: Trustees have freedom to decide when, how much, and to whom distributions are made. They have full discretion over how the income and/or capital of the trust is distributed among the beneficiaries. Beneficiaries do not have a fixed entitlement to the trust assets. It provides flexibility to adapt to changing beneficiary needs and circumstances. They are generally used for asset protection, tax planning, or managing wealth for future generations.
- Fixed (Interest) Trusts: The beneficiaries have a predetermined, guaranteed entitlement to the trust’s income and/or capital. Income and capital distributions follow a fixed schedule or proportion as dictated by the settlor. The trustee has no discretion in deciding how or when distributions are made. They are typically used for estate planning to ensure certainty in asset distribution.
Each type of trust serves different financial planning needs, with Discretionary trusts providing flexibility and adaptability, while Fixed trusts offer certainty and predictability.
There are other types of trusts, each serving different financial and legal purposes. Revocable trusts allow the settlor to modify or revoke them, offering flexibility, while irrevocable trusts provide stronger asset protection but cannot be changed once established. Living trusts help manage assets and avoid probate during the settlor’s lifetime, whereas testamentary trusts take effect after death through a will. Other common types include charitable trusts, special needs trusts, spendthrift trusts, asset protection trusts, bare trusts, and hybrid trusts.
Belgian Tax Obligations
As the founder or beneficiary of a foreign trust residing in Belgium, it is important to be aware of the potential tax obligations that may arise here, which includes both income and registration tax (gift and inheritance taxes).
During the lifetime of the founder or settlor, Belgian income tax obligations will occur, including the reporting of legal structures and their generated income in personal tax declarations under ‘Cayman Tax’ rules. These regulations aim to ensure transparency and proper taxation of foreign-held assets and income.
The Cayman Tax provides for a tax transparent treatment of the trust structure. The income of the trust will in first place be taxed in the hands of the founder. The income of the trust may also be taxed (afterwards) in the hands of the founder’s beneficiaries, unless they can prove that they will not, at any time or in any way, receive any benefit from the trust.
If the beneficiary is a Belgian tax resident, they may be liable to Belgian income tax on the income paid or allocated to them by the trust as if they received it directly. How this income will be taxed depends on its nature—dividends, interest, rental income, or capital gains are taxed according to their respective Belgian domestic tax rules, as if directly earned by the taxpayer. In other words, the beneficiary is taxed in a transparent (‘look-through’) manner, even if they are not deemed to own the assets themselves.
Double Taxation Agreements (DTAs) generally do not hinder the application of the Belgian Cayman Tax in an international context.
Inheritance Taxation
Additionally, Belgian inheritance tax may be applicable upon the death of the settlor, potentially subjecting the trust assets to taxation based on residency and the jurisdictional rules governing the transfer of wealth.
The debate over the taxability of such distributions is longstanding, frequently reshaped by decisions from both the Belgian tax authorities and tax courts. An additional complexity is that inheritance tax is a regional competence in Belgium, which means the rules and rates vary depending on the taxpayer’s region of residence (i.e. Flanders, Wallonia, or Brussels), potentially affecting how trust assets are taxed upon inheritance.
Legal Fiction
If a beneficiary receives a distribution after the founder’s death, it is legally considered to come from the trust, not the deceased’s estate.
The Belgian tax authorities, however, will usually try to levy inheritance tax on these distributions via a legal fiction. This legal fiction or ‘deemed legacy’ in Belgian inheritance tax law is a legal construct that typically includes certain transfers or benefits granted during the deceased’s lifetime as part of the estate, ensuring they are subject to inheritance tax. Similarly, the legal fiction is applied to trust distributions made after the settlor’s death under the same reasoning.
However, it can be argued that distributions from a trust may not necessarily fall within the scope of inheritance tax based on the ‘deemed legacy’ provision. The application of this legal fiction requires the existence of a contract that includes a ‘clause in favor of a third party’. As mentioned, an Anglo-Saxon trust does not qualify as a contract and is not governed by the applicable contract law in those jurisdictions. Moreover, it also does not constitute an agreement containing a third-party beneficiary clause. In that regard, the position of the Belgian tax authorities is flawed.
Distributions from a Trust
At the moment, the Belgian tax authorities consider distributions from both Discretionary and Fixed Interest trusts subject to inheritance tax.
Although this is a more technical matter, the timing of the taxation may differ. Non-Discretionary trust distributions are usually taxed at the time of actual payment, rather than immediately upon becoming due, provided the distribution is contingent on a specific future date post-settlor’s death (e.g. the beneficiary reaching a certain age). For Discretionary trusts, on the other hand, taxation remains tied to the actual distribution due to the lack of a concrete beneficiary claim (“wait and see” approach).
It appears to us that the actual distribution from the trust would in that case give rise to the submission of a new inheritance tax declaration afterwards.
Taxing Discretionary trust distributions under Belgian inheritance tax remains debatable. While the settlor established an agreement with a trustee, the beneficiaries have no direct claim to the assets, complicating the justification for inheritance tax. Yet, the local tax authorities often simply disregard this nuance.
Gift Tax Planning
While this may not seem obvious in case of a trust, in some cases, paying a gift tax in Belgium at the time of transfer could be advantageous, as it may prevent future trust distributions from being subject to Belgian inheritance tax.
Gift tax rates in Belgium, typically 3-7% for movable property, depending on the region, are significantly lower than inheritance tax rates.
By settling the registration tax obligation upfront, beneficiaries may avoid a higher tax liability and potential disputes with the authorities regarding the classification of trust distributions under Belgian inheritance tax rules.
Practical Advice
While subjecting distributions from a trust to Belgian inheritance tax is often questionable, it is crucial to note that a foreign trust will not automatically avoid Belgian inheritance tax if authorities determine that the assets effectively belong to the settlor or beneficiaries residing in Belgium.
Comprehensive planning and strict compliance with Belgian tax regulations are essential to prevent unforeseen tax liabilities, both during the lifetime of the settlor and afterwards.