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.